New tough rules to enhance scrutiny and control of banks

The Central Bank has issued new guidelines seeking to enhance scrutiny and control of Kenyan banks operating in local and regional markets.

The Guidelines on Non-Operating Holding Companies, which take effect from October 1, will require banks within the group to hold a capital conservation buffer of 2.5 per cent over and above minimum ratios on individual and consolidated basis.

This will enable them to withstand future periods of stress.

“The capital conservation buffer should be made up of high quality capital which should comprise mainly common equity, premium reserves and retained earnings,” the new guidelines stated in part.

This now brings the minimum core capital to risk weighted assets and total capital to risk weighted assets requirements to 10.5 per cent and 14.5 per cent, respectively.

Shareholders of non-operating holding companies that currently meet the minimum capital ratios of 8 per cent and 12 per cent but remain below the buffer-enhanced ratios of 10.5 per cent and 14.5 per cent will be forced to maintain strict earnings retention policies to meet the conservation buffer by January 2015.

Failure to comply with such regulations will lead to suspension of activities of the approved non-operating holding company.

In May this year, Equity Bank said it would establish a holding company to oversee its regional businesses across Kenya, Uganda, Tanzania, Rwanda and South Sudan.

This would delink the Kenyan company from directly controlling subsidiaries and shield individual businesses from shocks like interest rate spikes in respective financial markets.

Analysts say new rules introduced last year primarily seek to stabilise the banking sector, both in the domestic and regional markets. This has seen the need for banking institutions to be sufficiently safeguarded from emerging interest rates risks and increased competition, potentially shrinking profit margins.

To secure new capital in an increasingly competitive market with thinning margins is likely to be an uphill task for players without key anchor shareholders or solid capital reserves.

The guidelines also seek to see banks retaining much of their revenues to enhance capital requirements.

Meanwhile, the new Guideline on Incidental Business Activities also seeks to enhance checks on banks carrying out activities other than their core business, for instance, bancassurance services.

The guidelines restrict banks which act as distribution channels for financial services and products either through cross-selling or marketing.

They will not undertake or engage in insurance underwriting and securities brokerage or any other financial business which they are not authorised to undertake by the Central Bank.

They have also been barred from forcing their customers to buy the products.

Last year, the CBK also supported the establishment of supervisory colleges for Kenyan banks operating in regional markets.