1. What is a bank?

A bank means a company which carries on, or proposes to carry on, banking business in Kenya and includes the Co-operative Bank of Kenya Limited but does not include the Central Bank of Kenya (CBK).

2. What is banking business?

Banking business means:-

• the accepting from members of the public of money on deposit repayable on demand or at the expiry of a fixed period or after notice;
• the accepting from members of the public of money on current account and payment on and acceptance of cheques; and
• the employing of money held on deposit or on current account, or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money.

3. What is a non-bank financial institution (financial institution)?

A financial institution means a company, other than a bank, which accepts from members of the public money on deposit repayable on demand or at the expiry of a fixed period or after notice; and employs the money held on deposit or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money.

4. What is a mortgage finance company?

A mortgage finance company means a company (other than a financial institution) which accepts, from members of the public, money:-

• on deposit repayable on demand or at the expiry of a fixed period or after notice; or
• on current account and payment on and acceptance of cheques, and is established for the purpose of making loans for the purpose of the acquisition, construction, improvement, development, alteration or adaptation for a particular purpose of land in Kenya; and the repayment of which, with interest and other charges, is secured by first mortgage or charge over land with or without additional security or personal or other guarantees.

5. Who licenses Commercial Banks?

Commercial banks are licensed and regulated by the Central Banks of the jurisdictions (countries) in which they operate.  In Kenya, the Central Bank of Kenya (CBK) licenses, supervises and regulates commercial banks, as mandated under the Banking Act (Cap 488).

6. Does the CBK regulate any other financial institutions beside commercial banks?

Yes. The CBK also licenses and regulates non-bank financial institutions, mortgage finance institutions, foreign exchange bureaus (forex bureaus), deposit-taking microfinance institutions (DTMs) and credit reference bureaus (CRBs). The Central Bank also regulates and supervises Building Societies, which are licensed by the Registrar of Building Societies under the Building Societies Act.  
A complete list of all institutions regulated by the CBK can be found on the Bank’s website under the link http://www.centralbank.go.ke/financialsystem/default.aspx.

7. How does the CBK exercise its supervisory function over the activities of commercial banks (and other financial institutions falling under its purview?)

The Banking Act, Central Bank of Kenya Act, Microfinance Act and Building Societies Act together with the regulations and prudential guidelines issued there under grants the CBK statutory powers to oversee the smooth entry (licensing), operations and exit of financial institutions falling under its purview.

8. How does the CBK oversee the activities of commercial banks (and other financial institutions falling under its purview?) on a day-to-day basis?

CBK carries out both on-site surveillance and off-site surveillance. On-site surveillance involves routine inspections conducted by CBK officers (inspectors) at the institution’s place of business to examine business records to confirm the institution’s state of compliance with the legal and regulatory requirements. Off-site surveillance entails the review of the periodic returns submitted to the CBK by the institutions’. Both onsite and offsite surveillance are based on predetermined inspection programmes and ratings criteria and any non-compliance noted necessitates appropriate enforcement action as stipulated in the relevant legislations.

9. Is a bank inspector like a policeman?

Just as a policeman ensures the safety of the members of the public, a bank inspector's role is to determine the safety of depositors’ funds held by the banks or other deposit taking institution in order to ensure safety and soundness in the banking sector.

10. How often are bank's inspected?

At least once every year. However the frequency is determined by the risk assessment of the institution.  High risk rated institutions are inspected more frequently following the adoption of Risk Based Supervision (RBS) Model which requires that more resources are dedicated to more risk prone institutions and or activity areas.

11. How long do bank inspections take?

This is determined by the size and risk profile of the institution; however, on average it takes four weeks to inspect a bank.

12. What kind of reports do bank inspectors produce and why are they not made public?

Bank inspectors produce various reports; fundamentally after each inspection an onsite inspection report is produced and is presented to the bank's Board of Directors and Senior Management. The reports are confidential due to the sensitive nature of the banking industry. However, banks are required to disclose some of the findings in their periodically published accounts.

13. What are the steps to follow in applying for a licence to start a commercial bank, mortgage finance company or non-bank financial institution? Click here to download

1. What is agent-banking?

Agent-banking is an arrangement by which licensed institutions engage third parties to offer certain banking services on their behalf.  In Kenya, agent banking is governed by the Prudential Guideline on Agent Banking issued by the Central Bank and which became operational on 1st May 2010.

2.  Why agency banking?

Agency banking model was embraced as an avenue to taking banking services closer to the unbanked or under banked sections of the population. Banks engage agents to offer specified banking services on their behalf in areas with business opportunities which may not necessarily merit the institutions’ physical presence.

3. Who appoints bank agents?

The responsibility of appointing agents rests on the licensed institutions who undertake the vetting guided by the criteria stipulated under the Prudential Guideline on Agent Banking. Prior to banks appointing agents they must obtain approval from CBK to roll out their agency networks and once they identify suitable entities they propose to appoint as agents, they are required to notify CBK before the agents commence the agency relationship.

4. Who is eligible to become an agent?

Only registered commercial entities holding a valid business licence for a lawful commercial activity may be contracted as bank agents. Further, the prospective agent must have held the said business licence for a minimum period of eighteen (18) months immediately preceding the date of application to become an agent. Entities whose activities are non-profit seeking are not eligible to be appointed as bank agents.  Both prospective and existing agents have to meet the suitability conditions stipulated in the Prudential Guideline on Agent Banking, which govern the capacity and integrity of the businesses and persons involved.

5. How can potential or existing bank customers differentiate between licensed and unlicensed agents?

Licensed Institutions are required to periodically publish an updated list of all their agents on their websites and in such other publications as they may deem appropriate. The publications containing the list of their agents should be disseminated to all their branches and agents. Specific agents’ status may be determined from these lists, or through inquiries made at the institutions’ branches.

6. What are the steps involved in becoming a bank agent?

Entities seeking appointment as bank agents should contact their prospective principal institutions for all necessary details on agent appointing procedures.

7. What banking activities can agents do?

A bank agent may offer any banking service as may be specifically agreed in writing, that is, in the agency agreement, between the agent and its principal institution. However, it is worth noting that it is the responsibility of the principal institution, based on agent risk-assessment, to determine which banking services a particular agent will provide. All permitted and prohibited services should be explicitly stated in the agency contract, including the requirement that all monetary transactions conducted through an agent should be denominated in Kenya Shillings.

8. Can an agent be appointed by more than one institution?

Yes. An agent may be contracted to provide agency banking services by a number of institutions provided that the agent has separate contracts for the provision of such services with each institution and provided that the agent has the capacity to manage the transactions for the different institutions. Exclusivity is legally prohibited under the Prudential Guideline on Agent Banking.

9. How sure am I that when I deposit my money with an agent, the money will reach my bank?

Bank customers should verify the status of particular agents from local branches of principal institutions before using the services of any agent. The principal should have in place adequate agent identification arrangements and customer feedback mechanisms to aid in the verification process. In the case of deposits, the principal institution’s mode of acknowledging agent collections from customers should be satisfactory to the customer, who may verify the same through balance inquiries. However, if in doubt, customers are best advised to deal directly with the principal institution. Transactions through agents are also mandated by prudential requirements to be done on a real time basis.

10. Who do I complain to if I am not satisfied with the service rendered to me by an agent?

Prior to using a particular agent’s services, you should first inquire whether the specific service is available from the agent. If not, seek advice from your bank’s nearest branch.  The services obtainable from particular agents are readily available to customers both from the agents themselves and from the relevant principal institutions. For complaints on service quality, you should first report your complaint to your bank for necessary action. If not satisfied with the institution’s response, you may write to the Central Bank of Kenya using the address given at the end of these questions

1. What is a foreign exchange bureau?

A foreign exchange bureau, a forex bureau or a bureau de change is an entity licensed under the Central Bank of Kenya Act and the Central Bank of Kenya Forex Bureau Guidelines to transact foreign exchange business.

2. How long does it take to process a forex bureau licence?

The Central Bank of Kenya shall issue a forex bureau licence to an applicant who has fulfilled all the licensing requirements within 90 days. 

3. Is the Central Bank of Kenya regulating on-line forex traders, forex brokers and similar businesses?

No, the Central Bank of Kenya regulates forex bureaus it has licensed and which have premises that have been approved by the Central Bank.

4. How can I distinguish a licensed forex bureau from one that’s not licensed?

A licensed foreign exchange bureau will have a current licence issued by the Central Bank of Kenya displayed prominently at each of the bureau’s business premises. The business name of a licenced forex bureau should incorporate the words "Forex Bureau", "Foreign Exchange Bureau" or "Bureau De Change". 

5. What is the purpose of the non-interest bearing deposit by Forex Bureaus?

The non-interest bearing deposit serves as a security against any penalties and other charges that may be imposed on a forex bureau for non-compliance with the regulatory framework and can be forfeited in case of contravention of the regulations under which the license is issued or failure to pay an assessed penalty.

6. Do licensed foreign exchange bureaus accept deposits and/or grant loans?

Licensed foreign exchange bureaus do not accept deposits from the public. They are also prohibited from lending money. 

7. Does the Central Bank allow investors to open a forex bureau in Nairobi and a few branches, say in Mombasa and Busia Towns?

Yes. Forex bureaus may be permitted to open outlets upon fulfillment of all requirements. Where a forex bureau has more than one outlet, it shall designate one of the outlets as its head office.  

8. Am I entitled to a receipt on every purchase or sale of foreign currency at a licensed forex bureau?

Yes, a forex bureau shall for every transaction issue a receipt which should contain as a minimum the full names of the customer, identity card number, type and amount of currency, transaction number, nature, time, date, name and address of the bureau, name of officer serving the customer and a brief statement on source or purpose of the foreign currency.

9. Should I identify myself when buying or selling foreign currency at a licensed forex bureau?

Yes, always carry with you your identification documents (identification card, passport, birth certificate or driver’s license) and present them to the cashier when requested to. Forex bureaus are required to obtain and retain a copy of your identification document. 

10. Am I under any obligation to declare the source of the foreign currency that I sell to a licensed forex bureau?

Yes, you are required to declare the source of money you are exchanging at the forex bureau. 

11. Is it normal for a licensed forex bureau to issue me with a cheque when I sell foreign currency at the bureau's counters?

Yes, ordinarily a forex bureau should give you Kenya shillings or the foreign currency you seek to obtain in cash; however customers may be issued with cheques if required. 

12. Can I open a foreign exchange bureau anywhere in Kenya?

Yes, there are no restrictions and therefore you can open a forex bureau anywhere in Kenya. 

13. What are the steps to follow in applying for a forex bureau licence? Click here to download

1. What is a Microfinance Institution (MFI)?

A microfinance institution (MFI) is an institution that offers financial services such as credit, savings, insurance, money transfer services to the poor, low income households and Small and Micro Enterprises (SMEs) who do not qualify for, and therefore lack access to, traditional formal financial institutions. The Central Bank has broadly categorised MFIs into credit non-deposit taking (credit-only) and deposit-taking microfinance institutions (see questions 39 and 40 below).

2. What is the importance of microfinance in the economy?

Microfinance is not the panacea to alleviating poverty; however, it is an important part of the solution. Microfinance provides opportunities for beneficiaries to generate a stable and sustainable source of income that enables them climb steadily out of poverty, while providing better living conditions and opportunities for their families.

3. What is the distinct difference between non-deposit taking (credit-only) and deposit-taking microfinance institutions?

The distinction between the two is that deposit-taking microfinance institutions are licensed and regulated by the Central Bank of Kenya and are permitted to mobilize and intermediate (or lend) deposits from the general public. Non-deposit taking microfinance institutions, on the other hand, are not allowed to mobilize public funds and can only lend their own funds or borrowed funds.

4. Who, then, licenses non-deposit taking (credit-only) microfinance institutions?

Non-deposit-taking microfinance institutions are licensed and regulated by the Ministry of Finance.

5. What is the difference between Deposit Taking Microfinance Institutions and commercial banks?

The major difference between commercial banks and deposit-taking microfinance institutions is in terms of the product range they can offer and the minimum regulatory requirements they have to comply with. Deposit-taking microfinance institutions can engage in a limited range of products, while commercial banks engage in a broader range of products. Deposit taking MFIs are not allowed to engage in:

1. Issuing third party cheques;
2. Opening current accounts;
3. Foreign trade operations;
4. Trust operations;
5. Investing in enterprise capital;
6. Wholesale or retail trade;
7. Underwriting or placement of securities; and
8. Purchasing or otherwise acquiring land except for expansion of deposit-taking business.

6. Why do MFIs charge high interest rates?

MFIs charge higher interest rates than commercial banks to cover transactional and credit delivery costs which are higher for small transactions. A KShs 100,000 loan, for example, requires the same personnel and resources as a KShs 2,000 loan, thus increasing unit transaction costs. Interest rates are also largely influenced by the rates MFIs themselves pay for borrowing the funds that they in turn lend to their clients.
The advent of deposit-taking microfinance institutions in Kenya in 2008 is expected, in the long-run,  to lower the general interest rates charged by MFIs as they can now legally tap into the alternative and cheaper sources of financing e.g. mobilised savings, and capital markets, among others.

7. How can potential or existing MFI clients differentiate between CBK licensed and unlicensed microfinance institutions?

Deposit-taking microfinance institutions that are licensed and regulated by the Central Bank of Kenya are required to use the term 'Deposit-taking Microfinance' or its acronym 'DTM' in their business name and display their licences in all their places of business.
The Central Bank shall also publish the names of newly-licensed deposit-taking microfinance institutions in the Kenya Gazette. Further, the Central Bank shall annually publish the names of all licensed deposit-taking microfinance institutions in at least two newspapers.
The public may also access the list of licensed DTMs in the Central Bank website (www.centralbank.go.ke).

What are the steps to follow in applying for a deposit-taking MFI licence? Click here to download

1. What is credit information sharing?

Credit Information Sharing (CIS) is a process where credit providers submit information about their borrowers to a credit reference bureau so that it can be shared with other credit providers.

2. What is a Credit Reference Bureau?

A credit reference bureau (CRB) is a company licensed to collect and collate (combine) credit information on individuals from different sources and provide that information upon the request of a credit provider in form of a credit report. Credit providers can only request a report on a borrower who has actually applied for a loan from them.

3. Who is an Authorised user?

Currently, the Banking (Credit Reference Bureau) Regulations, 2008 restricts authorized users of credit reports issued by licensed credit reference bureaus to institutions licensed under the Banking Act – commercial banks, mortgage finance companies and non-bank financial institutions.

4. What information can credit providers share?

Currently, institutions are obligated to submit negative data only to licensed CRBs. This includes information on:

• non-performing loans;
• dishonour of cheques other than  for technical reasons;
• accounts compulsorily closed other than for administrative reasons;
• proven cases of frauds and forgeries;
• proven cases of cheque kitting;
• false declarations and statements;
• receiverships, bankruptcies and liquidations;
• credit defaults or late payments on all types of facilities;
• tendering of false securities; and
• misapplication of borrowed funds.

 
However, it is worth noting that banks can voluntarily share their customers’ positive credit data with consent from their customers.

5. How do banks share information?

Banks submit credit information on their customers to licensed Credit Reference Bureaus (CRBs) periodically on an incremental basis. Currently, Kenya banks are required to update the information on at least a monthly basis. Banks then subscribe to the licensed CRBs for them to be able to request for credit reports on their existing or potential clients as and when they apply for bank facilities.

6. How is the information used?

Information obtained from a credit reference bureau (CRB) by licensed institutions is used to assess the ability of the potential borrower to repay a new loan applied for.  The CRB will compute a borrower’s credit score on the basis of past credit performance and communicate the same in a credit report to authorized users upon request. Unsatisfactory past credit performance will therefore be reflected in unsatisfactory credit scores which lenders will take into account in assessing any new credit applications. Past loan defaulters will therefore have unsatisfactory credit ratings, and banks take this into account when pricing or deciding on course of action on new credit facilities applied for.

7. How safe is information now that it will be stored outside of Banks?

The Banking (Credit Reference Bureau) Regulations, 2008 requires that CRBs meet international data security standards in both the transmission and storage of information in their custody. CBK confirms this before licensing a CRB and on a regular basis through data security audits aimed at ensuring that customer information is protected against unauthorized access, use or disclosure.

8. Do credit consumers have access to the information on their credit performance submitted by their lenders (banks) to credit reference bureaus?

Yes. Under the Banking (CRB) Regulations 2008 customers have the legal right to know what information a particular institution has submitted to the CRB on their accounts. To facilitate this, customers are entitled to a free copy of their credit report at least once a year and within thirty (30) days of receiving an adverse action notice.

9. Can a bank customer access his credit report from a credit reference bureau?

Yes. A customer is entitled to a free copy of his credit report at least once a year and within thirty days of receiving an adverse notice. Other than these instances, customers can also request for their credit reports at any time, but will have to meet the relevant costs as agreed between the CRBs and the subscriber banks. It is worth noting that customers are expected to request for their entitled credit reports from the CRBs in writing.

10. Can credit consumers challenge erroneous information?

Yes. The Banking (Credit Reference Bureau) Regulations set out the procedures for dispute resolution. If any dispute is not satisfactorily resolved within fifteen days after the customer has notified the CRB of his objection, such disputed information shall be removed from the database of the CRB. The disputed information may, however, be later reinstated if found to be correct after due investigation by the CRB and concerned bank.

11. Why is it necessary to share credit information?

Lack of information on borrowers results in two problems:

• Borrowers having more information about themselves than the lenders which causes credit providers to severely restrict lending to only those customers they know about. This is referred to as information asymmetry.
• Lenders restrict lending by raising interest rates (risk premium) to cover information search costs and to cater for possible default. These high interest rates
  attract only those who have no other option.

The sharing of credit information will, on the other hand, and especially if both positive and negative credit information is shared, lead to lower interest rates for borrowers with favourable credit scores and a result stimulating economic activity through availability of affordable credit.

12.  How long is negative information submitted to a CRB kept after the default is settled?

Licensed CRBs are required under the CRB Regulations to hold information on non-performing loans and other negative information submitted to them by banks for at least 7 years after the date of final settlement of the amount in default.

13. What are the steps to follow in applying for a credit reference bureau licence? Click here to download

1. Who regulates other financial institutions that operate in the financial sector in Kenya which fall outside the CBK’s authority?

The Central Bank does not regulate institutions that do not take deposits from the public and those that lend their own funds (Credit Only Institutions).
These financial institutions falling outside CBK’s supervisory mandate include  insurance companies (regulated by the Insurance Regulatory Authority), stock exchange, stock brokers, investment banks, investment advisers, fund managers and collective investment schemes (regulated by the Capital Markets Authority), savings and credit co-operatives (SACCOs) regulated by the SACCO Societies Regulatory Authority and retirement benefit schemes (regulated by the Retirement Benefits Authority).

2. Can I use the word, ''bank'', ''finance'' or ''microfinance'' in my business and not be regulated by the Central Bank?

No, you cannot. The words, ''bank'', ''finance'' or ''microfinance'' are protected and their use requires the approval of the Central Bank. Derivatives of these words too such as ''banking'' or ''financial'' are protected and their use requires the approval of the Central Bank.

3. Would my business need to be regulated by the Central Bank if it involved lending funds from personal resources?

No. You may start a business using your own capital to lend to others, so long as you don't take deposits from the public. In this case, you would not require a license from the Central Bank. But you must ensure that you do not use the protected words, ''bank'', ''finance'' or ''microfinance.'' However, it is worth noting that under the Microfinance Act, the Minister for Finance has the power to prescribe regulations applicable to credit only microfinance institutions.

4. I invested my money in an investment (pyramid) scheme that has been closed; can the Central Bank compensate me for the funds placed with the scheme?

The Central Bank does not regulate pyramid or ponzi schemes and cannot therefore compensate you for your lost funds. Depositors in institutions regulated by the Central Bank are protected by the Deposit Protection Fund (DPF). In the event of collapse of a regulated institution, DPF pays each depositor a maximum of KShs. 100,000. It is therefore important to ensure before you place your funds in any institution or scheme, that it is regulated. Lists of the institutions licensed and regulated by the CBK are available in the CBK website, www.centralbank.go.ke. Remember, “if the deal is too good to be true, it probably is''.

5. How then can the public be protected or feel secure from pyramid schemes or similar ill-intentioned schemes?

The public needs to be aware that any one taking or mobilizing deposits from the general public without a license from the Central Bank is committing an offence under the Banking Act and Microfinance Act. The general public is, therefore, strongly advised not to risk losing their money by depositing or placing it in unregulated entities like pyramid schemes claiming to be legitimate investment vehicles or financial service providers.

6. How do I lodge a complaint against a commercial bank (or its agent), mortgage finance company, forex bureau, deposit taking microfinance institution or credit reference bureau?

You should first report the complaint to your bank (or agent’s principal institution); forex bureau, deposit taking microfinance institution or credit reference bureau to ensure that appropriate action is taken as quickly as possible. The institution should get back to you preferably in writing on your complaint. However if you are not satisfied with how the institution has dealt with your complaint or no action is taken, you may contact the Central Bank at the address given below with details of your complaint.

MONEY LAUNDERING

7. What is money laundering?

Money laundering is the processing money obtained from criminal or illicit activities to conceal its true origin and make it appear to have been derived from a legitimate source or activity.

8. What are the sources of laundered money?

Sources of laundered money can be traced to criminal/illicit activities referred to as predicate crimes. These are:

Corruption; Fraud; Drug, human and  firearms trafficking; Cattle rustling; Currency counterfeiting;

Robbery; Tax evasion; Insider trading and Market manipulation;

9. How is money laundered?

Money laundering normally takes place in three stages;

• Placement: This is the first stage where proceeds of crime enter the financial system through e.g. financial instruments such as money orders as legitimate funds to avoid suspicion;
• Layering: This is the second stage, designed to hide or confuse the audit trail back to the original criminal activity.
• Integration: This is the final stage of the money laundering cycle and involves integrating the laundered funds into the legitimate economy.

10. What are the effects of money laundering on a country’s economy?

Some of the effects are:

1. Increase in crime in private and public sector organizations which increase the cost of doing business and therefore make the economic environment less competitive;
2. Distorts economic and financial markets
3. Undermines the integrity and stability of financial systems
4. Strains correspondent banking facilities between local and foreign banks
5. Losses in tax revenue
6. Loss of foreign direct investment opportunities as the business environment will be deemed risky
7. Integration of illicit monies into the economy leads to a high cost of living

11. Is there a specific legislation in Kenya that comprehensively addresses the issue of money laundering?

Yes, currently the Proceeds of Crime and Anti Money Laundering Act, 2009 comprehensively addresses the issue of money laundering. The Act:

1. Criminalises money laundering and provide measures for combating the offence
2. Establishes the Financial Reporting Centre (FRC), an Asset Recovery Agency and Criminal Asset Recovery Fund
3. Stipulates Anti-Money Laundering obligations for Reporting Institutions
4. Provides for the identification, tracing, freezing, seizure and confiscation of proceeds of crime
5. Provides for international assistance in investigations and  Proceedings

 

For further queries on applications, licensing and supervision of all financial institutions regulated by the Central Bank of Kenya, please contact:
 
Director, Bank Supervision
Central Bank of Kenya
P.O. Box 60000 00200 NAIROBI
Tel: 2863005
Email: fin@centralbank.go.ke
 
You may also obtain more details on the above and related matters from the Central Bank’s website on www.centralbank.go.ke.