Frequently Asked Questions
- What is a commercial bank?
A commercial 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).
- 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.
- 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.
- 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.
- What is a Bank Representative Office?
A Representative Office of a bank is an agency formed by a foreign banking institution in Kenya where the foreign banking institution does not run a fully fledged banking business. Representative Offices is established to serve purely as a marketing and/or liaison office for its parent or affiliated institutions and does not undertake any banking business.
- 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).
- 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), credit reference bureaus (CRBs) and Representative Offices established in Kenya by foreign banks. 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 banks and mortgage finance companies regulated by the CBK can be found on the Bank’s website.
- 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 thereunder grants the CBK statutory powers to oversee the smooth entry (licensing), operations and exit of financial institutions falling under its purview.
- 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 on-site and off-site surveillance are based on predetermined inspection programmes and ratings criteria and any non-compliance noted necessitates appropriate enforcement action as stipulated in the relevant legislation.
- 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 banks or other deposit taking institutions in order to ensure safety and soundness of the banking sector.
- How often are banks and other depository institutions inspected?
The frequency of inspections is determined by the risk assessment of the institution. High risk rated institutions are inspected more frequently following the adoption of the Risk Based Supervision (RBS) Model which requires that more resources are dedicated to more risk-prone institutions and/or activity areas.
- 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.
- 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 on-site 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 business. However, banks are required to disclose some of the findings in their quarterly published financial disclosures.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- What banking activities can agents undertake?
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.
- 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.
- 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. Prudential requirements also mandate that transactions conducted through agents be processed on a real time basis.
- 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. In case of lack of/unsatisfactory response from the institution concerned, you may write to the Central Bank of Kenya using the address given on page 23 of this brochure.
Foreign Exchange (forex) Bureaus
- 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.
- 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.
- 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.
- 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".
- 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.
- 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.
- 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 are 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.
- 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.
- 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.
- 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.
- Is it normal for a licensed forex bureau to issue me with a cheque when I sell foreign currency at the bureau's counters?
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.
- 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.
A complete list of the licensed foreign exchange bureaus can be found on the Bank’s website.
- What are the steps to follow in applying for a forex bureau licence?
THE A-Z OF LICENSING A FOREX BUREAU
- Book an appropriate name with the Registrar of Companies and write to the Central Bank to seek approval for the name. The name should incorporate the words “Forex Bureau”, “Foreign Exchange Bureau” or “Bureau de Change”.
- After the name has been approved by the Central Bank, register the company and then make a formal application to the Director, Bank Supervision Department, Central Bank of Kenya in a duly completed FORM/CBK/FXD1 (can be downloaded from www.centralbank.go.ke) attaching the following documents:
- non-refundable application fee of Ksh.20,000 for a new licence and Kshs 10,000 for an outlet of an existing forex bureau (bankers cheque payable to the Central Bank of Kenya);a certified copy of a statement of affairs of the applicant;
- a certified copy of the applicant’s memorandum and articles of association;
- a certified copy of the applicant’s certificate of incorporation;
- a feasibility study including financial projections for three years (balance sheet, profit and loss account and cash flow statements), organizational structure, physical location and postal address;
- evidence of existence of a minimum core capital of not less than US$60,000 or its equivalent in Kenya shillings , which should exist before commencement of operations and maintained at all times
- bank statements of the bureau’s shareholders and directors for a period of six months prior to the date of application;
- duly completed fit and proper forms for the shareholders, directors and principal officers of the bureau;
- credit reports from a credit reference bureau for the shareholders, directors and the principal officers of the bureau;
- a declaration by the applicant that none of its directors and/or shareholders has ever been declared bankrupt, participated in the management of a collapsed institution, convicted by any court of competent jurisdiction in Kenya or elsewhere of a criminal offence involving fraud, money laundering, tax evasion, or any other act of dishonesty;
- a declaration by the applicant that none of its directors and/or shareholders holds a similar position or role in any other forex bureau;
- an undertaking by the applicant to comply with the provisions of the Central Bank of Kenya Act, the Regulations, the Forex Bureau Guidelines and any instructions/ directions issued by the Central Bank of Kenya regarding the establishment and operations of forex bureaus at all times; and
- any other information as may be required by the Central Bank of Kenya.
The Central Bank shall within 90 days of the date of lodging the application:
- request for additional information for purposes of processing the application;
- where it is satisfied that all the necessary requirements have been met, issue a letter of intent to the applicant advising the applicant to;
- pay the licence fee of Ksh.65,000 to the Central Bank of Kenya by banker’s cheque;
- transfer the non-interest bearing deposit of US$30,000 to the Central Bank of Kenya offshore account;
- invite the Central Bank of Kenya to inspect the bureau’s premises prior to commencement of business.
Upon fulfillment of the above requirements or otherwise the Central Bank shall:
- issue a licence to the applicant; or
- inform the applicant in writing that the application has been declined and advise the unsuccessful applicant that an appeal to the Central Bank for review of the decision to decline may be lodged within 30 days from the date thereof.
Deposit Taking Microfinance Institutions
- 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 41, 42 and 43 below).
- 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.
- 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.
- Who, then, licenses non-deposit taking (credit-only) microfinance institutions?
Non-deposit-taking microfinance institutions are regulated by the Ministry of Finance.
- 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:
- Issuing third party cheques;
- Opening current accounts;
- Foreign trade operations;
- Trust operations;
- Investing in enterprise capital;
- Wholesale or retail trade;
- Underwriting or placement of securities; and
- 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.
- 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 of national circulation.
The public may also access the list of licensed DTMs in the Central Bank website: http://www.centralbank.go.ke/financialsystem/microfinance/deposittaking.aspx.
- What are the steps to follow in applying for a deposit-taking MFI licence?
The steps to follow in applying for a deposit taking MFI licence are as shown below:
Stage 1: Approval of Name
- Propose and book at least three business names with the Registrar of Companies and Business Names.
- Submit the proposed names to the Central Bank in order of preference before incorporation of the proposed entity as a company limited by shares.
- The proposed name must incorporate the words “Deposit Taking Microfinance” or the acronym “DTM” e.g. XYZ Deposit Taking Microfinance Limited or XYZ DTM Limited.
Stage 2: Application for Licence
- Complete and submit a certified Application Form [Form 1 of the First Schedule to the Microfinance (Deposit Taking Microfinance Institutions) Regulations 2008] to CBK accompanied by all supporting documents, including:
- Certified copy of the Certificate of Incorporation.
- Certified copy of the tax Personal Identification Number (PIN) certificate.
- Certified copy of the registered Memorandum and Articles of Association indicating core capital (at least KSh. 20 million or KSh. 60 million for community and nationwide deposit-taking Microfinance business, respectively). For community deposit-taking microfinance business, indicate the area of operation as District or Division; if operating in a city, attach the supporting Government administrative map(s).
- Verified official notification of the company’s registered place of business, including the prospective places of business (Head Office, branches, agency and outlets, if any).
- Pay a non-refundable application fee of KSh. 5,000 to the Central Bank by Bankers cheque.
- Provide evidence of minimum core capital (KSh. 20 million and KSh. 60 million for a ‘community’ and ‘nationwide’ deposit-taking microfinance business, respectively):
- Evidence should be reflected in a bank statement of a licensed bank indicating the isolated funds (attach letter from the bank) and/or Government of Kenya Treasury Bills and Bonds not under lien.
- Evidence should either be in the name of the company and/or the promoters/ shareholders of the company.
- The promoters/shareholders should give the Central Bank authority to verify the authenticity of the bank statement directly from the bank.
- The promoters/shareholders should provide the distribution or allocation (ultimate beneficiaries, citizenship, amount and percentage) of core capital to each individual promoter/shareholder and/or company, indicating significant shareholders/promoters (owning at least 10% of the share capital).
- Certified statements indicating that the entity and each of the shareholders and officers are tax compliant should be provided.
- Prepare and submit a comprehensive feasibility study and business plan covering but not limited to:
- executive summary;
- governance structure including ownership;
- summary of financial and operational performance, if applicable;
- comprehensive environmental impact analysis;
- economic and financial markets environment;
- financial sector structure and environment;
- institutional analysis;
- potential market survey;
- scope of business activities and marketing strategy;
- capital, liquidity and portfolio quality;
- projected financial statements and analysis;
- legal and regulatory compliance, and
- infrastructure and internal controls;
- Duly complete and submit the “Fit and Proper Forms” for all significant shareholders (at least 10% shareholding) and proposed directors accompanied by supporting documentation (certified) including:-
For individual natural persons:
- Curriculum Vitae and certified copies of academic and professional certificates.
- Evidence and disclosure of the source of funds e.g. certified copies of bank statements, fixed deposits and/or government securities.
- Certified copies of National Identity Card and Personal Identification Number (PIN) certificate.
- Total number and the percentage of shares to be acquired.
- Four recent colour passport size photographs, of which at least one must be certified.
- Names of three independent referees giving detailed contacts including postal addresses, e-mail and telephone numbers.
- A credit report from a licensed credit reference bureau.
For Companies, Firms or Other Corporate Entities Incorporated in Kenya:
- Certified copy of the Certificate of Incorporation of the company or Certificate of Registration of Business or other entity.
- Certified copy of the Memorandum and Articles of Association, Partnership Agreements or Constitution of the Association/body.
- Certified copies of the organization’s Personal Identification Number (PIN) certificate.
- Resolution of the Board of Directors or General Meeting authorizing the investment.
- Where the entity is regulated, the name and addresses of the Regulator; Letter of no objection from the Regulator and a certified copy of licence to operate.
- Audited Financial Statements for at least the last three years.
- Evidence of, and disclose source of funds e.g. certified copies of bank statements, fixed deposit receipt, government securities.
- Total number of, and the percentage of, shares to be acquired.
- Ultimate beneficiaries of shares to be acquired.
- Transforming entities/organizations will provide the following additional requirements:
- Board and Annual General meeting resolution approving the transformation and the proposed investment (Business Plan approved by the board).
- Copies of at least the last three years audited financial statements preceding the application, including the auditor’s report, if applicable.
- A due diligence report prepared by an external audit firm on the operational and financial performance, legal risks detailing a review of the adequacy of the management information system and internal control systems.
- The Applicant once it has received name approval may apply before incorporating the new company by using the old name in brackets transforming to the new name e.g. XYZ Limited may use the name XYZ Limited (in Transformation to XYZ DTM Limited or XYZ Deposit Taking Microfinance Limited) until it is licensed. No person shall use the approved name in its operations or engage in the deposit-taking business until it receives a licence from the Central Bank.
Foreign companies intending to set up a local subsidiary will be required to submit further information including but not limited to:
- A copy of the board resolution authorizing the entity to invest in the deposit-taking business in Kenya, and the designated persons who will represent the business in connection therewith.
- Historical background of the foreign entity.
- Signed declaration by the board of directors to adhere to the Microfinance Act and Regulations issued thereunder and other relevant Kenyan Laws at all times during the validity of the licence.
- Endorsement letter from the home supervisory authority.
Stage 3: Letter of Intent
Upon assessment and fulfilment of all the requirements in stage two, the Central Bank will issue a Letter of Intent, which is an approval in principle and advises the applicant on the next steps and requirements to be fulfilled before issuance of a licence and approval to commence operations, including:
- payment of licence fees to the Central Bank by banker’s cheque.(Kshs 150,000 for nationwide DTM, and Kshs 100,000 for community DTM)
- preparation of operating premises to meet prescribed standards [see inspection checklist in Form 4 of the First Schedule to the Microfinance (DTM) Regulations 2008] in readiness for inspection by the Central Bank
- completion and submission of the “Fit and Proper” Forms for significant shareholders, directors and key senior managers (to be guided by the Central Bank) accompanied by all the supporting documentation, including but not limited to the following:
- Curriculum Vitae and any documentation to support the application.
- At least three referees giving detailed contact address, e-mail and telephone.
- Previous employers and business of the proposed officers giving detailed contact address, e-mail and telephone.
- Certified photographs and copies of identification documents (ID card and/or Passport) and PIN certificate by a registered Commissioner of Oaths. If the proposed officers are not Kenyan citizens, the submitted documents should be certified by notaries of the officers’ original jurisdictions.
- A declaration that none of the shareholders/directors/managers owns or holds a similar position in another Micro Finance Institution(s) licensed under the Banking Act
- Preparing and putting in place the proposed management information system (MIS) and other institutional structures required to conduct the deposit-taking business including but not limited to the following:
- Governance structures: Board, Senior Management and Committees.
- Deposit mobilization strategies/plans and marketing methodologies.
- Management Information Systems and infrastructure.
- Operations manuals – lending and credit administration; human resource development; investment policy; liquidity and funds management policies; accounting procedures; Management Information System; internal audit and controls; capital, planning and budgeting; Know Your Customer (KYC) and operations and assets manuals.
- Risk management policies and internal control systems.
- A satisfactory inspection, upon invitation thereto, by the Central Bank, of the applicant’s proposed operating premises to examine compliance with the standards and operational readiness of the applicants to commence the business of the deposit-taking microfinance institution
In this stage, the Central Bank shall undertake a due diligence evaluation on the proposed management, an assessment on the adequacy of the MIS, internal controls and procedures.
Stage 4: Issuance of Licence
The Central Bank, if satisfied that the applicant has met all the requirements of the above three stages, may then issue a licence; the Central Bank will duly specify the institution by placing a notice in the Kenya Gazette, thereby legally authorizing the applicants to commence the deposit-taking microfinance business.
Credit Reference Bureaus
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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. You may also access the list of licensed CRBs on the Central Bank website:
- What are the steps to follow in applying for a credit reference bureau licence?
THE A – Z OF LICENSING A CREDIT REFERENCE BUREAU
- Register a limited liability company with the Registrar of Companies.
- Submit a duly completed application form to the Central Bank of Kenya (CBK). The prescribed application form can be downloaded from the CBK website, www.centralbank.go.ke.
- Documents and information to accompany the application:
- Certified copies of the applicant’s certificate of incorporation and its Memorandum and Articles of Association.
- Feasibility study by the applicant, showing the nature of the planned business.
- Duly completed “Fit and Proper” forms for proposed directors, senior officers and significant shareholders. The forms can be downloaded from the CBK website, www.centralbank.go.ke.
- Management processes including the software required for operation, characteristics of products and services to be provided to subscribers, service policies and procedures manuals, as well as the proposed security and control measures aimed at preventing misuse or improper management of information.
- Overview of operations including the description of systems and the design of the data collection including the unique identification system for individuals and enterprises.
- A description of the applicant’s proposed premises and the security measures to be adopted.
- The proposed fees structure.
- A prototype of the final product that demonstrates the principal features and functions of the system.
- A banker’s cheque of Kshs. 10,000 payable to Central Bank of Kenya, being a non-refundable application processing fee.
Upon meeting all the above requirements, the Central Bank will grant the applicant a letter of intent (approval in principle). The approval in principle indicates the Bank’s intention to license the applicant upon meeting the pending pre-licensing requirements.
- With the approval in principle, the applicant may proceed to obtain premises, Information Technology Systems and recruit staff for the proposed CRB.
- Once the applicant is ready with the premises and Information Technology systems, they should invite the CBK to conduct an inspection.
- If the inspection is satisfactory, the CBK shall notify the applicant to submit to the Central Bank:
- a bankers cheque for one hundred thousand Kenya shillings (KShs 100,000) payable to the Central Bank of Kenya being the annual licence fee, and
- a statutory declaration in the prescribed form sworn under oath by the Chief Executive Officer of the applicant, confirming that the applicant will adhere to the provisions of the Banking (CRB) regulations 2008 and, in particular, that the applicant will not disclose to any person any information obtained pursuant to the applicant’s obligations under the Banking (CRB) Regulations 2008 except as provided therein.
- Upon satisfactory fulfillment of the above requirements by the applicant, the CBK will then issue a licence to the applicant and place a notice in the Kenya Gazette to formally license the credit reference bureau.
- The newly licensed credit reference bureau may then open its doors to subscribers.
- Within thirty days of being granted the licence, the newly licensed credit reference bureau is required to submit to the Central Bank an irrevocable bank guarantee for one million shillings (Kshs 1,000,000) in a format acceptable to the Central Bank.
- What is money laundering?
Money laundering is defined as any attempt to disguise the proceeds of criminal activity so as to make them appear to have been obtained from a legitimate source or activity.
- What are the sources of laundered money?
Sources of laundered money can be traced to criminal/illicit activities referred to as predicate crimes. These include:
- Drug, human and firearms trafficking;
- Cattle rustling;
- Currency counterfeiting;
- Tax evasion;
- Insider trading and
- Market manipulation;
How is money laundered?
Money laundering normally takes place in three stages;
- Placement: This is the first stage where the proceeds of crime enter the financial system mostly through cash deposits or the use of financial instruments such as money orders so as to avoid suspicion;
- Layering: This is the second stage, where the proceeds of crime are further separated from their criminal source. This is achieved by creating layers of financial transactions designed to disguise the true origin of the funds or confuse the audit trail back to the original criminal source or activity; and
- Integration: This is the final stage of the money laundering cycle and involves integrating the laundered funds into the legitimate economy. This is accomplished through the legitimate purchase of assets, such as real estate, securities or other financial assets, or luxury goods.
What are the effects of money laundering on a country’s economy?
Some of the effects are:
- Increase in crime in private and public sector organizations which increase the cost of doing business and therefore make the economic environment less competitive;
- Distorts economic and financial markets; the circulation of counterfeit money into the economy may result in an unplanned increase in the money supply and the rate of inflation, leading to an undue increase in the cost of living;
- Undermines the integrity and stability of financial systems ;
- Strains correspondent banking relationships between local and foreign banks;
- Losses in tax revenue;
- Loss of foreign direct investment opportunities as the business environment will be deemed risky; and
- Integration of illicit monies into the economy leads to a high cost of living.
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:
- Criminalizes money laundering and provides measures for combating the offence.
- Establishes the Financial Reporting Centre (FRC), an Asset Recovery Agency and Criminal Assets Recovery Fund.
- Stipulates Anti-Money Laundering obligations for Reporting Institutions.
- Provides for the identification, tracing, freezing, seizure and confiscation of proceeds of crime.
- Provides for international assistance in investigations and proceedings.
- 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).
- 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 such as ''banking'' or ''financial'' are also protected and their use requires the approval of the Central Bank.
- 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.
- 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''.
- 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.
- 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.
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
You may also obtain more details on the above and related matters from the Central Bank of Kenya’s website: www.centralbank.go.ke.