Bank Supervision

Commercial Banks

  1. 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:-

a) 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;
b) the accepting from members of the public of money on current account and payment on and acceptance of cheques; and
c) 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:-

a) on deposit repayable on demand or at the expiry of a fixed period or after notice; or
b) 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.

 

  • Who licenses Commercial Banks?

Commercial banks in Kenya are licensed, supervised and regulated by the Central Bank of Kenya (CBK) as mandated under the Banking Act (Cap 488).

 

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

Yes. CBK also licenses and regulates non-operating holding companies of banks, non-bank financial institutions, mortgage finance institutions, foreign exchange bureaus (forex bureaus), money remittance providers, microfinance banks, credit reference bureaus (CRBs) and Representative Offices established in Kenya by foreign banks. CBK also regulates and supervises Building Societies, which are licensed by the Registrar of Building Societies under the Building Societies Act.

A complete list of licensed commercial banks and mortgage finance companies regulated by the CBK can be accessed on the CBK’s website under the link: https://www.centralbank.go.ke/index.php/bank-supervision

 

  • 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, 2006, National Payments Systems 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 (surveillance) 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 places 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 programmes and ratings criteria. Any instances of non-compliance noted necessitate appropriate supervisory action as stipulated in the relevant legislation.

 

    • What is a non-operating holding company of a bank?

A non-operating holding company of a bank is a company permitted under the Banking Act to own more than 25% of the shareholding of a bank unlike any other company or person, which are not allowed. CBK approves and regulates non-operating holding companies of banks pursuant to the Prudential Guideline on Non-Operating Holding Companies, which became effective in October 2013. The aim of approving non-operating holding companies of banks is to free banks to concentrate on their core business of mobilizing deposits and advancing loans and leaving the business of capital and risk management for banks in a group to the non-operating holding company.fety of depositors’ funds held by banks or other deposit taking institutions in order to ensure safety and soundness of the banking sector.

 

Are banks allowed to undertake other financial business services other than deposit taking, lending and the generally known activities of a bank?

Yes. Pursuant to the Prudential Guideline on Incidental Business Activities, banks are allowed to act as distribution channels for other financial services such as insurance, securities brokerage and other financial services classified as incidental business to the banking business. Banks can only act as distribution channels for non-banking products based on approval by CBK and also based on an approved contractual arrangement with the primary financial service provider. The guideline contributes to the ongoing initiatives of enhancing financial inclusion by taking financial services closer to the public.

 

  • How does CBK regulate and supervise Kenyan banks with subsidiaries and branches outside Kenya?

CBK has adopted consolidated supervision, which entails supervising a bank as an individual as well as a member of a banking group. Where a bank has affiliates (a holding company, subsidiary, associate and other affiliates), CBK’s regulatory and supervisory purview spans across the entire group of companies since risks that may affect the stability of the bank may emanate from any of the members of the group. Further, CBK together with the East African Community member states and other regional Central Banks have embraced the concept of supervisory colleges as part of the supervisory framework for regional banking groups. A supervisory college is a forum of banking supervisors to share knowledge and information on regional banks. Through supervisory colleges, CBK and other regional Central Banks are able to promote the stability of the regional banking system.

 

    • 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 ensure the safety of depositors’ funds held by banks or other deposit taking institutions in order to ensure the 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.

Representative Offices

  • What is a Representative Office of a foreign banking institution?

A representative office of a foreign banking institution is an office established by a bank licensed in another country for purposes of marketing its products and services in the country where the Representative Office is established. The Representative Office acts as liaison between the foreign institution and its clients in the country where the Representative Office is located.

In Kenya, Representative Offices are authorized by the Central Bank of Kenya as mandated under section 43 of the Banking Act and the CBK’s Prudential Guideline on Representative Offices in Kenya (CBK/PG/17). Representative Offices in Kenya are not permitted to transact banking or financial business. Any banking or financial business sourced through the Representative Office has to be booked in the country where the foreign institution is licensed to undertake banking business.

 

  • What steps is a foreign banking institution required to follow in applying for Authority to open a Representative Office in Kenya?

Section 43 of the Banking Act, Cap 488 of the laws of Kenya, empowers the Central Bank of Kenya (CBK) to grant authority to foreign institutions to open representative offices in Kenya.

The following key steps are followed in applying for authority to open a representative office in Kenya:-

a) Submission of a formal letter to the Central Bank from the foreign institution expressing intention to seek authority to open and operate a Representative Office in Kenya.
b) Alongside the aforementioned formal letter, the applicant should submit:

i. A duly completed Application Form for Authority to Establish a Representative Office of a Foreign Bank or Financial Institution (Form CBK/RO 1-1-Page 423 of Prudential Guideline on Authorisation of Representative Offices in Kenya) with the relevant supporting documentation:-
• Notarized copy of the Certificate of Incorporation of the foreign institution proposing to open the Representative Office;
• Notarized copy of the Articles and Memorandum of Association of the foreign institution proposing to open the Representative Office;
• The names of the principal shareholders of the foreign institution and their respective percentage holdings;
• A complete list of the Applicant’s Board of Directors and Chief Executive Officer;
• A notarized extract of the minutes of the Applicant’s Board meeting passing the resolution to establish the proposed Representative Office in Kenya;
• A statement identifying the kind of business intended to be conducted through the proposed Representative Office as well as the intended objectives of the Representative Office;
• The name and full contact details of the relevant monetary or supervisory authority to which the Applicant is subject;
• A notarized copy of the Applicant’s valid licence to conduct banking business as issued by the home supervisor;
• Certified copies of the audited financial statements for each of the three years immediately preceding the date of the application;
• If the applicant has links to or forms part of a group (either as parent company, subsidiary, joint venture or Associate Company) a detailed chart giving the entire group structure and respective shareholdings between members of the group;
• A feasibility study of the future operations and development of the business for a minimum period of three years from the date of the application;
• Proposed organisation structure for the Representative Office in Kenya;
• A declaration signed by the Chief Executive Officer as specified in the application form.
• A non-refundable application fee to the Central bank of Kenya, payable by banker’s cheque or such other mode of payment as the CBK may prescribe, as specified under the Fourth Schedule to the Banking Act, (The Banking (Fees) Regulations. The application fee is currently Kshs 5,000.

ii. Duly completed Fit and Proper Application Forms for the proposed Chief Representative Officer, proposed managers and senior officers for the proposed Representative Office (Form CBK/RO 1-2-Page 426 Prudential Guideline on Authorisation of Representative Offices in Kenya) with the following relevant supporting documentation:-

• A notarized copy of the nominee’s valid passport (for foreign nationals).
• A certified copy of a national identity card (for Kenyan citizens).
• An up-to-date and detailed curriculum vitae.
• Copies of the nominee’s academic and professional certificates, which should be duly certified where the issuing authority is located within the Republic of Kenya or notarized if the certificates and other related documents are issued by foreign authorities.
• Copies of any testimonials available, which should be duly certified or notarized as the case may be.
• Names and full contact details of at least three independent personal referees who should have known the applicants for at least five years.

Note: A senior officer at the Representative Office is the Chief Representative Officer or other officers who are likely to take part in decision making.

c) All documents submitted should be in the English language. Certified English translations should be provided for all submissions originally rendered in a language other than English. Translation certificates should be attached to the translated documents and should state, as a minimum:
• the name(s) and qualification(s) of the translator.
• that the translator understands the language in which the original versions of the documents in question have been prepared,
• the translation is true, accurate, and correct to the best of the translator’s knowledge and ability,
• The certificate should preferably be made under oath or notarized to provide assurance of its validity, and

The Central Bank reserves the right to request additional information, statements or documents as it shall deem necessary for purposes of determining an application.

d) In processing an application by a foreign institution to open a Representative Office in Kenya, the Central Bank shall have the right to object to the name under which the prospective Representative Office proposes to operate in Kenya if the Central Bank deems such name to be inappropriate, ambiguous, potentially misleading or confusing to the public.
e) Upon meeting all the requirements, the CBK will grant the applicant an approval in principle to open a representative office in Kenya.
f) With the approval in principle, the applicant may proceed to obtain premises, recruit staff and other facilities necessary for operations of the Representative Office and to pay the prescribed license fee of Kshs 20,000 vide a banker’s cheque payable to CBK, or such other mode of payment as CBK may prescribe.
g) Once the premises are ready, the applicant will invite CBK to conduct an inspection.
h) If the inspection is satisfactory, the CBK grants final authority to the applicant to commence the business of a Representative Office in Kenya.
i) Representative Offices are required to submit quarterly activity reports to CBK in the prescribed format (CBK/PR/RO/04).

A complete list of the authorized representative offices of foreign banks in Kenya can be found on the CBK’s website under the link: http://www.centralbank.go.ke/index.php/representative-offices-of-foreign-institutions-in-kenya.

Agent Banking

  • What is agent-banking?

Agent banking is an arrangement by which licensed institutions (banks and microfinance banks) engage third parties to offer specified banking services behalf of the on the institution. In Kenya, agent banking is governed by the Prudential Guideline on Agent Banking (CBK/PG/15) and Guideline on the Appointment and Operations of Third Party Agents by Deposit Taking Microfinance Institutions (CBK/DTM/MFG/1) issued by the Central Bank.

 

  • Why agent banking?

Agent 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 with the licensed institutions who undertake the vetting guided by the criteria stipulated under the Prudential Guideline on Agent Banking and Guideline on the Appointment and Operations of Third Party Agents by Deposit Taking Microfinance Institutions. 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 commencing business under the agency relationship.

 

  • Who is eligible to become an agent?

Duly registered commercial and non–commercial entities engaged in lawful commercial activity or non-commercial activity may be contracted as bank agents. Commercial entities need to hold valid business licences at the time of application to become agents. Further, it shall be established that, for commercial entities;

? The entity has a well established commercial activity which has been operational for at least twelve months immediately preceding the date of application to become an agent.

? The entity has not been classified as a defaulter in the financial sector at the time the agency contract is to be signed. That status must be maintained for the duration of the contract.
? The entity possesses appropriate physical infrastructure and human resources to be able to provide the services with the necessary degree of security.

Examples of entities that are eligible for appointment as agents include; limited liability companies, sole proprietorships, partnerships, societies, co-operative societies, state corporations, trusts, public entities, faith-based organisations, not-for-profit organizations, non-governmental organizations and educational institutions.

Both prospective and existing agents have to meet the suitability conditions stipulated in the Prudential Guideline on Agent Banking and Guideline on the Appointment and Operations of Third Party Agents by Deposit Taking Microfinance Institutions.

 

  • 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.

An agent shall show on request by a customer a copy of the approval letter issued by the Central Bank, a copy of the appointment letter from the institution and the current license for the commercial activity being undertaken by the agent.

 

  • What banking activities can agents undertake?

A bank agent may offer any banking service as may be specifically agreed in writing, 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 and Guideline on the Appointment and Operations of Third Party Agents by Deposit Taking Microfinance Institutions.

 

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

Bank agents are required to issue receipts for all cash deposit and withdrawal transactions. Additionally, the principal institutions are required to have in place adequate agent identification arrangements and customer feedback mechanisms to aid in the verification process. Further, bank customers are at liberty to verify the status of particular agents from local branches of principal institutions before using the services of any agent.

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.

Where an agent acts as a receiver and deliverer of documents, an acknowledgement should be provided by the agent for all documents received or delivered on behalf of the principal institution.

 

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

The principal institution shall provide a dedicated customer care telephone line for lodging complaints by customers. Complaints should be addressed within 30 days of reporting or lodging the complaint. Customers can also use this telephone line to verify with the institution, the authenticity and identity of the agent, its physical location and the validity of its agent banking business.

For complaints on service quality, you should first report your complaint to your bank for necessary action. In case of unsatisfactory response from the institution concerned, you may write to the Central Bank of Kenya using the address given at the end 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 online 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”.

A complete list of the licensed foreign exchange bureaus can be found on the Bank’s website under the link:
http://www.centralbank.go.ke/financialsystem/forexbureaus/Licensed.aspx.

 

  • 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 are not authorized to take deposits from the public and are also prohibited from lending money.

Further, forex bureaus are neither a deposit taking nor lending institutions within the meaning of the Banking Act, the Microfinance Act, 2006 or the SACCO Societies Act and therefore are not subject to any deposit protection.

 

  • 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/branches upon fulfillment of all requirements. Where a forex bureau has more than one outlet/branch, 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 under the link http://www.centralbank.go.ke/financialsystem/forexbureaus/Licensed.aspx.

Money Remittance Providers (MRPS)

  • What does money remittance business means?

Money remittance business means a service for the transmission of money or any representation of monetary value without any payment accounts being created in the name of the payer or the payee, where –
• funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee or to another payment service operator acting on behalf of the payee; or
• funds are received on behalf of, and made available to the payee.

 

  • Who is a money remittance provider/operator?

A money remittance operator/provider is a person licensed by the Central Bank pursuant to the Money Remittance Regulations, 2013 to undertake money remittance business.

 

  • What are the authorized activities of a money remittance provider?

Money remittance providers are authorized to deal in:

1) inbound and outbound international money transfer transactions.
2) spot foreign currency transactions involving cash and other instruments approved by the Central Bank.

 

  • What are prohibited activities for a Money Remittance Provider?

Money remittance providers are not authorized to:-

(a) act as authorized dealers in gold;
(b) engage in lending money;
(c) engage in deposit taking;
(d) maintain current accounts on behalf of customers;
(e) establish letters of credit; or
(f) act as a custodian of funds on behalf of customers.

 

  • Are money remittance providers subject to deposit protection?

No. Money remittance operators are neither deposit taking nor lending institutions within the meaning of the Banking Act, the Microfinance Act 2006 or the SACCO Societies Act and therefore are not subject to any deposit protection.

Microfinance Banks

  • What is a Microfinance Bank?

A Microfinance Bank is an institution that offers financial services such as credit, savings, insurance, foreign exchange transactions and money transfer services to the poor, low income households and Small and Micro Enterprises (SMEs) who do not qualify for, and lack access to other formal financial institutions. The Central Bank has broadly categorized microfinance banks into deposit taking and non-deposit taking.

 

  • 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 distinction between microfinance banks (deposit taking) and non-deposit taking microfinance banks?

The distinction between the two is that microfinance banks (deposit taking) 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 banks are not allowed to mobilize public funds and can only lend their shareholders’ funds or borrowed funds.

 

  • Who, then, oversees non-deposit taking microfinance banks (credit-only microfinance institutions)?

Non-deposit taking microfinance banks are overseen by the National Treasury.

 

  • What is the difference between Microfinance Banks and Commercial Banks?

The major differences between commercial banks and Microfinance banks are outlined in the schedule below:-

   Issue  Commercial Banks Microfinance Banks (MFBS) 
1) Legal Framework Licensed  under the Banking Act, Cap 488 Licensed under the Microfinance Act, 2006
2) Capital  Requirements Minimum of Kshs 1 billion (and can operate countrywide)
  • Nationwide MFBs (minimum of Kshs 60 million) – Operate countrywide
  • Community MFBs (minimum of Kshs 20 million) – Operate within a District (or Division if operating within a City)
3) Shareholding Limits
  • No more than 25% shareholding per person.
  • Significant Shareholding – 5% or more.
  • Prior approval by CBK for transfer of 5% or more shareholding.
  • No more than 25% shareholding per person.
  • Significant Shareholding – 10% or more.
  • Prior approval by CBK for transfer of 10% or more shareholding.
4) Insider Lending Limits
  • Single Insider and Associates cannot borrow more than 20% of the bank’s Core Capital.
  • Aggregate borrowings by all insiders cannot exceed 100% of Core Capital.

 

  • Single Insider and Associates cannot borrow more than 2% of the microfinance bank’s core capital.
  • Aggregate borrowings by insider cannot exceed 20% of the microfinance bank’s core capital.
5) Limits on Credit Concentration and Large Exposures Limits on Credit Concentration and Large Exposures
  • A single borrower cannot borrow more than 5% of the microfinance bank’s core capital.
  • Microfinance loans are those below 2% of the microfinance bank’s core capital.
  • Aggregate Microfinance Loans should be at least 70% of the Total Loan Portfolio.
6) Limits on advances Advances to any person should not exceed 25% of core capital at any point in time. Loans to a single end–user borrower should not exceed 5% of core capital.
7) Prohibited business Institutions are not allowed to engage in whole sale and retail trade, including import or export trade, except in the course of the satisfaction of debts due to it. Institutions are not allowed to engage in trust operations, investing in enterprise capital, wholesale or retail trade, underwriting or placement of securities, purchasing or otherwise acquisition of land except as may be reasonably necessary for expanding microfinance bank business.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Why do Microfinance Banks charge high interest rates?

Microfinance Banks 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 Microfinance Banks themselves pay for borrowing the funds that they in turn lend to their clients. 

The advent of Microfinance Banks in Kenya in 2008 (then described as deposit-taking microfinance institutions) is expected, in the long-run, to lower the general interest rates charged by Microfinance Banks 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 Microfinance Bank clients differentiate between CBK licensed and unlicensed microfinance institutions?

Microfinance Banks licensed and regulated by the Central Bank of Kenya are required to use the term ‘Microfinance Banks’ in their business name and display their licenses in all their places of business.

The Central Bank shall also publish the names of newly-licensed Microfinance Banks in the Kenya Gazette. Further, the Central Bank annually publishes the names of all licensed Microfinance Banks in at least two newspapers of nationwide circulation. 

The public may also access the list of licensed Microfinance Banks in the Central Bank website: http://www.centralbank.go.ke/index.php/microfinance-institutions/14-bank-supervision/83-list-of-licensed-deposit-taking

 

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 Credit Reference Bureau Regulations, 2013 restrict 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) and those licenced under the Microfinance Act (Microfinance Banks).

 

  • What information can credit providers share?

Currently, commercial banks, mortgage finance companies and microfinance banks are obligated to submit both positive and negative information to licensed CRBs. Positive information refers to any favourable data pertaining to a person's credit history, that is, history of fulfilling one’s credit and financial obligations.

Negative information means any adverse customer information relating to a customer and it includes:-
a) non-performing loans, credit defaults or late payments on all types of credit arrangements;
b) dishonour of cheques other than for technical reasons;
c) accounts compulsorily closed other than for administrative reasons;
d) proven cases of frauds and forgeries;
e) proven cases of cheque kiting;
f) false declarations and statements;
g) receiverships, bankruptcies and liquidations;
h) tendering of false securities; and
i) 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 commercial banks and microfinance banks share information?

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

 

  • Why is it necessary to share credit information?

Lack of information on borrowers results in two problems:
a) 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.
b) 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 is expected to address information asymmetry, enabling those with good credit records benefit from those records through lower risk premium on their borrowings, making credit to such borrowers more affordable.

 

  • How is credit information used by its recipients?

Information obtained from a credit reference bureau (CRB) by licensed institutions is used to assess the likely performance of potential borrowers in meeting their credit obligations. A 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 new credit applications. Banks will consider the credit performance of potential borrowers when appraising new or renewing existing credit applications.

 

  • How safe is information held by a CRB?

The Credit Reference Bureau Regulations, 2013 require 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.

 

  • As a consumer, do I have access to information on my credit performance held by CRBs?

Yes. Under the Credit Reference Bureau Regulations, 2013 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 every calendar year from a CRB (upon a written request) and within thirty (30) days of receiving an adverse action notice. In other instances, customers can also request their credit reports at any time from the CRB upon a written request, but will have to meet the relevant costs as agreed between the CRBs and the subscriber banks.

 

  • Can I challenge erroneous information held by a CRB on my credit performance?

Yes. The Credit Reference Bureau Regulations, 2013 set out the procedures for resolution of dispute between CRBs and aggrieved customers. Under the CRB Regulations, 2013, a customer has a right to dispute information held by a CRB, which the customer believes to be incorrect, by notifying the CRB in writing of the disputed information. On receiving such notice, the bureau is required to initiate and conclude investigations into the alleged inaccuracy within fourteen (14) days of receipt of the customer’s complaint. Where investigations reveal an error, the bureau should correct the error and inform all persons who may be affected by the information, including the customer. If any dispute is not satisfactorily resolved within twenty one days after the customer has notified the CRB of his objection, such disputed information shall be removed from the database of the CRB.

 

  • Will my bank notify me in advance before submitting information on my non-performing loan to a CRB?

Yes. A bank should notify the customer within one month before a loan becomes non-performing that the institution shall submit to a CRB the information on the loan immediately it becomes non-performing. However, for loans whose repayment interval or period is less than one month, the notice shall be served two weeks before the loan becomes non-performing.

 

  • How long is negative information submitted to a CRB kept after the debt is settled?

Licensed CRBs are required under the CRB Regulations, 2013 to hold information on non-performing loans and other negative information submitted to them by banks for at least 5 years after the date of final settlement of the amount in default.

The list of licensed CRBs can be accessed on the Central Bank website via the link: http://www.centralbank.go.ke/index.php/credit-reference-bureaus/14-bank-supervision/85-licensed-credit-reference-bureaus.

 

  • Do CRBs offer any other service besides credit reports?

In addition to issuing credit reports, CRBs are also authorized to carry out the following commercial activities:

a) credit scoring;
b) sell to institutions specialized literature and other information material related to its activities;
c) market and statistical research relating to matters set out under the CRB Regulations (2013) and
d) any other activity as may be approved by the Central Bank.

Financial Inclusion

  • What is financial Inclusion?

Financial inclusion is the delivery of formal financial services in a reliable, convenient, affordable, continuous, and flexible manner to those without access to financial services. These include individuals, households, micro, small and medium-sized entrepreneurs. Through increased access to formal financial services such as savings accounts, credit, insurance, and payment services, the poor can build financial security, manage risks against unforeseen events such as sudden unemployment, illness or natural disasters, and even invest in new business opportunities.

 

  • Why does financial inclusion matter?

An inclusive financial system:
• promotes economic growth and socio-economic well-being by enabling a greater part of the population participate in economic activity, hence contributing to efforts towards economic growth
• fosters greater efficiency in financial markets, facilitates the mobilization of domestic savings into long-term capital, and promotes the efficient allocation of a society’s resources.

 

  • Why is the Central Bank of Kenya interested in promoting financial inclusion?

As a government agency, the CBK is charged with overseeing the soundness, stability and overall growth of the banking sector, which is a key part of the financial sector. With more of the population having access to financial services, individuals and households can obtain reliable tools for managing their money. By borrowing and saving, individuals and households can meet basic consumption and long-term investment needs.

 

  • How is the level of financial inclusion (exclusion) in a country measured?

There are no standard measures of financial inclusion/exclusion. Different countries and institutions define financial inclusion differently. However, policymakers (such as the Central Bank of Kenya) use three main approaches to measure financial inclusion. These are:
• The number of users of financial services determined through surveys.
• The subjective assessments of financial service providers.
• Measurement of geographical and cost barriers to financial services.

 

  • How is one’s level of financial inclusion/exclusion determined?

While there is no standard measure of financial inclusion/exclusion in use, one is generally considered to have/lack financial access if, he/she has/lacks convenient, affordable and reliable access to formal financial services such as savings, credit, insurance and related financial products due to barriers beyond one’s control such as geography, cost or incapacity to utilize the service.

 

  • How does the Central Bank promote financial inclusion in Kenya?

To promote financial inclusion in Kenya, the Central Bank of Kenya has undertaken a number of initiatives including the following:

  •  Licensing of lower-tier depository institutions with lower capital requirements and lower operating costs than conventional banks to facilitate provision of low-cost service offerings that are accessible to low-income consumers.
  • Encouraging depository institutions to widen their branch networks countrywide to reach as many of the underserved areas as possible.
  • Introduction of the Agent Banking model and other forms of branchless banking – Turning non-bank outlets into financial services providers.
  • Introduction and promotion of the Credit Information Sharing (CIS) initiative which allows lenders to evaluate borrowers based on their past credit performance so as to better distinguish between good and bad credit risks. The CIS initiative facilitates the creation of information capital as an alternative to physical collateral and enables borrowers without physical collateral to use their credit histories as security against loans, thereby accessing credit which they could otherwise not access.
  • Launch of Currency Centres in partnership with the banking industry in a bid to reduce operating costs for banks and enable them lower the cost of financial services, thereby making the latter more accessible .
  • Introduction of Shariah Compliant Banking Products to cater to the financial needs of those excluded from conventional banking products based on religious beliefs.
  • Dissemination of information on financial services to the public through various fora and public events with a view to sensitizing the public on financial services, thereby empowering them.
  • Establishment of a Consumer Protection framework for institutions under the Central Bank’s purview to set, promote and enforce minimum service standards and practices.
  • All consumers should be treated equitably, honestly and fairly at all stages of their relationship with institutions.

 

  • What rights do I have from a service provider as a consumer of financial services?

Under the Banking Act and CBK Prudential Guideline on Consumer Protection CBK/PG/22, consumers have the following rights from institutions:

  • The right to be treated equitably, honestly and fairly in all dealings with an institution.
  • The right to receive explanations, in clear, simple and ordinary language which is understandable to the customer, the key features of the range of products and services that the consumer is interested in so as to enable the consumer to arrive at an informed decision
  • The right to relevant information on all charges, fees penalties and any other financial liability or obligation which would be incurred arising from the use of the product or the rendering of the service sought; and
  • The right to be issued with a copy of any signed agreement which contains the terms and conditions of the agreement for the said service.
  • The right to a cooling-off period prior to signing up for the product sought i.e. the right to take some time to think over the proposed transaction before signing the contract or committing himself to take the product or use the service.

 

  • What obligations do I have to a service provider as a consumer of financial services?

A customer has the obligation to:

  • provide a service provider with full details on the service required and one’s personal financial circumstances (including subsequent changes after signing up) to enable the service provider provide advice that is suitable and appropriate to the customer’s circumstances
  • abide by the terms and conditions of the service contract once the customer has voluntarily signed up for and benefitted from the service.

Money Laundering and Terrorism Financing

  • 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:

• Corruption;
• Fraud;
• Drug, human and arms and game trophy trafficking;
• Cattle rustling;
• Currency counterfeiting;
• Robbery;
• Tax evasion;
• Insider trading; and
• Market manipulation.

 

  • How is money laundered?

Money laundering normally takes place in three stages:-
i. Placement: This is the first stage where the proceeds of crime enter the financial system mostly through cash deposits or the use of otherwise legitimate channels such as electronic transfers so as to avoid suspicion;
ii. 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
iii. 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 constitutes terrorism financing?

Financing of terrorism is the willful provision or collection, by any means, directly or indirectly, of funds with the intention of providing financial support to terrorists or terrorist organisations, so as to facilitate terrorist activity.

Financing of terrorism encompasses use of legitimate or clean funds to commit or attempt to commit, facilitate or participate in the commission of both national and international terrorism.

 

  • What are the effects of money laundering and terrorism financing 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 and terrorism financing?

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.

The FRC is the principal authority charged with addressing suspected money laundering activities in Kenya. All transactions deemed suspicious are reportable to the FRC, whose role is to gather and collate financial intelligence for use in the fight against crime, illicit activities, money laundering and terrorist financing to protect the integrity and stability of Kenya’s financial system. The main functions of the FRC are to:-

(a) receive and analyze returns from reporting institutions, on suspicious transactions and to forward the same to the relevant authorities for appropriate action, and
(b) develop anti-money laundering policies.

  • What constitutes a reportable/suspicious transaction?

A suspicious transaction is one that departs from the normal patterns of account activity usually associated with a given account. Any complex, unusually large transaction (s), or unexplained pattern of activity may be considered suspicious. In determining whether a given transaction/activity is suspicious, one should consider all the known circumstances relating to that situation, and assess how likely or odd the situation at hand is.

 

  • Are there other reporting obligations imposed on financial institutions in respect to money laundering and terrorism financing?

Yes. All reporting institutions including banks, mortgage finance companies and microfinance banks are required to report to the Financial Reporting Centre (FRC) all cash transactions equivalent to or exceeding US$ 10,000 or its equivalent in any other currency whether they appear to be suspicious or not.

The Financial Reporting Centre is the agency mandated under the Proceeds of Crime and Anti-Money Laundering Act to receive, collate and analyse all reports on suspicious transactions, and cash transaction reports and where necessary forward to the relevant Government agency for further investigation and relevant action.

Other

GENERAL QUESTIONS

  • 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), the Nairobi Securities 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 Cabinet Secretary to the National Treasury 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 Kenya Deposit Insurance Corporation (KDIC). In the event of collapse of a regulated institution, KDIC 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, microfinance bank, money remittance service provider or credit reference bureau?
  • You should first report the complaint to your bank (or agent’s principal institution); forex bureau, microfinance bank, money remittance service provider 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
Tel: 2863005
Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

You may also obtain more details on the above and related matters from the Central Bank of Kenya’s website: www.centralbank.go.ke.

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