12 lenders ignore Central Bank of Kenya regulations

Deposit flight from small lenders at the height of the banking crisis distorted the liquidity ratio for most banks. [Wilberforce Okwiri, Standard]

Central Bank of Kenya (CBK) has flagged 12 lenders for flouting banking laws, even as it upgraded the rating of the banking sector from satisfactory to strong.

The enhanced industry rating was mainly due to improved capital adequacy and asset quality. Some 11 banks continue to be ranked as strong while the number of those ranked as satisfactory has dropped from 19 to 16.

For the year ended December 31, 2016, CBK notes in its latest supervision report that 12 banks were in violation of the Banking Act and CBK Prudential Guidelines by up to three times compared to four banks in the previous year.

“The increase in the number of banks in violation was mainly with respect to non-compliance with liquidity ratio after Chase Bank was placed into receivership due to deposit movement, mostly affecting small and medium banks,” notes the sector’s watchdog.

Liquidity ratio is the ratio between the liquid assets and the liabilities of a bank or other institution. It is used as a measure of how well a bank is positioned to meet its short-term obligations.

According to CBK, seven institutions were in violation of Section 19 (1) of the Banking Act and CBK Prudential Guideline (CBK/PG/05) on Liquidity Management, which requires institutions to have a minimum liquidity ratio of 20 per cent.

Social media rumours

After the small and medium-sized customers-centered Chase Bank was put into receivership on April 7 last year, confidence levels in the sector dropped, triggering panic withdrawal of deposits in small and medium-sized banks. In December last year, the sector’s year-on-year customer deposits increased by 5.3 per cent to Sh2.62 trillion, with large banks taking the lion’s share of deposits following the banking crisis.

For Family Bank, it closed the year with a liquidity ratio of 14.4 per cent being 5.6 percentage points below CBK’s threshold, having lost Sh21.3 billion in deposits. This was triggered by social media reports that the bank was about to fold after it was implicated in the National Youth Service scandal. “The malicious social media attack in November 2016 had an adverse impact on liquidity at the close of the year, which has since recovered fully,” said the bank when it announced its full-year results.

Fully State-owned Development Bank of Kenya saw its liquidity ratio shrink from 43.1 per cent to 1.7 per cent.