Central bank seeks tougher penalties for rogue banks

The Central Bank of Kenya (CBK) is working on tougher monetary penalties for errant commercial banks and credit reference bureaus in a bid to streamline the sector.

The apex bank has drafted new regulations to provide a clear framework for penalizing financial institutions that violate banking laws.

The East African nation has 41 commercial banks, one mortgage institution and at least three credit reference bureaus.

In the past months, poor practices have seen two banks collapse with customers' deposits, one which has, however, been revived and the other was liquidated.

There have also been cases of banks helping the corrupt launder money while others heaping on borrowers illegal charges.

While the financial transactions involved have been huge, banks have been slapped with as low as 1,000 dollars fine by the Central Bank, a practice that the regulator is now keen to change.

"The CBK has drafted the Banking (Penalties) Regulations, 2017 to provide a clear framework for assessing and levying of monetary penalties to promote compliance with banking laws and enhance integrity of the banking sector," said the Central Bank in a statement Wednesday.

Under the proposed laws, any institution that fails to comply with any provision of the banking laws or conditions imposed by the Central Bank shall be liable to a penalty not exceeding 194,174 dollars. Initially, the maximum the banks paid for a penalty was 9,708 dollars.

According to the Central Bank, some of the violations the banks would be penalized for include failure to maintain the minimum capital requirement prescribed under the banking laws, failure to maintain the prescribed minimum liquid assets and failure to maintain the prescribed insider lending limits.

Allowing a representative office to carry out banking business without the approval of the Central Bank and allowing a person to become a significant shareholder, director or senior officer of an institution before the Central Bank has approved would also attract a heavy penalty.

The banks would also be required to seek permission before granting loans, advances or other credit facilities exceeding 25 percent of the institution's core capital.

This is one of the reasons a top bank collapsed in the East African nation as directors had lent huge amounts of money without approval.

Analysts noted that the laws are what the sector needs to tame rogue practices by some institutions as they search for profits.

"Right now there are many cases in court of customers suing commercial banks for illegal charges, especially on loans. And they are winning them. People are going to court because banks exploited the lack of proper regulations to infringe the rights of customers. The new laws are welcome," said economics lecturer Henry Wandera.

The Central Bank is inviting comments from the public and financial institutions before ratifying them.