Nine banks on the spot over running afoul of Central Bank rules

Nine banks found themselves in the financial regulator’s bad books last year after violating critical legal requirements, a new report shows.

This was a decline compared to 13 banks that were in violation of the Banking Act and Central Bank of Kenya (CBK) Prudential Guidelines in the year ending December 31, 2020.

The improvement increased the profitability of banks after the economy began to recover from the negative impact of the Covid-19 pandemic.

CBK said most of the violations were in respect to a breach of the single obligor limit mainly due to a decline in core capital in some banks that have continued to report losses.

“Appropriate remedial actions were taken on the concerned institutions by the CBK in respect of the violations,” said the regulator in the 2021 Banking Supervision Report.

The report showed that eight banks failed the test of ensuring that a single borrower does not receive more than 25 per cent of their core capital in what is designed to avoid the risk of the lenders putting all their eggs in one basket.

Known as the single obligor, this requirement came to the fore in August last year after Deputy President William Ruto claimed that he had arranged a Sh15 billion loan from Equity Bank to a Turkish investor.

However, the bank revealed that it can only loan a maximum of Sh2.5 billion, as required by CBK’s prudential guidelines. The report shows that two banks failed to maintain the minimum core capital—or shareholders’ funds—of Sh1 billion.

Two banks were found guilty of engaging in prohibited business that restricts aggregate large credit exposures to not more than five times the core capital.

Five banks had sunk more than a fifth of their core capital into land and building, a violation aimed at ensuring that banks have enough liquidity in case depositors urgently need their money.

Five banks failed to meet the minimum statutory required ratio for total capital to total risk-weighted assets of 14.5 per cent, a violation that affected one of the largest banks.  

Risk-weighted assets are used to determine the minimum amount of capital that must be held by lenders to reduce the risk of insolvency due to their lending activities.

The more risk a bank takes, the more capital is needed to protect depositors.

Three banks failed to meet the statutory minimum required ratio for core capital to deposit ratio of eight per cent.

In another three banks, a single insider took up loans valued at over a fifth of their core capital while for another two lenders insider loans exceeded the total insider borrowing limit of 100 per cent of core capital.

One bank failed to maintain the minimum statutory liquidity ratio of 20 per cent, meaning that the lender would struggle to pay off current debt obligations.

The bank’s liquidity stood above the minimum statutory level of 20 per cent at an average liquidity ratio of 56.2 per cent in the same period.

Two banks violated the requirement that a financial institution maintain foreign exchange exposure at not more than 10 per cent of core capital.