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The implications of the Finance Act, 2016 on the Banking Sector in Kenya
July 04 2017 0 comment

The implications of the Finance Act, 2016 on the Banking Sector in Kenya

The implications of the Finance Act, 2016 on the Banking Sector in Kenya
By the Africa Legal Consulting Team

The Finance Act, 2016 made a few changes to the banking legal regime through amendments to the Banking Act and the Kenya Deposit Insurance Act. The amendments are aimed at curbing some of the factors which have contributed to the collapse of banks in the recent past. The collapse of banks has been attributed to various factors such as imprudent lending strategies, poor management and deficiencies in the legal framework. Many SACCOs have also collapsed leading to loss of savings by the shareholders. The following amendments to the Banking Act became effective on 1st January 2017.

First, the Finance Act expands the scope of institutions required to disclose information on non-performing loans to include SACCOs, cooperatives and public utility companies such as KPLC. Information on non-performing loans submitted from time to time contributes to accountability and also provides an opportunity for blacklisting of persons of who fail to repay loans granted. The Act further extends the credit information sharing pool and obliges the financial institutions to share such information with the relevant bodies across borders. This renders it difficult for borrowers who have failed to repay loans in Kenya to access credit facilities outside the country. It also creates the possibility for regulators such as the KRA to share taxpayer information across borders.

The CBK is allowed to enter into an arrangement with the board of directors of a regulated institution to rectify anomalies in the institution. The Finance Act prevents the CBK from entering into such arrangements without consulting the Cabinet Secretary. This facilitates the role of the national treasury in the banking sector although it is also likely to occasion delays where the CBK wishes to take action against an institution that have violated the existing legal regime. This will also minimise instances of collusion between the CBK and non-compliant institutions.

The penalties to be fined against institutions and/or persons who have failed to comply with the banking regulations have been enhanced. This is a deterrence mechanism which will persuade persons to comply with the acts as well as the CBK Prudential Guidelines. The penalties for non-compliant institutions have been enhanced to 20 million from five million while non-compliant individuals will be liable to a penalty of one million shillings, formerly set at two hundred thousand shillings. The CBK is empowered to charge additional penalties of up to one hundred thousand shillings per day when the default continues.

In addition to the above amendments, the Finance Act also increased the core capital for banks and mortgage finance companies from KES 1 billion to KES 5 billion, effective 1st January 2017. However, the realisation of this increase is expected to occur within a period of 3 years. By 31st December 2017, each institution should have a core capital of 2 billion, 3.5 billion should be attained by 31st December 2018 and the final phase should see the attainment of the 5 billion as laid out by 31st December 2019. This provision therefore gives timelines for affected institutions to hit the requisite target progressively. However, some of the institutions may not meet the requirement within the time frame hence some of the small institutions may be acquired by larger institutions while others may merge with each other to form one bigger entity that meets the core capital requirements.

The above provision also seems to sideline small scale investors who wish to venture into the banking sector due to the high capital requirements. It also fails to take into account that various banks engage in different activities hence each carries different risks from the other thus the core capital of each bank should be computed in relation to the risk assumed over and above the minimum capital requirements. Additional capital requirements should be imposed where the risk assumed is higher.

Finally, the Act amended the Kenya Deposit Insurance Act and called upon the Chief Executive Officer of the Kenya Bankers’ Association or his representative to be a member of the Kenya Deposit Insurance Corporation. The composition of the board is also altered and public officers and/or members of institutions licensed by the CBK are not eligible for appointment as members of the board. Lastly, Board Members should have least 10 years’ experience in banking, finance, insurance, commerce, law, accountancy or economics. These amendments facilitate independence and expertise by the board in exercising its mandate.

These changes are effective from 1st January 2017. If fully implemented, the amendments will not only transform the banking sector but also ensure that only serious investors venture into the banking business. The depositors’ funds will be adequately protected and the collapse of banks and other financial institutions might be put to rest. However, much of this is dependent on the goodwill in the implementation of these provisions by all the relevant stakeholders.

In case you need more information or advice on the above changes, please contact the Africa Legal Consulting team on This email address is being protected from spambots. You need JavaScript enabled to view it..

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