CBK seeks powers over micro enders

The Central Bank of Kenya is seeking powers to shut down microfinance institutions that breach regulatory guidelines, in a move that could precipitate an overhaul of the Microfinance Act.

The regulator says it also requires more powers to enforce remedial measures for microfinanciers facing capital deficiencies.

“The law currently does not give the Central Bank sufficient powers to take prompt corrective measures whenever a deposit-taking microfinance is faced with deficiencies in its business operations that are not related to solvency,” says the regulator in a new sector report.

The Central Bank started licensing deposit taking micro-finance institutions only three years ago, after enactment of the Microfinance Act.
There are six licensed deposit taking microfinance (DTM) institutions in the country, operating 63 branches.

The DTMs have collected customer deposits worth Sh11.6 billion through 1.6 million accounts and have issued loans worth Sh17.7 billion.

The DTMs are pushing to operate current accounts and to be included in the electronic payment system by being present in the clearing house.

Currently, the DTMs are represented in the clearing house by their bankers.

Apart from capital adequacy, other operation parameters observed by the CBK include liquidity levels, insider loans, investment in government securities and provisioning of bad loans.

CBK’s demand for more power is said to be as a result of the learning process that both the regulator and industry players have had to undergo.

“We are still going through the recommendations before meeting with Central Bank next week,” said Caroline Karanja, programmes officer at the industry umbrella body, Association of Microfinance Institutions.

In the banking sector, the Central Bank has powers to require a bank to pass specific board resolution, sign commitment letter or a memorandum with the regulator on steps to be address specific weaknesses.

In extreme cases, the supervisor has powers to prohibit an institution from some businesses, appoint its own officers or remove an employee viewed to be source of discontent.

Central Bank points out that the current legal framework does not give guideline on how to conduct stress tests which are used to gauge the financial stability of institutions in pessimistic conditions.

The framework also fails to define permissible activities of the institutions, the handling of possible mergers and amalgamations and creation of shariah compliant services.

To protect money collected from the public by the deposit taking institutions, the government has set stringent entry requirement which the industry players now wish to be relaxed together with their provisioning requirement which are tougher than those of the banking sector.