CBK issues new guidelines in drive to bolster banks stability

Corporate governance will be one of the factors determining capital to be held by a bank following introduction of risk-based supervision by the Central Bank of Kenya (CBK) which is likely to see some lenders raise more funds next year.

CBK in a circular to commercial banks says that beginning April, each bank will be required to hold capital consistent with its risk profile and business strategy. This is a one month extension from the previously recommended date of March.

Currently banks, irrespective of size and target market, are required to hold the same core capital and maintain quantitative ratios which do not factor in issues such as their internal management, stress testing and operating environment. The disclosure is part of the internal capital adequacy assessment process (ICAAP) guidelines issued by CBK following public debate.

“The dialogue will be structured to cover elements such as internal governance, organisation of the institution’s business and how the institution allocates capital against risk,” reads part of the guidelines.

Lack of strong corporate governance structures was one of the key contributors to recent banks failure. Imperial Bank had been headed by the same chief executive, Abdulmalek Janmohamed, since formation — who is said to have been the mastermind of massive fraud leading to its fall.

READ: How Imperial Bank boss stole Sh34bn from savers

Dubai Bank chairman, Hassan Zubeidi, is said to have usurped powers of the chief executive and had no functional board resulting in mismanagement.

Weak corporate governance has been cited as the Achilles heel of Kenya’s banking sector with CBK making attempts to address the issue.

The regulator recently asked all lenders to disclose their top five shareholders while disclosing intentions to cap the tenures of external auditors and chief executives.

The new guidelines will also give CBK a say on the amount of capital held by banks with regional operations in a move that may see large lenders seek additional funding.

“Institutions conducting their ICAAP at the group level should ensure that their consolidated capital is adequate to support the volume and risk characteristics of parent and subsidiary activities as well as being sufficient to absorb potential losses arising from such activities,” reads part of the guidelines.

The proposal to introduce ICAAP also comes at a time when the regulator is gearing up to conduct stress tests on the institutions.

The guidelines say banks should formulate capital adequacy strategies in line with the results of the stress tests, which also comes after the collapse of three banks in the nine months to April.