World Bank questions financial rules

• According to the survey, The Global Financial Development Report: Rethinking the Role of the State in Finance, Kenya has not formally incorporated Basel II principles, which stress raising capital levels as a buffer against market, operational and other risks.
• Market risk is the chance that an asset or liability position — such as interest or exchange rates — could change to the detriment of an institution.
• Operational risk is the probability the changes in systems such as ICT or security could expose an institution to adversity such as a cash loss.
• An attempt by the Central Bank of Kenya (CBK) to revise the prudential regulations by increasing capital buffers for commercial banks has been held in abeyance after the institutions asked for more time to consider them.
• Initially the regulations were supposed to take effect from July 1 but this was first postponed to August 1, before a deadline was dropped altogether.

Kenya is among countries where global best practices for supervision of commercial banks is yet to be legislated, a new World Bank survey of 154 countries shows.

The report says such legislation will take care of market and operational risks through capital requirements.

According to the survey, The Global Financial Development Report: Rethinking the Role of the State in Finance, Kenya has not formally incorporated Basel II principles, which stress raising capital levels as a buffer against market, operational and other risks.

Market risk is the chance that an asset or liability position — such as interest or exchange rates — could change to the detriment of an institution.

Operational risk is the probability the changes in systems such as ICT or security could expose an institution to adversity such as a cash loss.

An attempt by the Central Bank of Kenya (CBK) to revise the prudential regulations by increasing capital buffers for commercial banks has been held in abeyance after the institutions asked for more time to consider them.

Initially the regulations were supposed to take effect from July 1 but this was first postponed to August 1, before a deadline was dropped altogether.

Bankers say they have agreed with the regulator to engage until some compromise on implementation is agreed upon.

The Kenya Bankers Association (KBA) said its members had requested that the regulators not apply the provisions for now. Among the critical aspects of the regulations was a requirement that banks set aside extra capital and bring in independent directors into their boards.

“We are currently engaging with the regulator on the guidelines. They were to be implemented from the beginning of August but KBA and individual banks raised some issues on the practicality,” said KBA chief executive Habil Olaka.

Among the issues raised was that it would take longer to appoint new directors since stakeholders needed to be involved. “When it comes to raising more capital, shareholders would also need to be involved. It is not a one-day affair. Shareholders might at the same want to raise capital for expansion. So there has to be some structured arrangements,” said Mr Olaka.

However, the KBA boss said many banks had put in place their own risk management approaches taking account of the markets and operations — which are part of Basel II — without having to wait for legislation.

Mr Olaka said the new regulations on capital and directors were not only about Basel II but had gone beyond to incorporate some aspects of Basel III — a more strict regime touted as a bulwark against a financial crisis such as happened across the globe between 2008 and 2009 following the sub-prime mortgage meltdown in the US.

Standard Investment Bank research analyst Francis Mwangi concurred that some banks were already implementing Basel II in their operations.

“We have not fully implemented Basel II but we have adopted some of its recommendations. Banks have tweaked Basel I to accommodate Base II by factoring in marketing and operational risks,” said Mr Mwangi.