Central Bank of Kenya (CBK) last year reprimanded 11 lenders for various breaches of the law or rules largely due to failure by owners to raise more capital amid depleted cash reserves.
The number of errant lenders has, however, fallen from 15 in 2017, with the banking regulator singling out reduced core capital as the main driver of violations.
“Most of the violations (in 2018) were mainly in respect to non-compliance with single borrower limit, this was attributed to decline in core capital in some banks that have continued to report losses,” the CBK, which does not name non-compliant banks, says in the Bank Supervision Annual Report 2018.
Six banks were found to have lent cash equivalent of more than 25 percent of core capital to a single borrower in breach of Section 10(1) of the Banking Act in December 2018, down from eight the year before.
Smaller banks have struggled to attract fresh capital since the failure of Dubai Bank (August 2015), Imperial Bank (October 2015) and Chase Bank (April 2016) resulting in the considerable flight of deposits to larger lenders.
This was exacerbated by September 2016 legal ceiling on interest charges (that was scrapped last week) which cut profit margins and increased loan loss provisions from January 2018 biting into cash reserves.
Declared reserves and equity funds form the core capital for banks.
Shareholders’ funds and cash reserves in four banks fell below eight percent of customer deposits in breach of prudential guidelines compared with two in 2017.
Four others fell short of the minimum core capital to total risk-weighted assets ratio of 10.5 per cent and total capital to total risk-weighted assets ratio of 14.5 per cent.
Three banks also violated the restrictions on insider loans.