Banking Law Presentation
Introduction
Licensing of banks
Prohibitions and restrictions in respect of banking and financial business.
Reporting, inspection and control
Appointment of statutory manager
Liquidation
Deposit Protection/Insurance
Increase in charges and interest
Introduction
A Bank, according to Section 2 of the Banking Act, refers to a company which carries on, or proposes to carry on
banking business in Kenya and includes the Co-operative Bank of Kenya Limited but does not include the Central Bank.
See Section 2 (2) of the Banking Act).
The bank carries on “banking business” which includes but is not limited, to accepting of money on deposit from
members of the public which is repayable on demand or after the expired period of time given in the notice, b)
accepting of money on current account and payment on and c) acceptance of monies and the employing of money held
on deposit or on current account, or any part of the money, by lending, investment or in any other manner for the
account and at the risk of the person so employing the money
A bank has a legal personality.
License and Registration of Banks
For a bank to operate in Kenya, it must, first be incorporated in
compliance with provisions of the Companies Act. This means that the
procedure followed in registering a company i.e. -reservation of names,
preparation of formative documents, payment of stamp duty, filing of
Articles and Memorandum of Association and compliance with other
registration requirements.
It is important to note that for one to use the word ‘bank’, the consent
of the minister is required, and the business of the company must be
banking
Once the promoters have incorporated the bank, the next requirement
is a license from the Central Bank.
License and Registration of Banks
It is forbidden to carry out any banking business or financial business or the business of a
mortgage finance company, unless it is an institution or a duly approved agency conducting
banking business on behalf of an institution which holds a valid license (See Section 3 (1) of The
Banking Act). Any person who contravenes this provision is liable to a fine not exceeding one
hundred thousand shillings or to imprisonment for a term not exceeding three years or to both.
In considering whether to license the bank or not, The Central Bank will look into factors such
as;
i. The financial condition and history of the institution
(ii)The character of its management;
iii. The professional and moral suitability of the persons proposed to manage or control the
institution;
iv. The adequacy of its capital structure and earning prospects;
v. The convenience and needs of the area to be served; and
vi. The public interest, which will be served by the granting of the license.
REVOCATION OF LICENSES
Under Section 6 of The Banking Act, The Central Bank may, by notice in writing to the
institution, revoke a license of the institution if it;
(a) Ceases to carry on business in Kenya or goes into liquidation or is wound up or is
otherwise dissolved; or
(b) Fails to comply with this Act, the Central Bank of Kenya Actor any rules, regulations,
orders ordirections issued under any of those Acts or any condition of a license
The Central Bank, before revoking a license, shall give to the institution not less than
twenty eight days’ notice in writing of the Central Bank’s intention, and shall consider any
representations made to it in writing by the institution within that period before revoking
the license
Capital Requirements
Section 7 of the Banking Act states that a license shall not be granted to an institution
unless the
Institution meets the minimum capital requirements specified in the Second Schedule
.
The requirements are that banks must at all times maintain;
a) A core capital of not less than eight per cent of total risk adjusted assets plus risk
adjusted off balance sheet items as may be determined by the Central Bank;
b) A core capital of not less than eight per cent of its total deposit liabilities;
c) A total capital of not less than twelve per cent of its total risk adjusted assets plus risk
adjusted off balance sheet items as may be determined by Central Bank;
d) A core capital of at least two hundred and fifty million Kenya shillings in the case of a
bank or a mortgage finance company, which was increased to 1 billion as of 31st
December 2012;
e) A core capital of at least two hundred million Kenya shillings in the case of a financial
institution
x
Licensing of banks
The banking industry in Kenya is regulated by a number of laws. These are the Banking Act (Cap
488), the Companies Act (Cap 486), the Central Bank Act (Cap 491), and indirectly, the
Constitution 2010.
The principal law is the Banking Act, Cap 488. Its commencement date was 1st November 1995.
The aim of the Act was to “regulate the business of banking and for matters incidental thereto
and matters connected therewith” stated in the preamble of the Act.
The 1995 Act replaced the Act of 1989 which was a consolidation Act with the stated aim being,
to “consolidate the law regulating the business of banking in Kenya and for connected purposes”.
Since then, it has gone through several amendments, almost every year especially through the
Finance Acts after the budget speech by the Minister for Finance (now Cabinet Secretary for
National treasury).The latest amendments were in the 2013, 2019 finance bill.
Licensing & Regulation of banks
The second law which affects the banking industry is the Companies Act. Banks are businesses registered and
incorporated under the Companies Act and whose object is to carry out the business of banking as stipulated
in the objects clause of the Memorandum of Association. Section 2 of the Banking Act indeed defines a bank
as a “company
The third law that guides the business of banks is the Central Bank Act. The Central Bank Act has the
supervisory role over banks. The Central Bank may also open accounts, accept deposits from, offer facilities
for clearing financial instruments to a specified bank (See Section 31 (1) and (2) of the CBK Act.
The First Schedule of the Act lists the specified banks.The Banking Act gives power to the Central bank to give
permission to a company to use the name‘bank’ (See Section 3 b), to license institutions intending to transact
banking business (See Section 4),and to regulate a wide range of matters involving the operations of banking
business including inspection.
Prudential guidelines issued by the Central Bank of Kenya from time to time have legal effect and play a key
role in regulating the banking industry, as well as specific banks.
CONSTITUTION
The fourth law which indirectly has a bearing of the operation of
Banks is the Constitution 2010.
This is to the extent that Article 231 establishes the Central Bank of
Kenya as a constitutional institution which has the role of “performing
any other functions conferred on it by an Act of
parliament.”(subsection 2) Parliament has therefore enacted the
Central Bank of Kenya Act and the Banking Act, both of which give
supervisory functions of banks to the Central Bank. (Under Central
Bank , section 4A(c), and (d), and under The Banking Act, various
provisions throughout the Act).
The case for regulating the banking sector is justified vide the
following points
Maintain Stability in the Industry as a Key Economic Sector
Create and Maintain Confidence in Money Market
Protect Depositors
Control Illegal and Unethical Activities in Banking
Appointment of statutory manager
Power of the Central Bank to Appoint Manager
Section 34(4) of the Banking Act empowers the Central Bank, with the approval of the Minister,
to appoint a manager of an institution.The manager is appointed to assume the management,
control and conduct of the affairs and business of an institution and to exercise all the powers of
the institution to the exclusion of its board of directors. This includes the use of its corporate
seal.
The Central bank also has power to remove any officer or employee of an institution who in the
opinion of the Central Bank has caused or contributed to contravention of the Banking Act or to
deterioration in the financial stability of the institution or has been guilty of conduct detrimental
to the interests of depositors or other creditors of the institution.
The Central Bank may also appoint a competent person familiar with the business to its board of
directors, and may; by notice in the gazette, revoke or cancel any existing power of attorney,
mandate, appointment or other authority by the institution in favour of any officer or employee
or any other person.
The case for regulating the banking sector is justified vide the
following points
Section 34(1) provides The power is exercised in the following
circumstances;
(i) If the institution fails to meet any financial obligation when it falls due
including an
obligation to pay any depositor.
(ii) if a petition is filed, or a resolution proposed, for the winding up of the
institution or if any receiver or receiver and manager or similar officer is
appointed in respect of the
institution or in respect of all or any part of its assets.
(iii) If the auditor of an institution makes a report to the Central Bank to the
effect that
there has been serious breach of or non-compliance with the provisions of
the Banking
The case for regulating the banking sector is justified vide the
following points
The Central Bank Act or other guidelines issued by the Central Bank, or that a
criminal offence involving fraud or dishonesty has been committed or that losses
have been incurred which reduce the core capital of the institution by more than
fifty percent (50%) or serious irregularities have occurred which may jeopardize the
security ofdepositors or creditors or that he is unable to confirm that the claims of
depositors and creditors are capable of being met out of the assets of the
institution.
(iv) If the Central Bank discovers or becomes aware of any fact or circumstances
which, in
the opinion of the Central Bank, warrants the exercise of the relevant power in the
interests of the institution or its depositors or other creditors.
The case for regulating the banking sector is justified vide the
following points
Charterhouse Bank Limited vs Central Bank of Kenya and 2 others (Civil
Application No. 200 of 2006(CA) (2007) eKLR).
It was held that a manager, upon assuming the management , control
and conduct of the affairs and business of an institution, must discharge
his duties with diligence and in accordance with sound banking and
financial principles and, in particular, with due regard to the interests of
the institution, its depositors and other creditors. Unless there is a
complaint that a Statutory Manager has breached his statutory duties,
the court would be reluctant to issue injunctive orders against him.
The case for regulating the banking sector is justified vide the
following points
A manager is appointed for a period, not exceeding twelve (12) months, as may be specified by
the Central Bank in the instrument of appointment.
Such period can only be extended by the High Court, upon the application of the Central Bank.
The decision whether or not to extend time is essentially discretionary
See also Re Central Bank of Kenya (HC misc. Civil Application 960 of 2007, eKLR)
Re Central Bank of Kenya (HC misc. Civil Application 960 of 2007, eKLR)
In this case, the Central Bank of Kenya made an application under section 34(3) of the Banking Act for
the extension of the period of appointment of the statutory manager of Charter House Bank. Charter
House Bank opposed the application on the grounds that it was malicious, ill-founded and illegal. The
court ruled for the Central Bank and extended the period for a further 12 months
Duties of a Statutory Manager
Tracing and preserving all the property and assets of the institution.
Recovering all debts and other sums of money due to and owing to the institution.
Evaluating the capital structure and management of the institution and recommending to the
Central Bank any restructuring or reorganization which he considers necessary and which,
subject to the provisions of any other written law, may be implemented by him on behalf of the
institution.
Entering into contracts in the ordinary course of business of the institution including the
raising of funds by borrowing on such terms as he may consider reasonable.
Obtaining from any officers or employees of the institution any documents records,
accounts, statements or information relating to its business.
Section 34(6) of the Banking Act has provisions to the fact that for the purposes of discharging
his responsibilities, a manager has power to declare a moratorium on the payment by the
institution of its depositors and other creditors
Charges & Interest In the Banking Sector
As provided by section 44 of the Banking Act, no institution should increase its rates of Banking or other charges
without prior approval of the Cabinet Secretary for Finance.
Therefore, the Law prohibits or restricts increase in Bank Charges.Section 39(1) of the Central Bank of Kenya Act,
which prohibits the charging of interest to the tune that exceeds the principal sum.In other words, the total sum
charged as interest should never exceed the principal sum which was given as a loan or as a financial facility, to a
chargor.
This is the in duplum rule which first gained popularity in Kenya through the “Joe Donde Bill
Francis J. K. Ichatha v Housing Finance Company of Kenya (Civil Application No. 108/05 reported in Kenya Law
Reporting).
As provided by section 44 of the Banking Act, no institution should increase its rates of Banking or other charges
without prior approval of the Cabinet Secretary for Finance. However, section 44 does not apply for penalty interest
on loan arrears.
Charges and Interest In the Banking Sector
The CBK regulates interest rates through the Kenya Bank Reference Rate (KBRR) that is based on the CBK's policy rate
and other factors [6]. The current Central Bank Rate (CBR) is 8.75%, while the current Inter-Bank Rate is 6.47%
The central bank rate is the interest rate at which a nation's central bank lends money to domestic banks and is often
used as a tool to manage inflation and economic growth
if the CBK raises interest rates, banks may also raise their rates to maintain profitability. However, banks
can also choose to borrow from other banks at the federal funds rate, which is the rate at which banks
charge each other, rather than from the central bank
When it comes to specific loans, such as personal loans or mortgages, banks take into consideration a
variety of factors, including the borrower's credit history and the amount of the loan, when setting
interest rates . The interest rate charged on a loan may also include fees, such as an annual program fee
for personal loans or closing costs for mortgages
Interest Rates
The Kenyan banking sector has experienced fluctuations in interest rates
and charges over the years. The Central Bank of Kenya (CBK) regulates
the sector, and its reports contain historical interest rates on lending,
deposit, overdraft, and savings [1]. According to Trading Economics, the
Bank Lending Rate in Kenya averaged 15.93 percent from 1971 until
2022, with an all-time high of 32.28 percent in April of 1994 and a record
low of 9.00 percent in January of 1972 [2].
In 2022, the Central Bank of Kenya's Monetary Policy Committee raised
its base lending rate by 50 basis points to 8.75 percent, resulting in an
increase in interest rates in the credit market]. The private sector loan
rates also increased in line with the signals from the monetary regulator.
Charges & Interest Rates Cap
In August 2016, Kenya embarked on an ambitious path to regulate the cost of commercial credit by
imposing a government cap on interest rates.
The cap was imposed when the President of Kenya signed the Banking (Amendment) Bill 2015,
which put a cap on interest rates charged on loans and a corresponding floor on the interest rate
offered for deposit accounts by commercial banks. This new legislation was in response to the public
view that lending rates in Kenya were too high, and that banks were engaging in predatory lending
behaviour. The interest rate caps were therefore intended to alleviate the repayment burden on
borrowers and improve financial inclusion as more individuals and firms would be able to borrow at
the lower repayment rates
According to a report by the Central Bank of Kenya (CBK), the profitability of banks has declined
since the introduction of the caps, leading to a 14% drop in profits in 2017 compared to 2016 [2].
Additionally, changes made by commercial banks to comply with the caps have had adverse effects
on the Kenyan economy, including slowed profitability for the commercial banking sector compared
to 2016, and a decrease in GDP growth rate from 5.9% in 2016 to 4.9% in 2017
See Basil Criticos vs. National Bank of Kenya Ltd & Another
Reporting, inspection and control of Banks
The Banking Act at section 32(1) has vested in the Central Bank wide powers to
enable in the discharge of the functions of supervising and controlling institutions.
Section 32(2) gives the CBK Power to cause an inspection to be made by any
person of any institution and its books, accounts and records. Section 33 gives the
CBK the following powers:
Power to give advice, make recommendations and issue direction in respect of the
conduct of business and management of an institution
Power to appoint a person, suitably qualified and competent in the opinion of the
Central Bank, to advise and assist an institution.
Power to issue directions in respect of the standards to be adhered to by an
institution in the conduct of its business in Kenya or in any country where a branch
or subsidiary of the institution is located
Continuation
Power to issue directions in respect of guidelines to be adhered to by institutions in order
to maintain a stable and efficient banking and financial system. In this respect, the Central
Bank of Kenya has issued, under section 33(4) of the Banking Act, the Prudential
Guidelines for Institutions Licensed under the Banking Act, which cover licensing of new
institutions;corporate governance;capital adequacy;
risk classification of assets and provisioning;liquidity management; foreign exchange
exposure limits; prohibited business; proceeds of crime and money laundering
(prevention);external auditors; publication of financial statements and other
disclosures;opening of new place of business;
closing or changing place of business;mergers;amalgamations;transfers of assets and
liabilities ;and enforcement of banking laws and regulations.
Prohibitions and Restrictions in Respect of Banking and Financial Business
Regulations are necessary due to the relationship between the banking industry and other spheres. The
rationale behind prohibitions and restrictions include,
● Enhancing transparency between banking institutions and their customers.
● Reducing the risk bank creditors are exposed to; protecting depositors.
● Reducing the risk of disruption from adverse trade conditions that cause bank failures.
● Avoiding misuse of banks, e.g for money laundering.
● Protecting banking confidentiality Credit allocation.
Some of the prohibitions and restrictions include;
★ Only a Bank or a mortgage finance institution with a valid license should invite or accept deposits
in the course of a deposit-taking business.
★ No person ((except another institution), the govt. or state corporation) should directly or
indirectly hold beneficial interests in more than 25% of the share capital of any institution.
★ No institution, alone or with others should carry out retail or wholesale, import or export trade
unless it is in the satisfaction of the debts due to it.
★ No institution should grant or permit to be outstanding any advance or credit facility, incur
liability or give financial guarantee on behalf of any person at any time exceeding 25% of its core
capital.
Cont…
★ No institution should grant or permit to be outstanding any advance or credit facility against the security of
its own shares.
★ No institution should grant or permit to be outstanding any advance or credit facility, incur liability or give
financial guarantee to or on behalf of company in which it holds more than 25% of the share capital unless
the other company is a bank, mortgage finance institution or financial institution.
★ No institution should grant or permit to be outstanding any unsecured advances in respect of any of its
employees or associates/ or to persons to whom its officers are agents, directors, managers, guarantor, or
shareholders.
★ No institution should grant or permit to be outstanding any advance, loan or credit facility to any of its
directors or other person involved in the manage,ent unless the loan,advance, or facility is in the normal
course of business approved by the BoD.
★ Prohibition against the transfer of more than 5% of shares to an individual or an entity except through
approval by the CBK.
★ Unless it is a bank or financial institution, an institution is prohibited from making loan advances for
improvement or alteration of land exceeding 40% of its total deposit liabilities.
LIQUIDATION
Liquidation is the process by which an institution is brought to an end. It is the winding up of its operations, the redistribution of its
property and assets and the settlement of claims against it.
Liquidation can be voluntary or compulsory
1. Voluntary Liquidation
★ A financial institution may voluntarily wind up with the approval of the Central bank if it is able to meet all its liabilities. (See
Section 34 Banking Act)
Upon receipt of the application to liquidate, Central Bank may approve it upon satisfaction of the ability of the institution to settle its
liabilities. When approved, the institution ceases its operations except for those incidental to the realization, conservation and
preservation of its assets and settlement of its obligations.
● The liability of stakeholders with uncalled subscriptions continues until the end of liquidation
● The institution must discharge its liability to depositors and thereafter to the creditors according to the Companies Act taking
into consideration priority.
2, Compulsory Liquidation/ Liquidation by Central Bank
If an institution becomes bankrupt, the Central Bank is to appoint the Kenya Deposit Insurance
Corporation as the liquidator of that institution.
Instances when CBK will appoint the Corporation a s a liquidator:
A. When a recommendation to liquidate has been made under the Act
B. When the institution is unable to pay sums due and payable to its depositors and creditors
C. when the Central Bank ascertains that the value of its assets is less than that of its liabilities
D. If in the opinion of the CBK the institution has engaged in malpractices or activities contrary to
the provisions of any Kenyan law or the applicable
(See section 54 Kenya Deposit Insurance Corporation Act)
● The appointment of the corporation as a liquidator is to have the same effect as that of a
liquidator under the Companies Act
● The Kenya Deposit Insurance Corporation as a liquidator )is among other functions to carry on
the institution’s business as far as it will deem necessary, pay creditors, recover the institutions
assets, sell or dispose pay depositors due dividends and to invest the surplus funds in the
liquidation account if not urgently needed in the continuation of operations.
Amalgamation and Transfer of Assets and Liabilities
● Amalgamations involving as institution as a principal party or the transfer of all or part of
assets and liabilities cannot occur without the Minister`s approval.
● Institutions intending to merge or amalgamate or acquire must notify the director of the CBK
Bank Supervision Department 30 days prior to the relevant transaction.
● Such institutions must seek approval from of the CBK with regard to the name they wish to
use in case a change of name shall be effected.
● They must submit a due diligence report signed by the directors of the institutions involved.
● The report should contain an extract of the minutes of the general meeting of shareholders of
each institution involved passing the resolutions to acquire, Latest audited accounts of all
institutions involved, Memorandum of articles of participating institutions.
● The Minister must approve the acquisition, amalgamation or merger upon consideration of
various factors.
Cont…
● Upon approval by the Minister, the amalgamating institutions` licenses are
deemed to be cancelled and the new entity is issued with a new license.
● In the same vein, the register will be altered to reflect the new changes as
need be.
● All permits, licenses, and books must reflect the name of the new entity.
● As the case may be, all assets and liabilities transferred vest in the receiving
institution.
● All the rights, duties, or obligations of the institutions immediately before the
amalgamation vest in the amalgamated or receiving institution as the case
may be.
Kenya Deposit Insurance Corporation
● The Kenya Deposit Insurance Corporation is established under Section 4(1) of the Kenya Deposit Insurance Corporation Act,
2012 (hereinafter, the Act).
● It replaces the Kenya Deposit Fund Board.
● Unlike the KDFB which was under the CBK, KDIC is an autonomous corporation with a CEO per S. 10, and its own mandate
and staff per S. 11 of the Act.
● It has a mandate to liquidate an institution facing financial crisis.
● Banks are obligated to provide the KDIC with information on their total deposit liabilities, current and savings accounts
deposits, foreign currency deposits, total number of depositors, total number of depositors fully covered and total insured
deposits.
● Section 5 of the Act provides for the objects of the KDIC which are the same as those of the KDFB as contained under Section
36 A (1) of the Banking Act.
● Section 5 (2)(c) of the Act adds the KDIC a new function which is to provide incentives for sound risk management and
promote the stability of financial system.
● Further functions aimed at reducing or averting risks to an institution are provided under Section 6 of the Act.
Cont…
● The new body has, under S. 38 the power to request the CBK to conduct an inspection of a financial institution,
under S. 39 to make special examination, and under S.40 to force enforcement by prompt corrective action.
● Pursuant to S. 16(2) of the Act, the body receives money from the Government via approval by the Parliament.
● The Act under S. 20 creates the Deposit Insurance Fund.
● Through a shift from the old law, the Act under S. 25(1)(f) provides for the cessation of an institution after an
amalgamation or a merger.
● The KDIC may be appointed the sole receiver where necessary. (See S. 43 of the Act)
