Nine banks on the spot for breaking Central Bank rules
Nine banks ended up in the financial regulator’s bad books last year after breaching key legal requirements, according to a new report.
This is down from 13 banks that breached the Banking Act and Central Bank of Kenya (CBK) prudential guidelines in the year ending December 31, 2020.
The improvement boosted banks’ profitability after the economy began to recover from the negative impact of the Covid-19 pandemic.
The CBK said most of the breaches related to breach of the single obligor limit, mainly due to a decline in Tier 1 capital of some banks which continued to report losses.
“Appropriate corrective action has been taken against relevant institutions by the CBK with respect to the violations,” the regulator said in the 2021 Banking Supervision Report.
The report showed that eight banks failed the test of ensuring that a single borrower does not receive more than 25% of their capital base in what is designed to avoid the risk of lenders putting all their eggs in one. basket.
Known as single debtor, this requirement came to the fore in August last year after Vice Chairman William Ruto claimed he had arranged a 15 billion shillings loan from Equity Bank to a Turkish investor.
However, the bank revealed that it could only lend a maximum of 2.5 billion shillings, as required by the CBK’s prudential guidelines. The report shows that two banks failed to maintain the minimum capital base – or shareholders’ funds – of 1 billion shillings.
Two banks have been found guilty of engaging in prohibited activities that restrict aggregate material credit exposures to no more than five times the capital base.
Five banks had invested more than a fifth of their capital base in land and buildings, a breach aimed at ensuring that banks have enough liquidity in case depositors urgently needed their money.
Five banks failed to meet the statutory minimum required ratio of total capital to total risk-weighted assets of 14.5%, a violation that affected one of the largest banks.
Risk-weighted assets are used to determine the minimum amount of capital that must be held by lenders to reduce the risk of insolvency due to their lending activities.
The more risk a bank takes, the more capital it needs to protect depositors.
Three banks failed to meet the legal minimum ratio required for the core capital to deposit ratio of 8%.
At three other banks, a single insider took out loans valued at more than one-fifth of its capital base, while at two other lenders, insider lending exceeded the total insider borrowing limit of 100 % of basic capital.
A bank failed to maintain the minimum statutory liquidity ratio of 20%, meaning the lender would struggle to repay its current debts.
The bank’s liquidity stood above the minimum legal level of 20% with an average liquidity ratio of 56.2% over the same period.
Two banks breached the requirement that a financial institution must maintain a foreign exchange risk exposure of no more than 10% of its capital base.