There was a sharp increase in the number of banks that violated the Banking Act and Central Bank of Kenya (CBK) Prudential Guidelines last year compared to 2015, according to the Annual Banks Supervisory Department Report.
The report shows that 12 violated the law and the guidelines in 2016 as compared to four banks in the previous year.
“The increase in the number of banks in violation was mainly in respect to non-compliance with liquidity ratio after Chase Bank Ltd was placed into receivership due to deposit movement (mostly affecting small and medium banks),” the report says, adding the situation normalised later in the year.
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Three institutions were in violation of Section 10(1) of the Banking Act which restricts lending to a single borrower to an amount of not more than 25% of its Core Capital while two institutions were in violation of Section 18 of the Banking Act and CBK Prudential Guideline (CBK/PG/03) on Capital Adequacy, which requires an institution to have a minimum core capital to total risk weighted assets ratio of 10.5% and total capital to total risk weighted assets ratio of 14.5%.
In addition, one institution was in violation of Section 7(1) of the Banking Act and CBK Prudential Guideline (CBK/PG/03) on Capital Adequacy, which requires an institution to maintain a minimum core capital of KShs 1 billion while seven institutions were in violation of Section 19(1) of the Banking Act and CBK Prudential Guideline (CBK/ PG/05) on Liquidity Management, which requires institutions to have a minimum liquidity ratio of 20%.
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This was observed after placement of Chase Bank Limited into receivership causing panic withdrawal of deposits in small and medium banks. However, the situation normalised later in the year, says the report.
According to the supervisory report, two institutions were in violation of Section 12(c) of the Banking Act and CBK Prudential Guideline (CBK/ PG/07) on Prohibited Business, which requires that institutions investment in land and buildings should not be more than 20 percent of Core Capital.
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Two institutions were in violation of Clause 3.3.3 of CBK Prudential Guideline (CBK/PG/02) on Corporate Governance, which requires every member of the Board to attend at least 75% of the Board meetings of an institution in any financial year while two others were in violation of Section 11 (1) of the Banking Act which requires every bank to seek Board approval for any loan granted to the Executive Committee members and to ensure that these credit facilities are fully secured.
Appropriate remedial actions were taken on the concerned institutions by the CBK in respect of these violations, it says. The increase in the number of banks that were found culpable could be attributed to the tough stance taken by new CBK Governor Dr Patrick Njoroge.