Central Bank of Kenya (CBK) has directed lenders to provide comprehensive reports of their revised business models by April as it sets in motion a risk-based approach to banking regulation.
The CBK had issued a circular back in November informing lenders that they would be required to hold capital consistent with their risk profiles and business strategies and asked them to review their models to fit the new approach.
The new capital management approach, technically referred to as Internal Capital Adequacy Assessment Process, also covers governance, organisation of the institution’s business and allocation of capital against risk.
On Tuesday, CBK governor Patrick Njoroge said some of the banks that were reporting losses and were also on the threshold in terms of meeting regulatory ratios, had become more aggressive in revising their business models to fit in with the reality of the regulated interest rate environment.
“We have asked them to provide us with their revised business models, which should have been discussed and ratified by their boards and shareholders by April,” said Dr. Njoroge.
The new guidelines also give the CBK a say on the amount of capital held by banks with regional operations in a move that may see large lenders seek additional funding.
Core capital
Under the current model of regulation, banks are required to hold the same core capital and ratios irrespective of size and target market, and also without consideration of additional factors such as their internal management, stress testing, and operating environment.
The tighter regulation of banks has come into place as a result of the troubled run of the sector between 2015 and 2016 when three lenders collapsed on, among other reasons, poor corporate governance and oversight.
Imperial Bank had for instance been headed by the same chief executive, Abdulmalek Janmohamed, since formation.
He was said to have been the mastermind of massive fraud leading to its fall.
Dr. Njoroge, however, said the sector was still robust in terms of capital level and ratios last year, indicating resilience even with the shocks that faced it, including the rate capping law.
He said the sector’s total capital had increased by 12.2 percent and the asset base by 7.6 per cent last year.
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Credit: Business Daily
