Commercial banks paid a record Sh191 million in fines to the Central Bank of Kenya (CBK) for breaches, including disregard of a rule that limit lending to a single borrower to no more than 25 percent of their core capital.
The lending limit rule, which is also known as the single obligor rule, was breached last year as the Kenya shilling weakened sharply, exposing the lenders’ foreign currency-denominated loan books.
The single obligor rule prohibits commercial banks from lending more than 25 percent of their core capital to a single borrower and related entities. The rule, which protects banks from exposure to a single borrower, does not apply to loans to public companies.
Penalties paid to the CBK by commercial banks and foreign exchange bureaus jumped to Sh191 million in the fiscal year ended June 2024 from Sh66 million previously, a five-year high, according to data from CBK annual reports.
The central bank said that 12 banks last year violated the Banking Act and CBK prudential guidelines as of December 31, 2023, down from 13 banks previously.
“Most of the violations were with respect to breach of single obligor limit due to the depreciation of the Kenya shilling against the US dollar and the decline in core capital at some banks that have continued to report losses,” CBK noted earlier in its 2023 banking sector annual report.
Forex loans to individual borrowers as a share of banks’ core capital rose sharply on revaluation as the Kenya shilling went into free fall, depreciating at the highest rate in three decades in 2023.
Core capital breaches
The apex bank, however, did not specify the banks that breached both the single obligor limit and the core capital violations. The CBK also did not also specify the nature of violations by forex bureaus.
An analysis of bank balance sheets however reveals commercial banks that were in breach of various capital roles.
Consolidated and Spire Bank, for instance, both failed to maintain the core capital requirement of Sh1 billion, while the Development Bank of Kenya, Housing Finance, and UBA Kenya were short of the eight percent minimum requirement on their core capital to total deposit liabilities ratio.
Housing Finance, Consolidated, and Spire were further in breach of the core capital to total risk-weighted assets minimum threshold set at 10.5 percent, while the National Bank of Kenya, Premier Bank Kenya, Housing Finance and Consolidated Bank breached the 14.5 percent total capital to total risk-weighted assets ratio during the same period.
The increase in CBK fines on commercial banks and forex bureaus comes at a time when the apex bank is seeking to lay down specific rules for breaches of banking regulations.
The Draft Banking (Penalties) Regulations 2024, published by the CBK in February this year, stipulates a maximum fine of Sh20 million for institutions violating rules on minimum capital levels and adequacy ratios, adequate provisioning for loans and write-offs, and corporate governance rules.
The CBK has enhanced its surveillance and financial penalties on errant banks and their employees in recent years, in a bid to improve the stability of the sector in the wake of the collapse of three small-tier lenders in 2015 and 2016.
The rules have also been tightened to prevent cases of money laundering and financing of terrorism.
The CBK handed down penalties touching a high of Sh420 million in the fiscal year ended in June 2019, including fines to five banks – KCB, Cooperative, DTB, Standard Chartered Bank Kenya, and Equity – for handling billions stolen from the National Youth Service.
The CBK says the stiffer penalties will be deterrence enough to keep bank executives in check.
“There seems to be a number of banks who have not been complying with some of the provisions because the penalties are so low. I have suggested we strengthen those penalties. The stricter penalties will bring a lot of sanity to the system where banks will think twice before they violate a provision of the Central Bank,” CBK Governor Kamau Thugge said in an earlier interview.
