The Banking Act (Chapter 488 of the Laws of Kenya) ("the Act") section 55(2) authorises the Central Bank of Kenya ("CBK") to prescribe penalties to be paid by institutions, credit reference bureaus (or any other person) that fail or refuse to comply with any directions of the CBK under the Act or Prudential Guidelines. The CBK has published a draft of the Banking (Penalties) Regulations, 2024 ("the Draft Regulations") and has invited the public to comment on the Draft Regulations by 18 March 2024. If passed, the Draft Regulations will revoke the existing Banking (Penalties) Regulations, 1999 ("the Existing Regulations").

The purpose of the Draft Regulations is to promote compliance with and deter a violation of the Act and the Prudential Guidelines by providing a clear framework for assessing a violation and ensuring that an institution or person is penalised for a violation.

The Draft Regulations set out the following violations:

  • failure to maintain the statutory minimum liquid assets as determined by the CBK under the Act;
  • failure to classify and assign risk weights in the evaluation of capital adequacy measurements as is prescribed by the CBK under the Act;
  • permitting the total value of the advances, credit facilitates, financial guarantees or other liabilities of a mortgage finance company to exceed the per centum prescribed by the CBK under the Act;
  • failure to review, classify or make appropriate and adequate provisions and write-offs for loans and assets as prescribed by the CBK under the Act;
  • failure to obtain prior approval of the CBK before opening, relocating or closing the place of business of a person or institution or carrying out banking business;
  • failure by a shareholder, upon being determined by the CBK as not fulfilling the fit and proper criteria, to cease to exercise all his voting rights and reduce the holding of his shares to below five percent of the share capital in the institution;
  • failure to seek the prior written consent of the CBK before transferring more than five percent of its share capital to an individual or an entity;
  • a shareholder who holds directly or indirectly more than twenty-five per cent of the share capital of any institution and is not an approved person under the Act;
  • failure to appoint a person as a director or senior officer without obtaining the certification of the CBK that such individual is fit and proper;
  • an institution or person (excluding the Government and any public entity) becoming a significant shareholder (holder of five percent or more of the share capital) of an institution without being certified by the CBK;
  • failure to terminate the employment of a person who has been disqualified by the CBK from managing or controlling an institution;
  • failure to provide the CBK with information on the implementation of an effective control system or the establishment or implementation of a risk management framework;
  • failure to maintain or produce books and records or information in accordance with directions issued by the CBK and provide such information as may be directed by the CBK;
  • failure to exhibit the last audited financial statements in a conspicuous place in every office and branch as prescribed by the CBK under the Act;
  • purchasing, acquiring or holding any land or any interest in land in excess of the proportion of an institution's core capital contrary to the proportion of its core capital as prescribed by the CBK under the Act. Currently, the prescribed limit for land and buildings is restricted to 20 percent of an institution's core capital;
  • engaging in the restrictions on trading and investments without the approval issued by the CBK under the Act;
  • failure to comply with a directive issued by the CBK when carrying out an inspection, obtaining any document or accessing any system, record, office or premises during an inspection under the Act; and
  • changing an auditor without the prior approval of the CBK.

The above violations envisage an increase to the violations set out in the Existing Regulations which do not address breaches on shareholding, place of business, fit and proper persons, corporate governance, exhibition and submission of accounts, trading and investments and audit and inspection.

Violations under the Draft Regulations attract a range of financial penalties, with the most severe penalty being KES20,000,0000 for an institution and KES1,000,000 for an individual. These penalties are significantly higher compared to those in the Existing Regulations which are a maximum of KES1,000,000 for an institution and a maximum of KES100,000 for an individual.

The evaluation process of a violation involves issuing a written notification to the implicated institution or person, affording them a chance to reply, evaluating the responses and rendering a decision. Additionally, the Draft Regulations make provisions for the review of the CBK's decisions or the option to appeal to the High Court. This departs from the Existing Regulations which do not accord an institution or person an opportunity to reply or appeal.

All things considered, the Draft Regulations provide for more offences and higher penalties and are therefore likely to be more effective in deterring money laundering and financial terrorism. This is a welcome development in light of Kenya's recent addition to the Financial Action Task Force ("FATF") greylist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.