Thursday, February 01, 2007

Banking law amended in 2007

The banking amendment act (2006) and finance act (2006) were gazetted in January 2007. Some changes that will affect the banking system in a busy year, in addition to possible merger activity, include;

- Ban on bank charges within savings accounts. In fact banks must pay interest as long as the account minimums are maintained
- Section 44A (in duplum rule) – banks can only recover principal amount lent, interest to an amount not exceeding principal, and recovery expenses from bad debts. (Fortunately for banks this will not be applied retroactively)
- CBK gets a deputy governor appointed by the president
- CBK also gets to vet the professional and moral suitability of owners (of more than 5%), directors, and senior managers of banks
- All banks must get permission from the finance minister to open branches or establish subsidiaries outside Kenya
- Banks are allowed to invest in real estate. They can also hold land for as long as it takes to realize/recover debt
- Allows sharing of non performing assets information with the Central bank, others banks and credit reference bureaus


coldtusker said...

Banks charges on Savings Accounts - Good move BUT some banks will raise the minimum requirement!

In duplum - Stupid, stupid & stupid. Banks will now lend short-term not long-term. They will also try to foreclose on the slightest hint of trouble instead of working out a solution.

coldtusker said...

CBK Governor should be 'elected' by a board (made up of smart folk & not cronies of politicians) similar to Fed Chairman.

What is 'moral suitability'... it should be objective NOT subjective. So a smart banker who criticises th CBK or CBK Governor will be 'rejected'.

Will this rule keep out innovative bankers?

coldtusker said...

Banks should open/expand where they want to!

The CBK should have regulatory powers BUT going to the MoF means
- Delays esp if MoF is politicking
- Leaking expansion plans by MoF employees
- Corruption since its an extra layer of bureacracy!

Credit Information - Only positive I see for a bank!

MainaT said...

This is all very retrogressive especially for the banking sector. Banks should be able to do business with whoever they want wherever provided they abide by CBK's prudential and capital rules. I'd rather we did away with this whole issue of setting limits on bank charges-let the market find the equilibrium. There are other Equity Banks out there who will compete on price. What does MoF know about banking strategy? I thought this nonsense about mtukufu appointing CBK officials was done away with? At a time when the whole world and his mother are moving towards single financial regulators, we are still grappling with the CBK?

KE said...


Who told you that the appointment of the fed chairman is not a political one?? it is. Don't forget that reagan appointed greenspan and clinton chose to keep him there, but the appointment of the fed chairman is political, as it is for the reserves board members. Bernanke is a republican. An economist, but a republican nonetheless.

sijui said...

two steps forward.....three steps back! End the criminality of bank charges on savings accounts GOOD!
Oversight over personnel/business decisions....overkill. Throwing baby out with bathwater.
In duplum rule, not sure banks in Kenya will lend long term even if the Holy Grail was delivered to them on a platter. To date I have not seen Kenyan banks offer PROACTIVE suggestions to risk mitigation other than the usual whining. If they did, perhaps the government would be less vigilante about reigning them in.

coldtusker said...

Sijui - Kenya's judicial system is pathetic. It takes years to recover loans.

At the BBK AGM held in 2006, some idiot asked why BBK was pursuing matiba for unpaid loans!

I, a shareholder, was HAPPY that BBK refused to let Matiba off the hook for money he borrowed. BBK should sock him for the Principal & then some for not agreeing to the terms of the loan.

Competition is good. So Equity has lit a fire under the banks.

coldtusker said...

KE - Sometimes u really test my patience.
READ, then READ again my comment/s before shooting off your keyboard...

Sijui - Remember our discussion on KE's blog?
In Kenya, IMHO, being "pro-active" means lowering credit standards which can lead to major losses in case of default.

BTW, these 'rules' make lending more difficult!

If you owned a bank what would you do pro-actively?

1) Please note that banks have to follow CBK rules & regulations regarding collateral.
2) No tribal/ethnic/racial discrimination against applicants
3) Banks are NOT charities or Non-profits.
4) In case of default, recovery should be efficient & cost effective.

bankelele said...

Coldtusker: I didn't realize till last week that my savings accounting was incurring a 200/= charge (another way banks save money is by mailing savings statements quarterly of half-yearly) I asked and was informed there's now a 'minimum' of which I was not aware.

In duplum: It's short sighted to reform the banking side as long as the judiciary is back-logged. You can take someone to Milimani court and be told the earliest the case can be heard will be in September 2007 - but the debtor is given an injunction halting the bank's recovery process.

MainaT: More red tape. One of Rwanda's big banks was started by someone who got frustrated with the long period of time it took Kenya to evaluate his application for a license

KE: It's wrong for politics to meddle in business & regulation. The next step will be a compromise where parliament will ask to vet the president’s nominees (like the American senate) - but here that will be a political minefield

Sijui: banks' must lend money to survive and be profitable. CBK requires that loans be fully secured to mitigate risk and banks have been trying to come up with creative ways around that (other than land & buildings) - Equity has gone for group guarantees, while employer guarantees have been used to secure most of the personal loans on the market

Ssembonge said...

I closed my bank accounts in Kenya to as a sign of protest to their archaic laws. For people leaving in Kenya, they just have to put up with these banks at a high cost.

The fact that I maintained 10 dollars in barclays overseas for 2 years just to keep my account open, goes to show that banking in Kenya is a rip-off.

Don't get me wrong about overseas banks. They too have their own little tricks that they like to play with creditors.

ke said...


You said:
CBK Governor should be 'elected' by a board (made up of smart folk & not cronies of politicians) similar to Fed Chairman.

I am telling you that the Fed Chairman is appointed by the president (a political appointment) and congress (a political body) either confirms the appointment or doesnt. Get your facts straight buddy! he is not elected by an independent "board" -- that appointment is absolutely political.

You are making the same mistakes that most kenyans make when it comes to the role of government and private business. Business does not operate in a vaccuum. What do you mean it's wrong for "politics" to meddle in regulations? isn't parliament responsible for crafting laws and regulations that govern private business in the country???

I keep hearing this same comment on all the kenyan blogs - that businesses should be left totally alone to do as they please. However, you need a myriad of different things to create a thriving economy. You need the rule of law, you need regulations, you need infrastructure, you need public education so you can have an educated citizenry...All of these things come from government (aka politics)

MP's can get advice from different sectors of the country (academica, private business, etc, etc) - however, at the end of the day, THEY have to write the laws and regulations for the benefit of the people who have elected them. If the people are not happy with these MP's, then vote them out, but don't say we don't need government.

sijui said...

Banks and Coldtusker, thanks for calling me to account:
1) Please note that banks have to follow CBK rules & regulations regarding collateral-RESPONSE:then this is the most logical place to start negotiations:
-reduce inefficient/restrictive reserve and collateral requirements. ALLOW BANKS TO USE THEIR BUSINESS ACUMEN in defining credit analysis framework
-HELP bear the cost of underwriting. Increase the threshold of depositor protection covered by the GK.
-GIVE GENEROUS TAX incentives to cover investments made in high risk sectors. We all know banks disproportionally bear the tax burden, they can lobby for substantial relief IN EXCHANGE FOR deeper sectoral penetration.
-Public/private partnership in developing a nascent credit reporting system.
2) No tribal/ethnic/racial discrimination against applicants.
RESPONSE: Protect latitude in decision making as long as it does not break the law. I see nothing wrong with 'community banks' as long as they do not discriminate as a policy.
3) Banks are NOT charities or Non-profits. RESPONSE: Thank you, banks provide the service of financial intermediation. When they deviate from that and become ECONOMIC PARASITES, regulatory enforcement must be swift and decisive. Again I stress, if banks lobbied for regulatory and legal concessions in furtherance of broadening financial intermediation, those very protections would insulate them from fiduciary and legal risk. A good example, the bankruptcy law in the U.S. The law ensures that banks will not be penalized for their ROBUST credit extension. It is NOT GOOD ENOUGH TO ARGUE THAT THE JUDICIARY SYSTEM SUCKS....banks are CORPORATE CITIZENS too, use the political process to effect change just like the rest of Kenyans!
4) In case of default, recovery should be efficient & cost effective. RESPONSE: Definitely, that is why excessive regulatory oversight in management decisions must be resisted and over-turned.

Bottom line, BANKS in Kenya are rarely honest brokers when it comes to agitation for a JUST AND FAIR regulatory and fiscal environment. Instead of challenging the GK to LIVE UP TO THEIR END OF THE BARGAIN, they retreat and delegate the resulting business costs to the consumer. The height of pro-activity would be a determined public campaign in partnership with CONSUMERS to demand the incentives that facilitate profit growth through customer growth. Is that asking too much? The new MicroFinance Law is a perfect example of sensible, rational and pragmatic give and take between public/private sector players. Why must the interests of shareholders and customers be so divergent?

we~a~do said...

The so-called Independent Central Banks was a bad experiment, nobody believes in it anymore, unless you are a loony! Central Banks form part of Government and they have to align their policies to economic aspirations of a country. So, the appointment of a Governor will forever remain political.

Given that financial sector has brought down many economies, anyone promulgating the notion of little government regulation must be deluded.

I like the elimination of service charges on savings accounts; I have paid banks to save my money for too long. Will it apply in retro? I might just demand some back.

In Duplum is timely, however loud the banks cry. It's their problem to decide whether they want to go short- or long-term, Kenya moves on.

The approval of bank branches by MoF is the stupidest of all the recommendations.

When are they letting Post Bank become a full bank?

coldtusker said...

we-a-do: Short-term lending is less productive than long-term lending.

Strong protections for banks (against defaulters) makes it easier & cheaper for "good" borrowers.

This policy (among others) has created a very high level of home ownership among Americans.

coldtusker said...

Sijui - I really want to meet you! You are passionate... and I support it...

BTW, unlike the West, corporate taxpayers have little clout in Kenya. These are idiots in government not rational thinkers!

Fact: KQ (Kenya's largest airline) has been begging/cajoling GOK since 2003 to expand JKIA. It took 4 years & even then the expansion is not as extensive KQ would like. JKIA needs to compete with Dubai, Joburg & Addis as a hub.

Fact: KQ temporarily stopped flights to Kisumu in 2006 since the runway was in very poor shape. KAA (GOK) derided KQ saying the runway was in tip-top shape. 1 week later, the rains wash out the runway! KQ & passengers pay airport taxes on local flights.

Fact: Kenol (a large Oil Marketer) received the 'respected large taxpayer award' from KRA. In the same breath, KRA will not release refunds to Kenol for transit duties, deposits for bonds & tax refunds. Kenol finally complained publicly but to no avail. They are still owed refunds dating from Nov 2006. Taxes constitute 50%+ of the price at the pump.

Fact: Shell (among the other Oil Marketers) tried a showdown with the govt in 2006 regarding Refunds. The govt blocked Shell from drawing fuel from KPC/KPRL when Shell insisted on offseting current & future tax payments against refunds due them. The interest cost of financing Working Capital is passed on to the consumer.

Fact: Kenyan banks are forced to place deposits (capital ratio requirements) with the CBK at 0%. Whereas BBK pays you interest (e.g. 5%)on the entire deposit e.g. 100/-, BBK has to place 8/- at CBK earning 0%. BBK loads the 'loss' onto loans.

Fact: Banks (thru KBA) have lobbied for years to courts dedicated to hearing loan default disputes. The foreclosure process can take 5 years!

Fact: Borrowers & banks are forced to use external lawyers to draw up loan documents at horrendous billing rates! Closing costs in Kenya are much HIGHER than the USA as a % of the purchase price!

Fact: Tour firms have been begging the government & Narok Council through KTB 7 direct appeals to improve the Mara roads but nothing!

Unless ALL the banks (incl KCB & NBK) shut down their operations in protest, there is little they can do.

Not paying taxes or shutting down operations (except Saturdays, holidays & extraordinary circumstances) without CBK approval is a crime punishable by law.

Ultimately, a populist government will "look" to protect the people while screwing them over. The beneficiaries are the incompetents in the government + civil service who love the expansion of government.

sijui said...

Coldtusker, let me add to the list of FACTS:
1) Banks in Kenya have 'institutionalized' a risk mitigation policy of oiling political patronage networks i.e. loaning to 'low risk, high net worth' politicos whose insurance is guaranteed by their proximity to the center of power. Please, let's do look at the lending portfolio of Stanchart, KCB, BBK with a magnifying glass. So they are VERY MUCH PART OF AN INCESTUOUS RELATIONSHIP.
2) apart from developing a business strategy almost wholly catered to government paper......high inflation/high interest rate regime where they have been the principal beneficiaries......what new banking innovation has come out to circumvent state heavy handedness?
3) Let's dissect this equation again:
Fact: Kenyan banks are forced to place deposits (capital ratio requirements) with the CBK at 0%. Whereas BBK pays you interest (e.g. 5%)on the entire deposit e.g. 100/-, BBK has to place 8/- at CBK earning 0%. BBK loads the 'loss' onto loans.
If BBK is earning 0% from CBK by placing my deposit, and charging me 5% interest yet recouping 15-25% as a lending rate, WHO IS COMING OUT AHEAD? The 'loss' to CBK is recouped in spades!!!!!!!!

sijui said...

Last but not least, Coldtusker, blaming government ROT for everything is a cop out! PEOPLE GET THE LEADERSHIP THEY DESERVE!

If we all exhibit apathy, we might as well give up now and concede poverty and mediocrity for eternity!

More importantly, democratic space and accountability is BUDDING in Kenya. Let us not pretend that there are no improvements, ALSO let us not pretend that there are no PRAGMATISTS in government now who can be reasoned with! The financial services sector has to continually engage the political process just like the rest of us, AGAIN, people get the leadership they deserve.

pregnancy said...
This comment has been removed by a blog administrator.
coldtusker said...

Sijui - Please don't look at this as a personal attack...

I can backup all my 'facts' - yours IMHO are mere suppositions... I will only comment on what I had said earlier.

- CBK info/regs are online
- KQ made their expansion request PUBLICLY at the 2003 AGM. The Transport PS (Gerrishon Ikiara) even acknowledged the ministry was looking into the matter. I was there.
- KQ suspension of flights to Ksm are of public record as is KAA's denial & later grudging acceptance of a washed out runway.
- Kenol, Shell, KTB (Mara roads), KBA (loan defaulters & court delays) information is available via Nation & Standard newspaper archives.

I await the back up for your facts. I do not know how to include links in comments. If you do do, please provide them for me.

coldtusker said...

Well... I was partly responsible for kibz being prez. I did not vote for my current idiotic MP.

YES, Kenyans deserve the politicians they elected in what I think was largely a fair election.

coldtusker said...

Sijui - You forget that banks from the 15% have to:
- Pay taxes on their profits
- Pay for employees
- Pay for assets e.g. land rates, utilities
- Pay through the nose for security
- Pay for ads & promotions
- Cost of capital for me a shareholder for risking my funds
- Pay for intangibles e.g. computer software & franchise costs
- Pay legal costs for loans documentation

Why do banks charge 15%? Coz the government pays 13%...

As a shareholder I would rather have my bank invest at 13% risk-free than 15% with substantial default risk!

If my bank loaned at 13% vs govt paper at 13%... either there should be substantial fee income from the loans or I would vote to sack the directors.

BTW, Equity Bank charges a minimum 5% on the loan whether borrowed for 1 day or 1 month. They interest rates are in the 15%+ range!

In the US, I think they might be charged under usury laws (not a fact)!

On the other hand... its a free market... charge what the market will bear! Smart folks, the guys & gals at Equity Bank!

coldtusker said...

KE - My bad... you are right... I misinformed... the Fed Chairman is appointed SUBJECT to confirmation by the Senate.

Thanks for the correction.

Unfortunately, CBK Governor is appointed without any parliamentary say thus we had uber-idiot kotut as governor during the Goldenberg years!

alexcia said...

Don't these changes require an ok from paliament?
Finance Act and Banking Amendment act!!!
I wonder whether its even constitutional to ban charges (or fees) on savings accounts!!! Subsidizing one contact-read saving- by increasing the charges on another contract- read checking accounts.
Even the "in duplum rule" is nonsensical. It is a de facto cap on effective interest rate* loan duration to some like 80% of loan value!!!

I thought Kimunya had a B'com!!

But hey our constutition is rubbish to this regime!

pesa tu said...

Hi banks, i covered the same topic on my blog, some time back:

sijui said...

I'll have to rest my case with the following back up:
1) Banks in Kenya service 11% of the population, all independent statistics indicate that 11% is comprised of the political/economic elite of the country and the narrow middle class of public servants and the private sector. You can google any combination of banking landscape in Kenya + (World Bank, or IMF, or OECD or CIA) to get the official breakdown.
2)If you analyze bank profitability over the past 10 years, specifically the top 5, BANK FEES make up 2/3 of their profit margin. BANK FEES rather than interest income corroborates that credit expansion is a nominal consideration. The impact on this on the economy is unmistakable, please look at the most recent Kenyan economic forecast from the ADB which is one of the more balanced sources, peruse 'structural fundamentals' such as savings mobilization in the economy and gross capital formation:
3) you have vigorously defended the banking sector from a shareholder's perspective which is appropriate and warranted. However, I fear you may also be succumbing to myopia in your analysis. The fact that banks maintain profitability through a combination of exploitation of weak fiscal/monetary policy, exorbitant user fees on a static customer pool and high net worth segmentation, confirms both the unsustainability of such an approach as well as jeopardizing future profitability. You as a shareholder should be especially vigilant against such an eventuality! As is obvious, political pressure and regulatory overkill are GUARANTEED, in retaliation for perceived corporate abuse. Banks will continue to be a convenient whipping post, both for politicians as well as the general public. The constant antagonism at some point becomes counterproductive to their long term interests especially since they will be forced to change either through legislation or competition. Always better to effect change on your own terms. Secondly, market forces are already rendering their business strategies obsolete. Economic growth rewards innovators, especially as more and more Kenyans become empowered to vote with their pocketbooks......I need not lecture a savvy investor such as yourself on who the eventual casualties become. History is replete with corporate institutions whose 'collosus' become their fatal Achilles Heel.

coldtusker said...

Sijui - You are right... and I am wary of the continuing profitability of banks (esp those I have invested in)...

Banks like NBK will die out or be taken over. BBK is moving into rural areas & a huge aboutface from 2 yrs ago...

The government's job is to foster/facilitate competition rather than maintain the status quo BUT like the physician's credo... first do no harm!

Most Kenyan politicians are certifiable idiots... even legislation that has NET POSITIVE benefits to Kenya gets bogged down because they have nothing to gain i.e. no avenues for bribes.

Kenyans are politically immature, they think of tribe NOT merit. Unfortunately, the person one vote system will ensure the domination of thieves (moi sons), turncoats (wamwere) & idiots (gumo) of the government.


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