Top banks, including Equity Group, KCB Group, NCBA Group, Co-operative Bank and I&M Bank, face a shakeup in their expansion plans as the Central Bank of Kenya (CBK) moves to shield the lenders deemed ‘too big to fall’.
The CBK said in freshly published proposals that it will tighten its oversight of financial institutions whose collapse or distress could cause significant shockwaves across the wider economy.
“Domestic systemically important financial institutions may be restricted from expanding their operations or introducing new products whose effect may enhance systemic risk of the bank.
The supervisory measures to be deployed on a domestic systemically important financial institution depend on the supervisor’s judgment as to the institution’s degree of systemic risk,” states the draft framework for identification, regulation and supervision of domestic systemically important financial institutions.
“Domestic systemically important financial institutions are financial institutions operating in one or more countries and whose disorderly failure would cause significant dislocations in the domestic or regional financial system and adverse economic consequences in the country or region.”
The proposed framework provides that the domestic systemically important financial institutions will be determined based on size, interconnectedness, substitutability, complexity and importance to the domestic economy.
Substitutability refers to a scenario whereby a domestic financial institution plays an important role in a specific business segment as a provider of market infrastructure such as a payment system and substitution by players may prove to be a challenge.
According to the proposals, the CBK will conduct an assessment of all licensees once every calendar year as at December 31, after which entities that are designated as domestic systemically important financial institutions will be notified by March 31 the following year and the list thereof published by June 30.
The sequential collapse of three banks in Kenya between 2014 and 2016 — Dubai Bank, Imperial Bank and Chase Bank — shook the country’s banking sector and impaired the interbank market following fears by large and well-capitalised banks that they could have suffered exposure by lending to smaller and less capitalised players.
Banks in Kenya have registered considerable growth over the past decade, characterised by acquisitions and product diversification, including venturing further into the fast-growing wealth management and bancassurance business.
The CBK’s proposed framework comes as Kenyan banks make further inroads into the East and Central Africa region, with at least seven having a regional footprint.
Equity Group has operations in Kenya, Uganda, Tanzania, Rwanda, South Sudan and Democratic Republic of Congo. KCB Group is present in the same markets plus Burundi.
Of KCB Group’s Sh2.3 trillion worth of assets, 31.3 percent is attributable to business units outside Kenya, as is 52.0 percent of Equity Group’s Sh2.2 trillion worth of assets.
NCBA Group has operations in Kenya, Uganda, Tanzania, Rwanda and Côte d’Ivoire; DTB has operations in Kenya, Uganda and Tanzania, while I&M Group has operations in Kenya, Tanzania, Rwanda, Uganda and Mauritius.
The CBK is also proposing a requirement for stronger capital buffers to be held by financial institutions deemed domestic systemically important to ensure that they are well positioned to withstand shocks and mitigate potential spillovers into the wider economy in the wake of distress.
Coming at a time when the banking sector is undergoing recapitalisation in the push for Sh10 billion worth of core capital by 2032, the regulator has also cited the need to ensure that no domestic systemically important financial institution requires a government bailout in the event of distress as a key reason behind the push for higher capital buffers.
“In order to enhance the resilience of domestic systemically important financial institutions, the framework requires these banks to hold higher levels of capital through additional loss-absorbency requirements. These requirements aim to reduce the probability of domestic systemically important financial institutions’ failure, provide a buffer to absorb losses during periods of stress and limit the need for public sector support,” the CBK says.
Foreign banks operating in the country such as Absa, Stanbic and Standard Chartered, will also be on the radar of CBK for potentially being domestic systemically important financial institutions, upon which the market regulator in their parent jurisdictions will be informed.
“In case a Kenyan subsidiary of a foreign bank is designated as a domestic systemically important financial institution, CBK shall engage the home regulator of the parent bank/bank holding company and the parent bank/bank holding company in assessing the adequacy of the domestic systemically important financial institution’s recovery and resolution plans,” the CBK says.
