Victoria Mbithi, Donald Kipkorir and Rajab Mwachia of KTK Advocates in Nairobi introduce the country’s key financial legislation
The law governing financial matters is multifarious and entwined with other laws. This write-up demystifies the regulatory framework by identifying selected key legislations guiding financial matters in banking and lending, capital markets, credit reference bureaus and money laundering.
The pertinent financial laws
1 Bank lending and regulatory matters
I. The Constitution of Kenya 2010 enshrines the principles of public finance and measures of control of public money. It also establishes the Central Bank of Kenya which is the regulator of the banking industry and inter alia formulates monetary policy, promotes price stability and issues currency.
II. The Central Bank of Kenya Act (Chapter 491 of the Laws of Kenya) establishes the Central Bank of Kenya. The bank has the power to make rules and regulations concerning banking and financial matters.
The bank requires institutions to maintain minimum cash balances on deposit as reserves against their deposit and other liabilities. It specifies the ratios for different types of liabilities and the method of computing the amount of the total liabilities of an institution. It also issues regulations governing the forex bureau industry.
III. The Banking Act (Chapter 488 of the Laws of Kenya) deals with the business of banking and related matters. It provides for the process of licensing banking institutions and circumstances under which such licenses may be revoked. Banking, financial business and the business of mortgage finance are restricted to institutions holding a valid license.
The Central Bank of Kenya is mandated to inspect institutions and advise or impose sanctions. Some minimum capital requirements for banking and other financial institutions are dictated. Financial institutions, for example, should maintain a core capital of at least two hundred million Kenya Shillings.
The Deposit Protection Fund established under the Act secures the deposits of customers upon the insolvency of institutions. The fund is under a state corporation which determines the amount of contributions by institutions and claims by depositors.
IV. The Microfinance Act, 2006 governs the licensing, regulation and supervision of microfinance business. Most of the regulated institutions offer banking related services and are subject to the Central bank and the Kenya Deposit Insurance Corporation.
The Microfinance (Deposit Taking Institution) Regulations 2008 provides further regulatory framework.
2 The law governing capital markets
I. The Capital Markets Act (Chapter 485A of the Laws of Kenya) establishes the Capital Markets Authority (CMA) which inter alia regulates and facilitates fair and efficient capital markets. This is a government-led regulation scheme where a government agency prominently controls the industry.
The CMA licenses and regulates the Nairobi Securities Exchange (NSE) which provides the trading platform for listed companies. The authority has inter alia the following powers over the NSE:
• The NSE has to admit all firms licensed by the CMA;
• Securities approved by the CMA must be admitted to listing by the NSE;
• The NSE cannot alter its rules without approval of the CMA.
• The NSE cannot suspend or expel its member without prior approval of the CMA. Actions taken against members by the NSE must be communicated to the CMA within seven days. Such actions are subject to review by the CMA; and
• Any suspension or delisting of securities must be sanctioned by the CMA.
The regulations guiding the market include; The Capital Markets Licensing Requirements General Regulations, 2002; Capital Markets Registered Venture Capital Companies Regulations 2007; Capital Markets Foreign Investors Regulations 2002 and Capital markets (Securities) (Public Offers Listing and Disclosure) Regulations 2002, among others set by CBK.
II. The Central Depositories Act, 2000 provides for the establishment and regulation of central depositories. Companies apply to the CMA for licensing to operate a central depository.
This is a government-led regulation whereby a government agency issues rules and exercises control over central depositories. All rules by central depositories must be approved by the CMA and once approved they cannot not be amended or repealed without the sanction of the CMA.
3 The law governing credit reference bureaus
The Banking (Credit Reference Bureaus) Regulations, 2008 govern the establishment and supervision of Credit Reference Bureaus by the Central Bank of Kenya. Prospective Credit Reference Bureaus must be established and incorporated as a limited liability company under the Companies Act and licensed under these regulations. The Central Bank collects an annual License Fee before the anniversary date of the bureau.
Credit Reference Bureaus obtain customer information, store and supply it to subscribers. They also access the credit worthiness of a customer and carry out any other activity as approved by the Central Bank.
4 The law governing money laundering
The Proceeds of Crime and Anti-Money Laundering Act, 2009 governs Money Laundering and establishes a Financial Reporting Centre which identifies and combats the proceeds of money laundering.
The Anti-Money Laundering Advisory Board advises the Director generally on the performance of his functions and the exercise of his powers.
International conventions on this area include;
I. Financial Action Task Force (FATF) sets standards for effective implementation of legal measures for combating money laundering and terrorism financing. Its International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (2012)’ sets out the essential measures that countries should adhere to.
II. Palermo Convention - United Nations Convention against Organised Crime promotes cooperation to prevent and combat transnational organised money laundering.
III. Merrida Convention - United Nations Convention against Corruption promotes measures to prevent and combat corruption and facilitates international cooperation and technical assistance in the prevention and fight against corruption.
IV. The Basel Accords I, II and III are issued by the Basel Committee on Banking Supervision (BCBS). The Central Bank of Kenya following recommendations of Basel II formulated the Risk Management Guidelines on how Financial Institutions should counter money laundering.
The bank also issued Prudential Guidelines on the Proceeds of Crime and Money Laundering (Prevention) CBK/PG/08 on prevention, detection and the control of possible money laundering activities and terrorism financing.
About the author
Victoria was admitted as an Advocate in 2010. She currently handles the Firm’s Commercial Law Department, where her experience in handling Commercial Transactions across varied industry sectors is of note.
About the author
Donald was admitted as an Advocate in 1992. He is a founding partner of KTK Advocates and holds the position of Managing Partner. He has a wealth of experience in Corporate and Commercial Law, with exceptional track record with Commercial Litigation, and is a registered Patent Agent.
About the author
Rajab joined the Firm in 2014 to undertake his pupillage and is currently awaiting admission to the bar. He has a keen interest in commercial litigation.