LAW RELATING TO BANKING

An introduction to the Kenya banking laws

What is banking law?
Banking law determines how a bank must operate. Most countries hold broad objectives in
common with one another when regulating banking law. These include privacy protection, credit
allocation, minimizing creditor risk and avoiding total bank failure. Different nations have
different kinds of rules regarding these matters. Some prize stability above all things, while
others prize privacy.

Under the Kenya banking law,the government requires banks to hold certain levels of cash
deposits in order to function. These prevent the bank from borrowing heavily or from lending out
more than it can handle. In theory, such protections in banking law guard consumers from having
their bank go bankrupt due to poor investment. It also theoretically protects the government from
bailing out such banks. Financial crises such as the 2008 global banking collapse prove that
safeguards are in constant need of revision.

The amount of information a bank is required to divulge depends on the nation’s banking law.
Banks are often required to disclose their lending rates and mortgage activities so consumers can
decide if a bank is serving the best interests of the local community. Community investment
includes lending rates for small businesses; it also includes the total amount of small business
loans a bank makes. Nations want their banks to support the operations of their small and
independent businesses.

Accountability and privacy under the Kenya banking law are part of a bank’s duty towards
consumer protection. This also includes protecting consumers who have taken out loans,
mortgages and debit cards. It also regulates how a bank may collect debts such as credit card
debts and foreclose properties when buyers fail to keep up with mortgage payments.

Kenya Banking law also protects potential consumers by requiring banks not to discriminate.
This means that a bank cannot refuse to set up an account on the basis of someone’s age, race,
gender and other factors. The only factor to be taken into account is the potential customer’s
financial position at the time of application.

Government regulations and banking law require banks to cooperate with criminal
investigations. Even many tax havens have signed up to EU regulations to stop money
laundering and other criminal activities. When nations prize customer privacy above all other
things, it means the regulation of their activities is lessened, but it does not mean they support
illegal activities.
 Banking regulations in Kenya
Under the Kenya banking law,bank regulations are a form of government regulation which
subject banks to certain requirements, restrictions and guidelines. This regulatory structure
creates transparency between banking institutions and the individuals and corporations with
whom they conduct business, among other things.

Given the interconnectedness of the banking industry and the reliance that the national (and
global) economy hold on banks, it is important for regulatory agencies to maintain control over
the standardized practices of these institutions. Supporters of such regulation often hinge their
arguments on the "too big to fail" notion. This holds that many financial institutions (particularly
investment banks with a commercial arm) hold too much control over the economy to fail
without enormous consequences. This is the premise for government bailouts, in which
government financial assistance is provided to banks or other financial institutions who appear to
be on the brink of collapse. The belief is that without this aid, the crippled banks would not only
become bankrupt, but would create rippling effects throughout the economy leading to systemic
failure.

Objectives of bank regulation in Kenya

• Prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to protect
depositors)
• Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading
conditions for banks causing multiple or major bank failures
• Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes, e.g.
laundering the proceeds of crime
• To protect banking confidentiality
• Credit allocation—to direct credit to favored sectors
• It may also include rules about treating customers fairly and having corporate social
responsibility (CSR)

The Banking industry in Kenya is governed by the Kenya Companies Act, the Kenya Banking
Act, the Central Bank of Kenya Act and the various prudential guidelines issued by the Central
Bank of Kenya (CBK). The banking sector was liberalised in 1995 and exchange controls lifted.
The CBK, which falls under the Minister for Finance docket, is responsible for formulating and
implementing monetary policy and fostering the liquidity, solvency and proper functioning of the
financial system.

As at December 2008 there were forty six banking and non bank institutions, fifteen micro
finance institutions and one hundred and nine foreign exchange bureaus.
 The banks have come together under the Kenya Bankers Association (KBA), which serves as a
lobby for the banking sector’s interests .The KBA serves a forum to address issues affecting
members.

Over the last few years, the Banking sector in Kenya has continued to growth in assets, deposits,
profitability and products offering. The growth has been mainly underpinned by;

• an industry wide branch network expansion strategy both in Kenya and in the East African
community region.
• automation of a large number of services and a move towards emphasis on the complex customer
needs rather than traditional ‘off-the-shelf’ banking products.
Players in this sector have experienced increased competition over the last few years resulting
from increased innovations among the players and new entrants into the market.