Regulation of Financial Markets and Institutions

Central Bank of Kenya

Every country has a central bank which controls its entire banking system. The
central bank occupies a central position in the monetary and banking structure of
the country. The central bank is the undisputed leader of the money market, it
supervises, regulates and controls the activities of the commercial banks. The
central bank is also the biggest monetary institution in the country charged with
the duty and responsibility of carrying out the monetary policy formulated by the
government.

The central bank defined as the banking and monetary institution whose main
function is to control, regulate and stabilize the banking and the monetary system
of the country in the nation’s interests.

Functions of the Central Bank

1) The sole currency issuing authority

The central bank of Kenya is the sole authority for the issue of currency in Kenya.
The following advantages have occurred from the system of note issue by the
central bank of Kenya.

i. Uniformity in the monetary system and also possible to exercise proper

control over the supply of money in the country.
ii. Create public confidence. The method of note issue strengthens the public
confidence in the monetary system.
iii. Stability in the central and external value of money. With its monopoly of
note issue, the central bank can maintain stability in the internal and
external value of home currency.

2) Acts as the banker, agent and adviser to the government

 As the government banker the central bank keeps the accounts of various
government departments and institutions.
 Accepts deposits from the government.
 It undertakes the collection of cheques and drafts deposited in the
government account.
 The central bank also provides to the government foreign exchange
resources to enable its external debt or for the purchase of foreign goods
or for making other payments.
 As an agent to the government accepts loans and manage the public debt
on behalf of the government.

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  As financial adviser the central bank renders useful advice to the
government on important economic problems like those of devaluation of
currency.
 The central bank is also the custodian of the country’s foreign exchange
reserves.

3) Acts as the banker to commercial banks.

 Lender of the last resort. This means that if the commercial banks are
not able to secure financial accommodation from other souses, then as a
last resort, they can approach the central bank for necessary credit
facilities. This helps commercial banks to maintain the liquidity of their
financial resources. However, the CBK lending rate is higher than the
inter-bank rate in order to discourage banks from approaching it as a first
resort.

 Custodian of the liquidity and cash ratio balances of commercial

banks. Commercial banks are required to maintain a certain percentage
of their total deposits with the Central Bank as a statutory cash and
liquidity ratio requirement. The system enables central bank to control the
creation of credit by commercial banks through increasing or decreasing
reserves.
 Central clearance and settlement transactions. The Central Bank acts
as the service provider for the national clearing house. The settlement
process is facilitated through the commercial bank’s current accounts held
with the central bank.
 The Central Bank manages the national payments system.

4) Custodian of the nation’s foreign exchange reserves.

If there are fluctuations in the foreign exchange rates, then the central bank in
order to minimize fluctuations may have to buy and sell foreign currencies in the
market. Example: if the price of a certain currency rises up, the CBK will start
selling that currency in the market. This will automatically reduce the price of that
currency in the market. If the price of that foreign currency declines, the CBK will
start buying that currency to raise it up. This maintains stability in the market.

5) Publication of economic statistics and other useful information which provides

valuable information on the basis of which the government formulates and
implement its economic policies.

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7) Supervision of commercial banking

Under the Banking Act and the Central bank of Kenya Act, CBK has been given
vast power of supervision and control of commercial banks. The powers include:

 Power to issue, review, renew and revoke licenses to institutions intending

to conduct banking business in the country.
 Power to prescribe minimum capital and liquidity requirements for
commercial banks.
 Power to inspect banks and approve their external auditors.
 Power to vet senior management and directors of commercial banks.
 Power to issue directives and guidelines from time to time as CBK deems
fit.

The Deposit Protection Fund

he Deposit Protection Fund Board (DPFB) is a significant player in the financial

safety-net for the savings, banking and payments systems in the Republic of
Kenya. It plays the role of protecting depositors, especially small depositors,
against loss of their deposits in case of a bank failure, by providing payments of
insured deposits thereby ensuring depositors remain confident enough to
continue keeping their savings within the banking and payments system.

The fund was established in response to challenges presented by banking crises

and bank failures in the country and has proved its worth during the twenty years
of existence.

The principal objectives of the Board are to provide a deposit insurance scheme
for customers of member institutions and to wind up the operations of any
institution in respect of which the Board is appointed as a liquidator.
Complementary objectives are to hold, manage and apply funds levied as
contributions from member institutions.

Membership is compulsory for all institutions licensed to carry on business as

Commercial Banks, Financial Institutions, Mortgage Finance Companies and
Building Societies. All members pay flat-rate contributions based on the level of
deposits taken by the institution in the previous twelve months.

The Board is mandated to provide deposit insurance coverage of up to KES

100,000 (USD1,370) to each depositor of an institution licensed to carry on
banking or finance business in Kenya. The insurance covers all types of deposit
accounts including Current; Savings; Time; Bankers Cheques; Money Orders;
Drafts etc for which a protected institution is liable.
However, payment is restricted to one depositor per institution i.e. all accounts of
a depositor with more than one account in an institution are first consolidated

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before settlement as one claim to the maximum protected limit of Ksh.100,000.
This limit was set after analysis of returns submitted by the institutions

Determination of the size of the Fund, which is premised on the need to

sufficiently protect the interests of depositors, is largely guided by information
compiled from the mandatory returns member institutions file with both the Board
and the Central Bank of Kenya. At the moment, the Act limits premiums to a
maximum of 0.4 per cent of the average of a members total deposit liabilities in a
twelve month period prior to assessment.
Currently, the annual premium is assessed at 0.15% of the average total deposit
liabilities or Ksh.300,000 [US$ 4,100] per member, whichever is higher. It is
applied uniformly and assessments are carried out in July and premium
payments are expected by August of each year. Late payments attract penalties.

Capital Markets Authority

The Capital Markets Authority (CMA) is the body responsible for regulating the
capital markets industry in Kenya. It approves the offers of all securities to the
public, licenses market professionals like broker/dealers, investment advisors
and fund managers. It also has oversight over the Nairobi Stock Exchange (NSE)
and the Central Depository and Settlement Corporation (CDSC). The capital
market is part of the financial system that provides funds for long-term
development. It brings together lenders (investors) of capital and borrowers
(companies that sell securities to the public) of capital.

The authority was set up in 1989 after the Capital Markets Authority Act, Cap 485
was passed by parliament and assented to by the President. The formation of the
Authority came after the government realized that there was need to design and
implement policy reforms to foster sustainable economic development with an
efficient and stable financial system. The objectives of the move were:

 To enhance the role of the private sector in the economy.

 To reduce the demands of public enterprises on the exchequer.
 To rationalize the operations of the public enterprise sector to broaden the
base of ownership.
 Enhance capital market development. Commercial banks could not
support and sustain a desirable economic development because they
could not offer the necessary long-term credit.

Role of Capital Markets Authority

As the government agency responsible for regulating Kenya’s securities

markets, the Authority's primary mandates are to protect investors and to

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 encourage the development of efficient, orderly, and well-regulated primary
and secondary markets for securities.

Functions of the CMA

 Enforces the Capital Market Law and regulations

 Authorizes prospectuses of new securities issues.

 Reviews information memoranda of securities private placements.

 Grants license for securities companies.

 Protects rights of minority shareholders.

 Applies disclosure requirements in accordance with Kenyan

Accounting Standards based on International Accounting Standards.

 Conducts market surveillance to ensure transparent and fair trading

in securities and to deter fraud, including reviewing disclosures from
listed companies, monitoring securities trading, and inspecting
brokers and other intermediaries.

 Facilitates the growth and development of Kenya's capital market,

including improving the skills of capital market officials, encouraging
the introduction of new financial instruments, facilitating the
implementation of state-of-the-art technology, and increasing investor
awareness.

Major Goals of the Capital Markets Authority

 Protecting investors from non-commercial risks.

 Organizing and developing capital markets and keeping its integrity.

 Applying fairness and transparency principles.

Insurance Regulatory Authority

The Authority was established under the Insurance (Amendment) Act 2006
enacted on 30th December, 2006 to take up the role of regulating, supervising
and developing the insurance industry. The Act became effective on 1 st May
2007.

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The Mandate

 To regulate, supervise and develop the insurance industry in Kenya.

 Administer the Insurance Act.
 Advising the government on policy matters insurance.
 Protecting the interests of policyholders more so the more vulnerable
groups.

Core Functions:

 Formulating general insurance policies and guidelines.

 Licensing of insurers and intermediaries.
 Formulation and enforcement of insurance standards especially in regard
to the compulsory insurance covers like third party motor vehicle
insurance.
 Approving tariffs and rates of insurance.
 Handling complaints from policyholders and the general public.
 Monitoring the performance and financial viability of insurance companies.
 Collecting insurance license fees and other related taxes.
 Preparing annual performance reports of members of the industry.
Monitoring and enforcement of claims settlement.

Policyholders’ Compensation Fund

The Policyholders’ Compensation Fund was established on 24th September

2004 under the provisions of Section 179 (2) of the Insurance Act. The purpose
of the Fund is to promote confidence in the insurance industry and also relief
policyholders of the suffering they may undergo in the event of unfortunate
collapse of an insurer. The Fund became effective from 1st January 2005.
Insurers and policyholders contribute equally to the Fund through monthly levy of
0.5% on gross direct premium written. The maximum compensation payable to
policyholders by the Fund on any one claim is KES 100, 000. Claims arising out
of policies issued before the commencement of the Fund operations are not
covered under the scheme. The administration of the Fund is vested in a Board
of Trustees with the Retirement Benefits Authority(RBA) being the managing
trustee of the Fund.