Regulator to vet corporate ownership of banks

The Central Bank of Kenya. The regulator has issued new guidelines that bring holding companies owning at least 20 per cent stake in banks under its direct supervision. Photo/Salaton Njau 

By GEOFFREY IRUNGU

In Summary

• Under the new draft Guideline on Non-operating Holding Companies, top managers and owners of holding companies will be vetted.
• Activities of the holding companies will come under close watch of the CBK to minimise possible negative impact on the banking industry or the commercial bank itself.

Central Bank of Kenya (CBK) has brought holding companies owning at least 20 per cent stake in banks under its direct supervision. But it has also granted the companies permission to own subsidiaries across the borders.

Under the new draft Guideline on Non-operating Holding Companies, top managers and owners of the holding companies will be vetted. And before approving an application for a holding company in a commercial bank, CBK will need to be satisfied that “the person seeking to become a significant shareholder and senior officer is a fit-and-proper person” in the sense that he is not barred from being a director of a bank.

The best-known bank under a holding firm is I&M Bank — that incidentally owns foreign subsidiaries — which is in the process of coming under City Trust Ltd in a share swap (see article).

The new draft guideline also stipulates the coming into effect of minimum capital and buffers, which are essentially the same as those of commercial banks. CBK has posted the document for discussion ahead of operationalisation on May 2, 2013.

Activities of the holding companies will come under close watch of the CBK to minimise possible negative impact on the banking industry or the commercial bank itself.

Banks in Kenya have expanded into the region in the recent past, making the supervision of their cross-border operations more complex.

“The new guideline allows banks to be owned by holding companies which in turn can also own subsidiaries across the border,” said Habil Olaka, the Kenya Bankers Association CEO.

A holding company is said to control a bank if it owns at least one-fifth. However, any shareholding above five per cent is considered significant shareholding and has to be disclosed to the CBK.

Under the CBK rules, significant shareholders are not allowed to be managers in a commercial bank, unless they get express exemption from the monetary authority.

Most significantly owners or directors of companies who attempt to hide their shareholding through the holding companies will find the going tough because the CBK will have the power to find out who the nominees represent.

The guideline says that if a shareholder holds any share in the approved non-operating holding company as nominee, “the person for whom he holds the share” should be identified “either by name or by other particulars sufficient to enable that person to be identified.”

“The Central Bank of Kenya may, by notice in writing, direct any approved non-operating holding company to obtain from any of its shareholders and to transmit to the [CBK] any information relating to its shareholders which the Bank may require for the purposes of ascertaining or investigating into the control of shareholding or voting power in the approved non-operating holding company,” said the guideline.

Under the City Trust and I&M Bank merger that has already been approved by their shareholders, I&M owners will own 92.7 per cent of the holding company and the rest will remain with the current owners of City Trust.

Bankers say the document helps to define the current rules of operation.

The new rules say a group of people cannot unilaterally change the terms of incorporation of the holding company without consulting CBK even if they have controlling shareholding in a bank.

“Every approved non-operating holding company shall, prior to the making of any amendment or alteration in the memorandum of association and articles of association … furnish to the Central Bank of Kenya particulars in writing of the proposed amendment or alteration,” says the new guideline.

The CBK will have authority to inspect at any time the shareholding structure and beneficial owners of the holding company. The monetary authority will also inspect the operations of the holding firm and could even authorise an audit into its books and ownership.

The CBK can order the holding company to show that its operations are legal. This means suspicion by the CBK can trigger an audit and inspection of the premises and books and related parties or owners.