CBK seeks powers to weed out rogue bank investors

The Central Bank of Kenya building in Nairobi. PHOTO | FILE 

By VICTOR JUMA, vjuma@ke.nationmedia.com

In Summary

• The CBK seeks to weed out shadowy investors who exercise control or influence decisions in banks, despite keeping their ownership below five per cent.
• The regulator currently focuses on vetting banks’ senior management and shareholders with at least five per cent stake, in a practice meant to safeguard stability of the financial system by enforcing strong corporate governance standards.

The Central Bank of Kenya (CBK) is set to get more powers to investigate shareholders of commercial banks who have questionable character.

The regulator seeks to weed out shadowy investors who exercise control or influence decisions in banks, despite keeping their ownership below five per cent —the shareholding threshold at which CBK is currently legally mandated to scrutinise.

Those in violation of the suitability standards, including having a history of fraudulent activities, face the prospect of forfeiting their voting rights and having their shares sold among other penalties.

The CBK will get the broader mandate effective January next year if the proposed Finance Bill 2015 which contains the amendments to the Banking Act is passed into law.

“The Central Bank may vet any shareholder who is not a significant shareholder if … the Central Bank has reason to believe or reasonably suspect that such shareholder has reduced direct or indirect shareholding in an institution or in a corporate entity to below five per cent in order to avoid vetting,” reads part of the proposed amendments.

Banking crisis

Such scrutiny will also commence if CBK determines that an investor exercises or has the capacity to exercise direct or indirect control of the institution through his or its associates.

The lowering of the vetting threshold to shareholders with less than five per cent equity means the regulator will have the powers to investigate virtually any investor who may have direct or indirect influence in a bank through personal connections or cross ownerships.

This will bring tens of individuals under the purview of the regulator since sizeable stakes of less than five per cent are largely held by individual investors under their name or through wholly-owned investment vehicles.

The amendments are seen as pre-empting a situation where a bank’s ownership may be highly fragmented, leaving a group of investors with seemingly low shareholding stakes with the power to control an institution working in concert.

CBK currently focuses on vetting banks’ senior management and shareholders with at least five per cent stake, in a practice meant to safeguard stability of the financial system by enforcing strong corporate governance standards.

The significant owners, including individual and institutional investors, are vetted for fraud or flouting of laws meant to protect the public in provision of financial services.

Those found not morally suitable are to cease exercising all their voting rights immediately upon the bank being notified of the same by CBK in writing.

This means that the offenders will not have a say in electing directors, amending articles of associations or any other decision that would ordinarily be their right as shareholders.

This punishment is meant to protect banks from dishonest owners who may steer it in the wrong direction at the expense of depositors, creditors and other investors.