Microfinance (Deposit Taking Microfinance Institutions) Regulations, 2008 (Cap. 493D)

MICROFINANCE (DEPOSIT-TAKING MICROFINANCE INSTITUTIONS) REGULATIONS, 2008 ARRANGEMENT OF REGULATIONS PART I – PRELIMINARY 1. Citation. 2. Interpretation. PART II – LICENSING 3. Application for licence. 4. Company incorporated outside Kenya may establish an institution. 5. Issuance of letter of intent and licence. 6. Validity of licence. 7. Institutions to use the word ‘deposit-taking microfinance’. 8. Central Bank to publish names of licensed institutions. 9. Central Bank’s power to inspect. PART III – PLACE OF BUSINESS 10. Opening or relocating or closing place of business. 11. Opening head office or branch. 12. Opening of an agency or outlet. 13. Relocation of place of business. 14. Closure of place of business. 15. Points to consider. PART IV – CAPITAL ADEQUACY 16. Minimum Capital Requirements. 17. Criteria for Higher Minimum Capital Ratios. 18. On-Balance Sheet Items. 19. Off-Balance Sheet Items. 20. Returns to Central Bank. 21. Administrative sanctions. PART V – LIQUIDITY 22. Liquidity risk management plan. 23. Statutory minimum. 24. Returns. PART VI – GOVERNANCE 25. Institution’s board and Committees. 26. Membership of committees. 27. Role and responsibilities of audit committee. 28. Responsibilities of credit committees. 29. Assets and liabilities management committee (ALCO). 30. Monitoring and evaluation. 31. Appointment of the chief executive. 32. Reckless and fraudulent activities. 33. Scheme of arrangement. 34. Restrictions on Trading and Investments. 35. Single Borrower Limit. 36. Insider Lending Limits. 37. Know Your Customer requirements. PART VII – INTERNAL CONTROLS, AUDITING, REPORTING, PUBLICATION AND SUBMISSION OF FINANCIAL STATEMENTS AND DISCLOSURES 38. Internal Controls. 39. Internal Audit. 40. Audit plan. 41. Application to appoint external auditors. 42. Contents of application. 43. Evaluation of application. 44. Preparation and submission of financial statements. PART VIII – RISK CLASSIFICATION AND PROVISION OF LOANS 45. Loan review function of institutions. 46. Review and classification of loans. 47. Classification of Renegotiated or Restructured Loans. 48. Suspension of interest. 49. Points to consider in determining loss. 50. Write-off of loans. 51. Review of assets and reporting. 52. General penalty. SCHEDULES FIRST SCHEDULE – APPLICATION FORM FOR A LICENCE TO CARRY OUT THE DEPOSIT-TAKING BUSINESS IN KENYA SECOND SCHEDULE – FEES THIRD SCHEDULE – OPENING NEW PLACE OF BUSINESS FOURTH SCHEDULE – CLOSURE OR RELOCATION OF AN EXISTING PLACE OF BUSINESS FIFTH SCHEDULE – CAPITAL TO RISK WEIGHTED ASSETS RETURN SIXTH SCHEDULE – LIQUIDITY STATEMENT SEVENTH SCHEDULE – GUIDANCE ON BOARD PERFORMANCE EVALUATION EIGHTH SCHEDULE – LOANS, ADVANCES AND OTHER FACILITIES TO ANY PERSON OR CONNECTED GROUP EXCEEDING 2% OF CORE CAPITAL NINTH SCHEDULE – PART A – ANNUAL AUDITED FINANCIAL STATEMENTS AND OTHER DISCLOSURES TENTH SCHEDULE – RISK CLASSIFICATION OF ASSETS ELEVENTH SCHEDULE – ACTIVITY AND PORTFOLIO REPORT MICROFINANCE (DEPOSIT-TAKING MICROFINANCE INSTITUTIONS) REGULATIONS, 2008 [L.N. 58/2008.] PART I – PRELIMINARY 1. Citation These Regulations may be cited as the Microfinance (Deposit Taking Microfinance Institutions) Regulations, 2008. 2. Interpretations In these Regulations unless the context otherwise requires— “agency” means— (a) an institution’s place of business operated within a third party premises or structure by means of agreements between the institution and the third party in the provision of deposit-taking microfinance services; or (b) a third party contracted by an institution to provide deposit-taking microfinance services in the manner set out in regulation 12;. “branch” means an institution’s place of business, used for provision of the deposit-taking microfinance business in Kenya and directly responsible to the head office of the institution for the conduct of business and which is situated at a permanent location and address; “capital adequacy” means the maintenance of minimum capital requirements at all times in accordance with the Act and Regulations; “capital deficiency” means the failure by an institution to meet and maintain at all times the minimum capital requirements in accordance with the Act and Regulations; “capital requirement basis” means the basis upon which total capital, core capital and supplementary capital are measured to determine capital adequacy; “contingent claim” includes direct credit substitutes, such as guarantees, acceptances and endorsements; transaction related items such as performance bonds; formal commitments such as standby facilities, credit lines and unused facilities; “classification” means the determination of the quality and collectibility of a credit facility; “credit facility” includes— (a) loans, advances or any other facilities, by which a customer of the institution has access to funds or financial guarantees; or (b) the incurring by the institution of other liabilities on behalf of a customer; “group loan” means a loan given to an individual within a group and which is jointly guaranteed by all the members of that particular group; “head office” means an institution’s principal place of business responsible for the overall management, coordination and operations of the institution, in which it conducts its business at a permanent location and address; “internal controls system” includes the policies and procedures established and implemented individually or with other policies or procedures, to manage and control risks or business activities, to which the institution is exposed or in which it is engaged; “insider” includes a significant shareholder, an officer or employee of an institution or their associates; “large exposure” means a loan or credit facility granted to a person and his associates that exceeds two per centum (2%) of an institution’s core capital; “marketing unit” means an institution’s place of business, which the institution uses only as a marketing point without carrying out or transacting any deposit-taking business; “microfinance loan” means a credit facility granted to an individual single end user whose maximum amount shall not exceed 2% of the institution’s core capital; “mobile unit” means an institution’s place of business operated by means of using air, land or water transportation modes in carrying out deposit-taking microfinance services to its clients; “non-executive director” means an individual not involved in the day-to-day management and not a full time salaried employee of the institution; “non-performing loan” means a credit facility that is not generating income and the principal or interest is due and unpaid for, for than thirty days and includes a loan or credit facility classified either as substandard, doubtful or loss; “outlet” means an institution’s place of business, directly responsible to a branch or head office, used for the provision of deposit-taking microfinance business and includes a mobile unit and an automated teller machine; “past due loan” means a loan that has not been repaid within a day of the agreed repayment term in the loan contract; “place of business” means an institution’s premises where the deposit-taking business is carried out, and includes the institution’s head office; “premises” means an institution’s building or structure, whether owned, rented or leased, that is used in the deposit-taking business in Kenya; “renegotiated loan” or “restructured loan” means any loan that has been rescheduled or refinanced in accordance with an agreement setting forth a new repayment plan on a periodic basis; “significant shareholder” means a person, other than the Government or a public entity, who holds, directly or indirectly or otherwise has a beneficial interest in, more than forty (40%) per centum of the share capital of an institution; “supplementary capital” means general provisions which are held against future and presently unidentified losses that are freely available to meet losses which subsequently materialize and revaluation reserves on the premises of an institution which arise periodically from the independent valuation of those premises, and any other form of capital as may be determined by the Central Bank. PART II – LICENSING 3. Application for licence (1) No person shall carry out deposit-taking business without a valid licence. (2) An application for a licence to carry out deposit taking microfinance business shall be in Form 1 set out in the First Schedule to these Regulations and shall be accompanied by the following information— (a) incorporation of the words “Deposit Taking Microfinance” or the acronym “DTM” in their business name; (b) the “Fit and Proper” Test of the professional and reputational suitability of persons proposed to manage or control an institution, completed in Forms 2a and 2b set out in the First Schedule to these Regulations; (c) feasibility study and three-year business plan of the proposed deposit-taking business in Kenya, detailing the mission, vision, scope and nature of business operations, profitability analysis and internal controls and monitoring procedures, including but not limited to— (i) the proposed shareholding structure; (ii) the proposed organizational structure; (iii) the domestic economic situation and its relevance for the operation of the proposed institution and an analysis of the financial sector environment and the market to be served by the proposed business company; (iv) a schedule of all the preliminary expenses including the institutions costs, all expenses relating to the establishment or transformation of the institution; (v) (3) All documentation submitted shall be in the English language. (4) A person who contravenes paragraph (1) commits an offence. 4. Company incorporated outside Kenya may establish an institution (1) A company incorporated outside Kenya intending to establish an institution in Kenya shall apply to the Central Bank and shall in addition to the requirements set out in regulation 3, furnish the following information— (a) evidence that the company operates an entity on a going concern basis; (b) a signed statement by its board of director to adhere to the Act and these Regulations and other relevant Kenyan Laws during the validity of the licence; and (c) such other conditions as the Central Bank may deem necessary. (2) The Central Bank shall obtain a letter from the relevant authority in the country of the foreign company— (a) confirming that the promoters of the foreign incorporated company operates an entity on a going concern basis, and may grant a no objection to the establishment of the branch or subsidiary in Kenya; and (b) undertaking that the supervisory authority shall exchange supervisory information with the Central Bank before the institution is licensed and continuously as long as the institution is in operation. 5. Issuance of letter of intent and licence (1) The Central Bank shall consider an application for licence and if satisfied that the applicant meets the requirements, it may issue a letter of intent to the applicant, which shall act as an interim approval of the application. (2) Upon being issued with a letter of intent, an applicant shall proceed to— (a) prepare the premises to meet the prescribed standards; (b) to put in place management information systems and such other institutional structures required for carrying out the deposit taking business in Kenya; and (c) pay the prescribed fee as set out in the Second Schedule to these Regulations. (3) The Central Bank may, on being satisfied that the applicant has fulfilled all the requirements in paragraph (2), issue a licence to the applicant, which shall signify an approval to commence operations. (4) A licence issued under this Regulation shall be in Form 3 and 3(a) and 3(b) set out in the First Schedule to these Regulations. (5) A licence issued under these Regulations shall not be transferable or assignable. 6. Validity of licence (1) A licence issued under these Regulations shall, unless revoked, be valid up to the 31st December of the year in which it is issued and may, on expiry, be renewed. (2) An application for the renewal of a licence shall be made in writing to the Central Bank at least three months before the date of expiry. (3) An institution which fails to commence business within twelve months of the grant of a licence, shall if it still proposes to carry out the deposit-taking business, make a fresh application for licence. 7. Institutions to use the word ‘deposit-taking microfinance’ (1) Every institution shall prominently display at its usual place of business in a part thereof to which the public has access the words “deposit-taking microfinance”. (2) No person shall carry on business under a name which is likely to mislead the public or give the impression that the institution is carrying on any other business than deposit-taking microfinance business. (3) A person who contravenes this Regulation commits an offence. 8. Central Bank to publish names of licensed institutions (1) Upon issuing a licence to an institution, the Central Bank shall, within fourteen days of licensing, publish in the Kenya Gazette, the names of the newly licensed institution. (2) The Central Bank shall, every twelve months, publish in at least two newspapers of nationwide circulation, the names of all institutions licensed to carry out the deposit taking business in Kenya. 9. Central Bank’s power to inspect (1) If the Central Bank has reason to believe that a person is carrying out the deposit taking business in Kenya without a valid licence, the Central Bank shall, under a warrant issued by the High Court, shall, at all times— (a) have full and free access to the premises at which that person is suspected of carrying out the deposit-taking business in Kenya without a valid licence or at which that person may have books, accounts and records; and (b) have the power to examine copy or take possession of the books, accounts and records of that person in order to ascertain whether or not that person has contravened, or is contravening any of the provisions of the Act and regulations. (2) Refusal to allow the Central Bank full and free access to the premises or to submit any books, accounts or records shall be prima facie evidence that the person is operating a deposit-taking business without a licence. PART III – PLACE OF BUSINESS 10. Opening or relocating or closing place of business (1) No institution shall open, relocate or close a place of business without the prior written approval of the Central Bank. (2) An application to open, relocate or close a place of business shall be made to the Central Bank in the manner prescribed in these Regulations and shall be accompanied by the prescribed fee. (3) A person who contravenes paragraph (1) commits an offence. 11. Opening head office or branch (1) No institution shall open a head office or branch without a valid licence. (2) An application for opening a branch shall be in the form set out in the Third Schedule to these Regulations and shall be accompanied by the following information— (a) a summary report showing performance of the institution; (b) an organization structure for the proposed place of business; (c) a feasibility study of the future operations and development of the new place of business for a minimum of three years from the date of application including projections for— (i) expected deposit mobilization and interest payable stating separately the proposed major sources of deposits; (ii) projected investments to be made and earnings, stating policy and categories of business to be funded; (iii) operating expenses including rent, salaries, employees benefits and director’s remuneration; (iv) liquid and cash reserve assets; (v) provisions for loans and advances; (vi) fixed assets including business premises; (vii) other incomes including commissions and discounts, among others; and (viii) net operating profit/loss; (d) statistical and other data which may have been collected in respect to the area in which the applicant intends to serve including population of the area, sectoral activities such as agricultural activities, micro business and industrial development, among others and existing financial intermediaries; and (e) a schedule of all the preliminary expenses. (2) Every institution shall notify the Central Bank of its readiness to operate a head or branch and shall invite the Central Bank for inspection of the premises before commencing operations. (3) The Central Bank shall undertake the inspection of the head office or branch premises and examine compliance with the standards and the operational readiness of the institution for commencing operations. (4) The Central Bank shall, if satisfied that all requirements have been fulfilled, grant a licence upon payment of the prescribed fee. 12. Opening of an agency or outlet (1) No institution shall open or operate an agency or outlet without the prior written approval by the Central Bank. (2) An institution that contravenes paragraph (1) commits an offence. (3) An application to open an agency or outlet shall be in the form set out in the Third Schedule to these Regulations and shall be accompanied by the following information— (a) the reasons for opening the agency or outlet; (b) a duly executed copy of the agency agreement between the parties concerned, if any; and (c) the security features and space available for carrying out the deposit-taking business in Kenya. (4) The Central Bank shall, if satisfied that the applicant fulfils all the requirements, grant an approval for opening an agency or outlet. (5) An institution granted an approval to open an agency or an outlet shall ensure that the agency or outlet opens for business no later than ninety days after the date of approval and the institution shall notify the Central Bank of the opening within fourteen days from the date of opening. (6) An institution that contravenes this Regulation is liable to such administrative sanction as the Central Bank may prescribe. 13. Relocation of place of business (1) No institution shall relocate a place of business without a written approval by the Central Bank. (2) An application for an approval to relocate a place of business shall be made to the Central Bank in the Form set out in the Fourth Schedule to these Regulations and shall be accompanied by the following information— (a) the reasons given for the change of location and plan for settlement or transfer of claims and liabilities; (b) completion of the preparations of the new place of business premises; and (c) analysis of the potential and feasibility for changing the place of business location. (3) A person who contravenes paragraph (1) commits an offence. (4) The Central Bank may impose the prescribed monetary penalties on an institution that contravenes this Regulation. 14. Closure of place of business (1) No person shall, without the written approval of the Central Bank— (a) close or cause to be closed a place of business, in a manner so as to permanently cease operation of business; or (b) close temporarily or cause the temporary closure of a place of business. (2) An application to close a place of business shall be made to the Central Bank in the Form set out in the Fourth Schedule to these Regulations and shall be accompanied by— (a) the reasons for such closure; and (b) a plan for settlement or transfer of assets and liabilities. (3) An application for temporary closure of a place of business excluding public holidays and Sundays shall be accompanied by the following information— (a) the reasons for closure; (b) period of closure; and (c) the date at which the place of business shall reopen. (4) In deciding on the approval to authorize the closure of a place of business, the Central Bank shall be satisfied that— (a) the public interest in the location of the institution will not be jeopardized by the closure; and (b) alternative financial service provided by the institution are available in the locality. (5) The Central Bank shall consider the application for permanent closure of a place of business and if satisfied, shall grant an approval for permanent closure of an institution. (6) An institution granted approval to close its business permanently shall— (a) report closure to the Central Bank not later than fourteen days after closure; and (b) give a notice of the closure to the public, at least six months prior to such closure. (7) An institution granted approval to close a place of business, whether permanently or temporarily, shall ensure that the notices of the closure are made— (a) in at least two newspapers of nationwide circulation; (b) to all government administrative offices in the area of the place of business. (8) An institution that contravenes this Regulation is liable to such administrative sanction as the Central Bank may prescribe. 15. Points to consider (1) In determining the application to open, relocate or close a place of business, the Central Bank shall take into consideration the following factors— (a) the public interest that was being served in the area of the location of the institution will not be jeopardized by the closure; (b) alternative financial services that were being provided by the institution at current place of business are available in the locality; (c) institution’s performance strengths; (d) capital adequacy and structure; (e) current and future earning capabilities; (f) managerial capabilities; (g) liquidity position; (h) track record on adherence to the provisions of the Act and Regulations including the Central Bank directives; (i) credit tools and discipline; and (j) safety and security arrangements. PART IV – CAPITAL ADEQUACY 16. Minimum Capital Requirements (1) Every institution shall, at all times— (a) maintain records including balance sheets and periodic statements of income and expenditure to enable proper computation of the institution’s capital adequacy; and (b) maintain the prescribed minimum capital requirements. (2) The Central Bank shall determine whether an institution is in compliance with the capital adequacy requirements in accordance with the Act and these Regulations. (3) An Institution that contravenes paragraph (1) is liable to such administrative sanctions as may be prescribed by the Central Bank. 17. Criteria for Higher Minimum Capital Ratios The Central Bank may require higher minimum capital ratios for an individual institution based on, but not limited to the following criteria— (a) if an institution has losses resulting in a capital deficiency; (b) if an institution has significant exposure to risk; (c) if an institution has a high, or particularly severe, volume of poor asset quality; (d) if an institution is growing rapidly, either internally or through acquisitions without adequate capitalization and risk management system among other resource needs as may be determined by the Central Bank; or (e) if there is a likelihood that an institution may be adversely affected by the activities or conditions of its holding company, associates or subsidiaries. 18. On-Balance Sheet Items (1) Every institution shall assess and provide for risks in the evaluation of their respective capital adequacy measurement. (2) Every institution shall classify and assign risk weight to credit exposures into four categories according to their relative risk exposures, in the following manner— (a) zero weight may be assigned to the on-balance sheet items including cash, balances with the Central Bank, claims on the Kenya Government by way of investments in Treasury Bills, Treasury bonds and promissory notes, loans fully secured by cash and loans duly guaranteed by the Government of Kenya or Organisation for Economic Co-operation and Development (OECD) central governments; (b) twenty per centum (20%) weight, where deposits and balances due from commercial banks, financial institutions, mortgage finance and building societies in Kenya, deposit-taking microfinance institutions in Kenya, securities issued by foreign governments and balances due from foreign banks (including banks in groups) and claims (loans and advances) guaranteed by a multilateral development bank (MDB), a Regional Development Bank, or a development agencies; (c) fifty per centum (50%) weight where loans are fully secured by a first legal charge over residential property located within cities and municipalities in Kenya that are either occupied by the borrower or rented: Provided that the fifty per centum (50%) will not be applied to loans granted to companies engaged in speculative residential building or property development or any portion of loans in excess of 80% of the forced sale value of the residential property or rescheduled facilities; (d) the one hundred per centum (100%) weight shall apply to all other claims on the public and private sector which are not covered under the other categories, and include- deposits in banks, financial institutions, mortgage finance building societies, and deposit-taking microfinance institutions, that are all under statutory management; premises and other fixed assets, loans and advances, bills discounted and all other assets of these institutions. (3) For the purpose of this Regulation “Multilateral Development Banks (MDBs)” include international financial intermediaries whose shareholders include both borrowing developing countries and donor developed countries. (4) An institution that fails to comply with this Regulation shall be subject to such administrative sanction as may be prescribed by the Central Bank. 19. Off-Balance Sheet Items (1) Every institution shall ensure that— (a) off-balance sheet items fully secured by cash or cash equivalent and those that are guaranteed by Government of Kenya or OECD Central Government shall be assigned zero per centum (0%) risk weight; and (b) off balance sheet items with the maturity exceeding a year are assigned a risk weight of fifty per centum (50%), including performance bonds and bid bonds. (2) An institution that fails to comply with this Regulation is liable to such administrative sanctions as may be prescribed by the Central Bank. 20. Returns to Central Bank (1) Every institution shall prepare and submit to the Central Bank, at the end of every month to be received by the tenth day of the following month, returns on Capital to Risk Weighted Assets in the form set out in the Fifth Schedule to these Regulations. (2) An institution that fails to comply with this Regulation is liable to such administrative sanctions as may be prescribed by the Central Bank. 21. Administrative sanctions Where an institution defaults in meeting the provisions of this Part, the Central Bank may pursue any or all the following administrative sanctions against an institution and its officers— (a) prohibition from declaring or paying dividends; (b) prohibition from establishing new places of business; (c) from engaging in new activities or from expanding existing activities; (d) suspension from lending, investment, and credit extension operations; (e) prohibition from acquiring, through purchase or lease, additional fixed assets; (f) prohibition from accepting further deposits; (g) prohibition from declaring or paying bonuses, salary incentives, severance packages, management fees or other discretionary compensation to directors or officers. PART V – LIQUIDITY 22. Liquidity risk management plan (1) Every institution shall plan and fund its liquidity requirement over specific time periods as set by the institution. (2) A liquidity risk management plan shall, as a minimum, address the following— (a) management structures and information systems; (b) measuring and monitoring net funding requirements; (c) contingency planning schemes; and (d) internal controls for liquidity management. (3) An institution that fails to comply with this Regulation is liable to such administrative sanctions as the Central Bank may prescribe. 23. Statutory minimum (1) Every institution shall maintain a minimum holding of liquid assets of twenty per cent of all its deposit liabilities, matured and short term liabilities. (2) An institution that contravenes paragraph (1) shall be liable to the prescribed penalty and an additional charge not exceeding one per cent of the amount of deficiency for every day during which the default continues. 24. Returns (1) Every institution shall provide, twice a month, as at the fifteenth and the last day of each month, liquidity information to the Central Bank as set out in the Sixth Schedule to these Regulations. (2) Where the date of submission falls on a weekend or a public holiday, the deadline shall be the Friday or the day before the public holiday. (3) Every institution shall ensure that every return on liquidity requirement shall be submitted to the Central Bank within five working days of the date stipulated in paragraph (1). (4) An institution that fails to comply with this Regulation is liable to such administrative sanctions as the Central Bank may prescribe. PART VI – GOVERNANCE 25. Institution’s board and Committees (1) Every institution shall be managed by a board which shall have at least two thirds of its members being non-executive members. (2) Every board shall constitute at least an Audit committee and Credit committee. (3) The board and board committees shall meet at least once in a quarter, to deliberate on the affairs and financial condition of the institution and provide oversight and guidance to the management. (4) Every member of the board shall attend at least two thirds of the board meetings in any financial year. 26. Membership of committees (1) Every committee of the board shall consist at least three members, two of whom shall be non-executive directors of the institution and who are qualified in finance, audit, information technology, banking, economics or law: Provided that the chief executive officer of an institution shall not be a member of the Audit Committee, while the chairperson of the Board shall not be a member of the credit and audit committees, but may attend meetings by invitation, for consultation only. (2) The committee members shall elect a chairperson among themselves who shall be a non-executive director. (3) The quorum for meetings shall be at least two-thirds of the committee members, where at least one attendee must be a non-executive director of the institution. (4) Every committee shall report to the board, at least every three months. (5) No person shall hold the position of a director in more than one institution, unless the institution are subsidiaries or holding companies of the institution. 27. Role and responsibilities of audit committee (1) The audit committee shall assist the board in raising the standards of corporate governance and internal controls in the following areas— (a) ensuring that financial and operational information is prepared in a timely and accurate manner; (b) improving the quality of financial record keeping and reporting; (c) strengthening the effectiveness of internal and external audit function; (d) strengthening the internal control environment and risk management; (e) enhancing public confidence in the credibility and stability of the institution; (f) monitoring incidences of non-compliance with the Act and regulations issued there under as well as any other relevant legislations and regulations, and advising the board on the best solutions; and (g) monitoring the ethical conduct of the institution and developing the code of conduct and ethical standards and requirements, including effectiveness of procedures for handling and reporting complaints. (2) The external and internal auditors of an institution shall have free access to the audit committee. (3) The external auditor, upon request may attend and be heard at any meeting of the audit committee. (4) Upon the request of the external auditors, the chairperson of the audit committee shall convene a meeting to consider any matter that external auditor deems necessary to be brought to the attention of directors of shareholders. 28. Responsibilities of credit committees Every credit committee shall— (a) review and oversee the overall lending policy, including monitoring and risk management tools; (b) review loan applications based on established discretionary approval limits; (c) review lending practices and quality of loan portfolio; (d) ensure that there are effective procedures and adequate resources to identity and mitigate credit risk; (e) monitor and evaluate all issues that may materially impact on the present and future quality of the loan portfolio and credit risk management; (f) delegate and review lending limits to the sanctioning arms of the institution; (g) ensure adequate provisions for loans and advances, bad and doubtful debts and write off policy; (h) conduct loan reviews independent of any person or committee responsible for sanctioning credit; (i) ensure that the credit policy and risk lending limits are reviewed at least once on an annual basis and as and when the environment so dictates; and (j) set limits on lending exposure in line with the institution’s risk management programs and market conditions. 29. Assets and liabilities management committee (ALCO) (1) Every institution shall establish a management committee to be known as the assets and liabilities committee hereinafter referred to as ALCO. (2) The ALCO shall drive the strategy for the institution in terms of the mix of assets and liabilities and its expectations of the future and the potential consequences of interest rate movements, liquidity constraints, and capital adequacy. (3) The responsibilities of the ALCO shall include— (a) to review and assess the integrity of the internal and risk controls systems; (b) to ensure that the risk policies and strategies are effectively managed; (c) to set out the nature, role, responsibility and authority of the risk management function of the institution; (d) to provide an independent and objective oversight and review of the information raised by management at different levels; (e) to monitor limits on loans to deposit and loans to capital ratios as well as the percentage on a particular deposit category as set by the board; (f) to monitor limits on maximum and minimum maturities for all categories of assets and liabilities as set by the board; (g) to monitor limits on the sensitivity of the net interest margin on changes in market interest rates as set by the board; (h) to monitor maximum percentage imbalance between rates and sensitive assets and liabilities as set by the board; (i) to monitor limits on minimum spread acceptable between costs and yields of liabilities and assets as set by the board; (j) to monitor limits on minimum liquidity provision to be in maintained to sustain operations while longer term adjustments are set by the board; (k) to monitor sources of funds; (l) to monitor the institution’s policies, procedures and holding portfolio to ensure that it achieves its goals; and (m) generally to implement the funds management policy of the institution. (4) In order to perform its duties and responsibilities efficiently and effectively, the assets and liabilities management committee, may access or obtain professional advice, both inside and outside the institution, as it may consider necessary. (5) The assets and liabilities management committee shall have access to any information and records its needs to fulfill its duties and responsibilities. 30. Monitoring and evaluation (1) The board shall assess its own performance and that of the management in the discharge of their duties and responsibilities and shall— (a) develop and submit to the Central Bank a self assessment questionnaire in the manner set out in the Seventh Schedule to these Regulations; and (b) develop and submit to the Central Bank an annual self assessment board evaluation, not later than three months after the end of each financial year. (2) An institution that contravenes paragraph (1) shall be subject to the prescribed administrative sanctions. 31. Appointment of the chief executive (1) Every institution shall have a chief executive officer who shall be appointed by the board and whose terms and conditions of service shall be determined by the board in the instrument of appointment. (2) No chief executive officer shall be appointed without the prior approval of the Central Bank. (3) No person shall be appointed as chief executive officer of an institution unless such person has at least five years experience in banking business, economics, law, or finance at senior management level with experience in microfinance practices or such other conditions as may be determined by the board. (4) The board of every institution shall report to the Central Bank the resignation or removal of the chief executive officer of its institution within seven days of such resignation or removal. 32. Reckless and fraudulent activities (1) No institution shall— (a) allow a credit facility or guarantee to be outstanding; (b) incur any liability; (c) enter into any contract or transaction; or (d) conduct its business or part thereof, in a fraudulent or reckless manner detrimental to the institution's interest or the interest of depositors or the general public. (2) In relation to paragraph (1)— “reckless” means— (a) transacting the deposit-taking business beyond the limits set under the Act or Central Bank of Kenya Act (Cap. 491); (b) offering facilities contrary to any guidelines or regulations issued by the Central Bank; (c) failing to observe the institution's policies as approved by the board of directors; or (d) misuse of position or facilities of the institution for personal gain; “fraudulent” means intentional deception, false and material misrepresentation, concealment or non-disclosure of a material fact or misleading conduct, device or contrivance that results in loss and injury to the institution with an intended gain to the officer of the institution or to a customer of the institution. http://41.84.156.1:8181/exist/kenyalex/actviewbyid.xql?id=KE/LEG/AR/C/CHAPTER%20491#KE/LEG/AR/C/CHAPTER 491 33. Scheme of arrangement (1) No institution shall enter into any scheme or arrangement with creditors. (2) An institution that contravenes paragraph (1) commits an offence. 34. Restrictions on Trading and Investments (1) No institution shall— (a) acquire or hold, directly or indirectly, any part of the share capital of; or (b) have a beneficial interest in any financial, commercial, agricultural, industrial or other undertaking, where the value of the institution’s interest exceeds twenty five per centum (25%) in the aggregate of the institution’s core capital, except in an undertaking in fulfillment of a debt due to the institution. (2) An institution that contravenes paragraph (1) commits an offence. 35. Single Borrower Limit (1) No institution shall extend loans exceeding five per centum (5%) of its core capital to a single end-user borrower. (2) Every institution shall ensure that loans or credit facilities equivalent to the maximum limit are extended only to those borrowers who have the capacity or have an established track record of satisfactory repayment. (3) Every institution shall formulate well-defined credit policies and procedures covering the maximum lending limits and approval levels, rate to be charged, repayment period, loan tracking and any collateral, among others. (4) No institution shall grant a microfinance loan to any single end-user or his associate that exceed two per centum (2%) of its core capital. (5) Every institution shall ensure that the aggregate amount of microfinance loans is equivalent to or more than seventy per centum (70%) of the institution’s total loan portfolio. (6) Where an institution grants a credit facility of more than two per centum (2%) of its core capital, hereby referred to as a large exposure, such credit facility shall in aggregate not exceed thirty per centum (30%) of the institution’s total loan portfolio. (7) Paragraph (1) shall not apply to transactions between institutions licensed under the Act or branches of these institutions. (8) Where a credit facility is non-performing, the outstanding balance will be net of provisions for purposes of determining the single borrower exposure limit. (9) The term “person” includes that person and his or her associates. For this reason facilities for the person and the associates shall be aggregated and the five per centum (5%) limit of core capital rule shall apply to the aggregate amount. (10) Every institution shall submit to the Central Bank a return on single borrower limits on a quarterly basis to be received on the tenth day from the end of each quarter as prescribed in the Eighth Schedule. (11) An institution that contravenes this Regulation is liable to such administrative sanctions as the Central Bank may prescribe. 36. Insider Lending Limits (1) No institution shall grant or permit to be outstanding any advance or credit facility to significant shareholders and Directors of the institution unless such advance, loan or credit facility— (a) is approved by the full board of directors of the institution, complying with documented internal policies and procedures. An institution must ensure that all members of the board are made aware of the facility before it is disbursed; and (b) is made in the normal course of business and on terms similar to those offered to ordinary customers of the institution. (2) Every institution shall notify the Central Bank of every approval given pursuant to paragraph (1), within fourteen (14) calendar days of such approval. (3) No institution shall— (a) grant or permit to be outstanding a credit facility, financial guarantee, or (b) incur a liability to or in favour of, or on behalf of, any single insider or associate in excess of two per centum (2%) of the institution's core capital; and (c) grant or permit to be outstanding a credit facility, financial guarantee or a liability to, or in favour of, or on behalf of an insider in excess of an aggregate value of twenty per centum (20%) of the institution's core capital. (4) No institution shall— (a) grant or permit to be outstanding a credit facility, or a financial guarantee or a liability to or in favour of, or on behalf of any company in which the institution holds directly, indirectly or otherwise has a beneficial interest in more than one to twenty per centum (1-20%) of the core capital of the institution; (b) grant or permit to be outstanding a credit facility, or a one financial guarantee or a liability which are not fully secured to— (i) officers of the institution and their associates; (ii) any person or entity of whom or of which any of its officers has an interest as an agent, director, manager or significant shareholder; (iii) any person or entity of whom or of which any of its officers is a guarantor; and (iv) any associate of the institution: Provided that facilities granted to employees or staff within schemes approved by the board and serviced by salary deductions through a check off system are allowed. (5) Every institution shall submit to the Central Bank a return on insider lending on a quarterly basis to be received on the tenth day from the end of each quarter as prescribed in the Eighth Schedule. (6) An institution that contravenes this Regulation commits an offence and is liable to such administrative sanction as the Central Bank may prescribe. 37. Know Your Customer requirements (1) Every institution shall ensure that its management— (a) obtains and maintains proper identification of customers wishing to open accounts or make transactions or enter into an engagement with the institution whether directly or indirectly through proxy; and (b) maintains adequate and accurate records for a minimum of seven years regarding its customers, sources of funds and transactions. (2) Every institution shall establish to its satisfaction that it is dealing with a person that actually exists and identify those persons who are empowered to undertake any business transactions or activity, whether on their own behalf or on behalf of others. (3) Every institution when establishing a business relationship with any persons shall ensure that the nature of the business to be conducted is ascertained and well documented as to determine the terms and conditions as well as the normal activity levels. (4) Every institution shall have full disclosure of beneficial owners or controlling persons behind nominee accounts and engagement. (5) No institution shall carry out business with any anonymous persons in obvious fictitious names and any numbered accounts. (6) An institution that contravenes this Regulation commits an offence. PART VII – INTERNAL CONTROLS, AUDITING, REPORTING, PUBLICATION AND SUBMISSION OF FINANCIAL STATEMENTS AND DISCLOSURES 38. Internal Controls (1) Every institution shall implement an effective internal controls system that is consistent with the nature, complexity and risk inherent in their on- and off balance sheet activities and that is designed to respond to changes in the institution’s environment and circumstances. (2) Every institution shall develop and maintain internal control systems and activities that shall form an integral part of the daily activities of an institution and shall consist of— (a) a comprehensive financial, operational and compliance data and information, as well as external market information about the institutions operations and activities, events and market conditions that are relevant for decision making. The information shall be accurate, reliable, timely, and accessible and maintained in a consistent format; (b) reliable information systems to cover all significant activities and operations of the institution including the use of data in an electronic form; and (c) effective channels of communication to ensure that staff fully understand and adhere to policies and procedures affecting their duties and responsibilities and that other relevant information is communicated to the appropriate personnel. (3) Every Institution shall review at least once a year, its internal controls with a view to appropriately addressing any new or previously uncontrolled risks and changing market conditions. (4) An institution that contravenes this Regulation commits an offence. (5) An institution that contravenes this Regulation is liable to such administrative sanctions as may be prescribed by the Central Bank. 39. Internal Audit (1) Every institution shall— (a) appoint an internal auditor; and (b) have a written internal audit charter that specifies and enhances the standing of the internal audit purpose, authority and responsibility within the institution. (2) An institution that contravenes paragraph (1) commits an offence. (3) Every internal audit charter shall include— (a) the objectives and scope of the internal audit function; (b) internal audit's role and responsibility for governance, risk management, consulting services, and fraud investigations, among others; and (c) internal auditor's position within the institution, its powers, responsibilities and relations with other control functions. (4) Every institution shall review its audit charter at least once every year. (5) The audit charter shall be approved by the audit committee and subsequently ratified by the board as part of their supervisory role before the start of each financial year. (6) An institution that contravenes paragraph (4) commits an offence and is liable to such administrative sanctions as may be prescribed by the Central Bank. 40. Audit plan (1) Every internal auditor shall prepare an annual audit work plan for the assignments to be performed during the next financial year and present it to the audit committee for review. (2) The annual audit plan shall include— (a) the scope; (b) objective; (c) timing; (d) frequency; and (e) resources, of the planned internal audit work. (3) The report of the internal auditor shall contain the findings and recommendations as well as the responses of the officers. (4) The reports and working papers of the internal auditors shall be kept for at least five years. (5) The board audit committee shall follows up its recommendations to verify whether the recommendations provided are implemented and the status of the recommendations shall be communicated to the board audit sub-committee at least on a quarterly basis and permanent coordination shall be maintained with all functional officers. 41. Application to appoint external auditors (1) No institution shall appoint an external auditor without the approval of the Central Bank. (2) All applications for approval of external auditors shall be submitted to the Central Bank by 31st August of each year and prior to the commencement of the interim audit if any, where this is to be conducted before 31st August. (3) An institution that contravenes subregulation (1) commits an offence. 42. Contents of application (1) An application for the approval of the appointment of the external auditor shall contain the following information— (a) name of the registered external auditor; (b) where the auditor is a firm, names, qualifications and experience of each partner; (c) physical and postal address of the local office and in case of an international external auditor, full details of the head office; (d) details of the partner in n charge of the external audit of the institution; (e) name, qualifications and experience of the officer to be engaged in the external audit of the institution; (f) details of the external auditor’s experience in other similar institutions; (g) details of any existing relationship between the partner in-charge of the external audit and the institution; (h) confirmation that neither the external auditor, nor the partners or staff involved in the audit of an institution are holding past due loans in the institution; (i) a copy of the practicing certificate and/or licence of external auditor; and (j) any other information considered necessary in support of the application. (2) Every external audit firm shall keep the Central Bank informed of any changes in partnerships, audit managers, disciplinary actions against the firm or its partners, within thirty days of the event. (3) A person who contravenes paragraph (2) shall be subject to the prescribed administrative sanctions. 43. Evaluation of application In assessing an application, the Central Bank shall consider and be satisfied that— (a) the external auditor is not disqualified from being appointed as an external auditor; (b) the external auditor or any of its partners have not been granted any type of loans or credit facilities in the institution, except in the normal course of business and at arms-length; and the loans or credit facility is performing and has been approved by the full board; (c) the external auditor or its partners do not represent directly or indirectly the interests of the shareholders or directors of the institution in any business ventures; (d) the external auditors do not have any business association with the shareholders or directors of the institution except in public quoted companies, where the shareholding is less than 5% of the shares; (e) the external auditor, its partners and employees have the capacity to conduct an audit that satisfies the International Standards on Auditing; (f) where the external auditor or its partners have been subject to any disciplinary action by any professional body, ensure that clearance has been obtained from that body; and (g) there has been no element of misconduct in the performance of the external auditor's duties in other firms whether in its auditing, accounting, secretarial, trustee, nominee services or otherwise. 44. Preparation and submission of financial statements (1) Every institution shall prepare and submit to the Central Bank audited financial statements and other disclosures within three months after the end of each financial year in the manner set out in Part A of the Ninth Schedule to these Regulations. (2) Every institution shall, within three months of the end of every financial year, publish in a newspaper of nationwide circulation, between Mondays and Fridays excluding public holidays and weekends— (a) a copy of their audited balance sheet showing its assets and liabilities; (b) an audited profit and loss statement covering its activities and other disclosures; and (c) any other information as may be directed by the Central Bank in the format prescribed by the Central Bank. (3) Every institution shall submit to the Central Bank for review and approval, all the audited financial statements and other disclosures to be published at least three weeks before publication. (4) Upon approval by the Central Bank, an institution shall prominently exhibit a copy of their most recent audited annual financial statements with a note indicating that any person so interested with the financial statements may obtain a copy from a specified office or employee of the institution, throughout the year, in a conspicuous position at all their places of business with a permanent premise. (5) Every institution shall— (a) prepare and submit to the Central Bank, un-audited quarterly financial statements and other disclosures on or before the twentieth day from the dates of their preparation, in the manner set out in Part B of the Ninth Schedule to these Regulations; and (b) cause a copy of the un-audited quarterly financial statements and any other disclosures to be conspicuously exhibited in the place of business with permanent premises. (6) Every institution shall ensure that all un-audited quarterly financial statements and other disclosures to be displayed, are signed by the chief executive. (7) Every institution shall prepare un-audited monthly financial statement and submit to the Central Bank within fifteen days from the date of the return, in the manner prescribed by the Central Bank. (8) An institution that contravenes this Regulation commits an offence and is liable to such administrative sanctions as the Central Bank may prescribe. PART VIII – RISK CLASSIFICATION AND PROVISION OF LOANS 45. Loan review function of institutions (1) Every institution’s loan review function shall ensure that— (a) the loan portfolio and lending function conforms to a sound written lending policy, which has been approved and adopted by the board; (b) management and the board are adequately informed regarding credit risk, among other risks and risk management control effectiveness; (c) problem accounts are identified properly and on a timely basis and internally classified in accordance with the classification criteria in these Regulations; and (d) appropriate and adequate level of provisions for potential loss are made and maintained at all times. (2) An institution that contravenes paragraph (1) shall be liable to such administrative sanction as the Central Bank may prescribe. 46. Review and classification of loans (1) Every institution shall review, classify and appropriately make provisions for its loan portfolio at least once every three months. (2) Every institution shall classify loans and advances in the manner set out in the Tenth Schedule to these Regulations. (3) Where an institution has granted multiple loans to a single borrower, and any one of such loans is non-performing, the institution shall evaluate every other loan to that borrower and place such loans on non-performing status accordingly. (4) Every institution shall classify a group loan as past due in its entirety, when any of the members of the group defaults and the amount due is not covered by the members of the group: Provided that if the amount due is guaranteed by the members of group, only the portion in arrears shall be accounted for as past due and the group members shall pay up for the guarantee. (6) An institution that contravenes this Regulation is liable to such administrative sanction as may be prescribed by the Central Bank. 47. Classification of Renegotiated or Restructured Loans (1) Every institution shall classify a renegotiated or restructured loan in the Substandard category unless— (a) all past due principal and interest is repaid in full at the time of renegotiation, in which case it may revert to ‘Normal’ classification; and (b) all past due interest is repaid in full at the time of renegotiation in which case it may revert to ‘Watch’ classification. (2) A renegotiated or restructured loan classified as doubtful or loss shall continue to be classified as doubtful or loss unless— (a) all past due principal and interest is repaid in full at the time of renegotiation, in which case it may revert to ‘Watch’ classification; or (b) all past due interest is repaid in full at the time of renegotiation in which case it may revert to ‘Substandard’ classification; and (c) all past due principal and interest is repaid in full at the time of renegotiation and there has been consistent repayment of three installments in which case it may revert to ‘Normal’ classification. (3) No institution shall restructure or renegotiate any loan or credit facility more than twice over the life of the original loan or credit facility. (4) Any loan or credit facility restructured for the second time shall be classified as substandard if all past due principal and interest is repaid in full at the time of renegotiation: Provided that if all past due interest is repaid in full at the time of renegotiation, the loan or credit facility shall be classified as doubtful. (5) A person who contravenes this Regulation is liable to such administrative sanction as may be prescribed by the Central Bank. 48. Suspension of interest (1) Where a loan is classified as non-performing every institution shall suspend any interest on such loans and advances and— (a) the interest in suspense shall not be treated as income; (b) all interest in suspense shall be taken into account in the computation of provisions for non-performing accounts; and (c) reverse any interest on non-performing loans or credit facilities accrued into income but uncollected and credit into the interest in suspense account until paid in cash by the borrower. (2) Every institution shall ensure that a non-performing loan or credit facility is returned to accrual basis only when all outstanding dues and unpaid obligations have been paid up to date. (3) Every Institution shall ensure that all interest on non-performing loan or credit facilities previously accrued into income but uncollected is reversed and credited into the interest in suspense account until paid in cash by the borrower. (4) An institution that contravenes this Regulation is liable to such administrative sanction as may prescribed by the Central Bank. 49. Points to consider in determining loss (1) In determining the amount of potential loss in specific loans or in the aggregate loan portfolio, every institution shall be guided by the following minimum provisioning percentages— (a) for loans classified “Normal”, one per centum (1%); (b) for loans classified “Watch” five per centum (5%); (c) for loans classified “Substandard” twenty five per centum (25%); (d) for loans classified “Doubtful”, seventy five per centum (75%); and (e) for loans classified “Loss”, one hundred per centum (100%). (2) Where the impairment charges computed under International Financial Reporting Standards (IFRS) are lower than provisions required under these Regulations, the excess provisions shall be treated as an appropriation of retained earnings. (3) Where the impairment charges computed under IFRS are higher than provisions required under these Regulations, the IFRS impairment charges shall be considered adequate for the purposes of these Regulations. (4) An Institution that contravenes this Regulation is liable to such administrative sanction as the Central Bank may prescribe. 50. Write-off of loans (1) An institution shall write-off a loan or a portion of a loan from its balance sheet when— (a) the institution loses control of the contractual rights over the loan; (b) all or part of a loan is deemed uncollectible or there is no realistic prospect of recovery; (c) the borrower becomes bankrupt; or (d) efforts to collect debt are abandoned for any other reason. (3) Every institution shall write off a loan or a portion of a loan classified as loss, within ninety days of their being classified as loss, if there are no recoveries within that period. (4) An institution that contravenes this Regulation is liable to such administrative sanction as may be prescribed by the Central Bank. 51. Review of assets and reporting (1) Every institution shall, at least every year, review its assets and make necessary provisions as need arises, if an actual loss of an asset occurs or when the recoverable amount of the asset is less than it’s carrying value. (2) Every institution shall submit a copy of the review report to the Central Bank within fifteen days from the date of review. (3) Every institution shall submit returns in the manner prescribed in the Eleventh Schedule to these Regulations. (4) An institution that fails to submit accurate information to the Central Bank on a timely basis is liable to such administrative sanction as may be prescribed by the Central Bank. (5) An institution that contravenes this Regulation is liable to such administrative sanction as may be prescribed by the Central Bank. 52. General penalty A person who commits an offence under these Regulations for which no penalty is specifically provided is liable on conviction to a fine not exceeding one hundred thousand shillings or to imprisonment for a term not exceeding one year, or to both. FIRST SCHEDULE [Regulation 3(2).] SECOND SCHEDULE [Regulations 3, 5.] FEES THIRD SCHEDULE [Regulation 11.] OPENING NEW PLACE OF BUSINESS FOURTH SCHEDULE [Regulations 13(2), 14(2).] CLOSURE OR RELOCATION OF AN EXISTING PLACE OF BUSINESS FIFTH SCHEDULE [Regulation 20(1).] SIXTH SCHEDULE [Regulation 24(1).] SIXTH SCHEDULE, FORM 3—continued COMPLETION INSTRUCTIONS SEVENTH SCHEDULE [Regulation 30(1)(a).] EIGHTH SCHEDULE [Regulation 35(10).] EIGHTH SCHEDULE—continued COMPLETION INSTRUCTIONS NINTH SCHEDULE [Regulation 44(1), 44(5)(a).] PART A – ANNUAL AUDITED FINANCIAL STATEMENTS AND OTHER DISCLOSURES PART B – UN-AUDITED QUARTERLY FINANCIAL STATEMENTS AND OTHER DISCLOSURES NOTES FOR COMPLETION OF AUDITED AND UN-AUDITED QUARTERLY FINANCIAL STATEMENTS AND OTHER DISCLOSURES TENTH SCHEDULE [Regulation 46(2).] TENTH SCHEDULE—continued COMPLETION INSTRUCTIONS ELEVENTH SCHEDULE [Regulation 51(3).] ACTIVITY AND PORTFOLIO REPORT COMPLETION INSTRUCTIONS ACTIVITY AND PORTFOLIO REPORT