Central Bank of Kenya Proposes Banking Sector Charter

On 6th August 2018, the Central Bank of Kenya (CBK) invited public comments on the proposed Kenya Banking Sector Charter (the Charter). The Charter is one of multiple regulatory responses to improve Kenya’s credit market as well as consumer protection and competition within the banking sector. This is in addition to the proposed repeal of the interest rate caps under section 16A of the Banking Act (Chapter 488, Laws of Kenya) and the proposed Financial Markets Conduct Bill, 2018.

The Charter will be mandatorily applicable to banks, microfinance institutions, mortgage finance companies and other entities licensed under the Banking Act and the Microfinance Act, No. 19 of 2006.

Some of the key measures proposed by the CBK under the Charter are detailed below:

a) Credit-scoring – Licensed entities will be required to price their loans by fully implementing risk-based credit scoring techniques. This will be based on rating sourced from licensed credit reference bureaus and applied at the loan screening stage to allow differential loan pricing as per individual risk profiles. This would be a response to complaints made that data from credit reference bureaus has so far mainly been utilised in blacklisting loan defaulters.

b) Cost of credit – Commercial banks will be required to upload their internal and external charges and fees for all products to the Cost of Credit website (accessible at https://www.costofcredit.co.ke/). This is in response to failure by some banks to embrace this industry-led initiative. Administrative sanctions have been proposed for such continued failure.

c) Financial literacy – Licensed institutions shall be mandated to provide technical assistance to micro, small and medium enterprises (MSMEs) to increase their capacity and skills in securing and understanding financing. Further, financial literacy initiatives will be required to be distinct from licensed institutions common product marketing.

d) Financial access – Licensed institutions will be required to achieve increased penetration and access to financial services to unbanked and underserved segments of the population. Key in achieving this will be the requirement that institutions increase business loans to MSMEs by at least 20% from a December 2017 baseline.

The CBK has proposed that each bank shall be required to, within 30 days of the Charter’s effective date, submit a time-bound, board-approved plan detailing its individual measures to comply with the Charter. The effective date indicated on the draft Charter is 1st September 2018 although this may change after consideration and incorporation of public comments.

The deadline for submission of public memoranda and comments on the draft Charter is Friday, 24th August 2018.

Upon the implementation of the Charter, banks will be required to submit quarterly reports and failure to do so may attract the administrative sanctions permitted under the Banking Act and Microfinance Act.

There have been similar initiatives in South Africa and Namibia. However, in these jurisdictions, their respective Financial Sector Charters were enacted voluntarily by industry players and they adopt an opt-in framework for implementation. As a result, such industry-led initiatives have applied incentives to enhance implementation of these Charters.