These are dealt with under Part III of the Banking Act what is classified as prohibited business.
From Section 10 of the Act which limits advances or imposes limits on advances that an institution is allowed to make to anyone person and the limit here is that an institution should not grant or permit facilities to any person to exceed 25% of that institution’s core capital.
Core capital’s definition is permanent share holders equity (issued and fully paid-up ordinary shares and perpetual non-cumulative preference shares) in the form of issued and fully paid up shares plus all disclosed reserves (additional share premium plus retained earnings plus 50% of profits after tax plus minority interest in consolidated subsidiaries), less goodwill or any other intangible assets.
This is the difference between the value of the business as a whole and the aggregate of the fair values of its separable net assets at the time of acquisition or sale.
OTHER INTANGIBLE ASSETS
These are assets without physical existence. E.g. patents, copyrights, formulae, trademarks, franchise etc.
An institution is not allowed to grant or permit to be outstanding advances or guarantees to exceed 25% of the core capital. To avoid a situation where a person asks for facilities under different hats, the definition given in the statute of what a person is that it includes the associates of that person. The restriction on the person includes a restriction on that person’s associates.
The Central Bank of Kenya may permit with the Minister’s approval a mortgage finance company to exceed that limit.
The definition that is given for who an associate is for purposes of the Act associate in relation to a company or other body corporate means
1. Its holding company or its subsidiary;
2. A subsidiary of its holding company;
3. A holding company of its subsidiary;
4. Any person who controls the company or body corporate whether alone or with his associates or with other associates of it.
In relation to an individual, associate means
1. Any member of his family;
2. Any company or other body corporate controlled directly or indirectly by him whether alone, or with his associates
3. Any associate of his associates.
Classification of members of his family is extended to include
- a parent;
- Step Father
- Step Mother
- Step Child;
- Adopted Child; etc.
There are restrictions on advances of credit facilities and these are essentially under section 11
1. An institution is prohibited from taking its own shares as security for advances;
2. Institutions are prohibited from granting facilities to company or on behalf of companies in which the institution itself holds more than 25% of the share capital in that company.
3. Institutions are not permitted to grant or permit to be outstanding unsecured advances in respect of their employees or the employees’ associates.
4. a restriction against granting or permitting facilities which are unsecured to officers of the institutions or the associates. Any person who is an agent, a director, a manager or a shareholder of the officer. Advances or facilities to directors or other persons participating in the general management of the institution are also restricted unless the facilities are approved by the full board or directors of the institution, if the Board is satisfied that the facility is viable. Secondly the facility to these persons must be made in what they refer to as normal course of business and on terms that are similar to terms that are offered to other customers of the institution. The institution is then required to notify Central Bank of having done so. in any event facilities to all these classes of person must not exceed 25% of the core capital of the institution.
Act No. 9 of 2000 essentially restricts or prohibits an institution from transacting in a fraudulent or reckless manner. Fraudulent is defined to include intentional deception, false and material representation, concealment or non-disclosure of a material fact or misleading conduct that results in the loss and injury to the institution with an intended personal gain. Reckless transacting includes under the Act the transacting business beyond the limits set under the Central Bank of Kenya Act offering facilities contrary to the Central Bank guidelines or regulations, failing to observe the institution’s policies as approved by the institution’s Board of Directors and misusing position or facilities of the institution for personal gain. All these are classified as reckless or fraudulent.
All officers of an institution who transact either fraudulently or recklessly in terms of those definitions shall be liable to indemnify the institution against loss arising from such reckless or fraudulent advances, loan or credit facility.
In the case of an advance, loan or a facility to a person other than a director of the institution or a person participating in the general management of the institution, an officer shall not be so liable. Provided he or she shows that, through no act or omission on his or her part, he or she was not aware that the contravention was taking place, or he or she took all reasonable steps to prevent it taking place.
The Central Bank may in the case of an advance, loan or credit facility to a director of the institution, direct the removal of such director from the Board of Directors of the institution. The bank may direct the suspension of any other officer or employee of the institution who sanctioned the advance, loan or credit facility.
Any director of an institution who defaults in the repayment of any advance or loan made to him by the institution for three consecutive months shall forthwith be disqualified from holding office as such. The institution concerned is required to comply with such a directive. An officer or director who is aggrieved by such removal or suspension has recourse to the High Court. Such an officer or director can apply to the High Court to determine the matter and the High Court is empowered either to confirm the decision of removing the officer, or reverse the decision or modify the decision even.
But whilst proceedings are pending in the High Court challenging the removal, the order directing the removal remains in force. If a director defaults in the repayment of any facility, granted to him for 3 consecutive months, such a director should forthwith be disqualified from holding office in that institution.
The Act prescribes and says that an institution that allows such a director to continue holding office is guilty of an offence and equally any institution that fails to comply with a directive from Central Bank for the removal of an officer is also guilty of an offence.
Section 12 imposes restrictions on trading and investments and under the Section an institution is prohibited from engaging in wholesale or retail trade. There is a restriction prohibiting institutions from acquiring or holding directly or indirectly any part of the share capital in any commercial, agricultural or other undertaking where the value of the institution’s interest would exceed in the aggregate of 25% of that institution’s core capital.
There are exceptions to that rule so that an institution may take an interest in such an undertaking in satisfaction of a debt due to it and such interests have to be disposed of within such time as the Central Bank may allow. The other exception is where the shareholding is in a corporation established for the purpose of promoting development in Kenya and such shareholding has been approved by the Minister.
An institution is not allowed and is prohibited from purchasing or acquiring land except where such acquisition is necessary for purposes of conducting its business or for housing and providing amenities for its staff. But that does not prevent an institution from taking land as security or acquiring land for what the Act describes as purposes of its own development.
Section 13 of the Banking Act addresses the question of ownership and share capital of an institution. The object is to avoid a situation where an institution is at the core of the owner. This restriction on ownership of share capital of an institution, its objective is basically to diversify ownership of an institution for the purpose of prudent management, direct or indirect share-holding of an institution has been restricted to a maximum of 25% to any one person other than.
(i) another institution;
(ii) the government of Kenya, or the Government of a foreign sovereign state.
(iii) A state corporation within the meaning of the State Corporations Act, or
(iv) A foreign company, which is licensed to carry on the business of an institution in its country of incorporation.
Section 13 also states that no financial institution or mortgage finance company shall acquire or hold, directly or indirectly any part of the share capital of, or otherwise have beneficial interest in the bank.
An institution is required to disclose to the Central Bank natural persons behind nominee companies and/or any other company.
Restrictions on making advances for Purchase of Land (Banking Act Section 14)
1. An institution is restricted from making advances or loans for the purchase, improvement or alteration of land so that the aggregate is in excess of 25% of the amount of its total deposit liabilities unless it is a mortgage finance company.
2. The Central Bank may however, authorize an institution to exceed the limit up to a maximum of 40% in case of a bank and 60% in the case of a financial institution.
3. These provisions, shall however, not prevent an institution from accepting security over land for a loan or an advance made in good faith for any other purpose.