IMPLICATIONS OF THE FINANCE ACT, ACT NO. 4 OF 2012 ON COMMERCIAL BANKS

INTRODUCTION

The Finance Act, Act No. 4 of 2012 was assented to on 27^th April, 2012 by the President of Kenya. The date of commencement of its various sections has however been varied under Section 1 therefore with some sections coming into effect as from 2006.

The Act amends several statutes. Of interest for purposes of this advice is the Banking Act, Cap 488 of the Laws of Kenya.

THE AMENDMENTS

AMENDMENT I: BRANCHES AND SUBSIDIARIES

The establishment of branches and subsidiaries of banks and other financial institutions is governed by Section 8A of the Banking Act, Cap 488 of the Laws of Kenya. Section 8A (1) thereof empowers the Minister to approve applications for opening of bank branches and or subsidiaries outside of Kenya.

Section 41 of the Finance Act, 2012 now creates an additional subjection, subjection (5) which is to the effect that:

“Notwithstanding the provisions of this section, the Central Bank may, subject to such conditions or limitations as it may prescribe, permit an institution to provide SUCH SERVICES as it may, in any particular case, specify, TO ITS CUSTOMERS who are outside the country through banking institutions located outside Kenya.”

This section has a number of implications, namely:

1.       It allows the Central Bank of Kenya to permit an institution to provide such services as the CBK may approve to such institution’s customers domiciled outside Kenya through banking institutions located outside Kenya. It is opined that this section allows Kenyan banks to work with other financial institutions outside the country to facilitate provision of financial/banking services in those jurisdictions.

2.       The CBK has full discretion to determine nature of services to be offered and stipulate the conditions for and requirements for grant of such licenses. The section gives these powers to the CBK and not the Minister, as the section is not subject to any section which grants powers to the Minister.

In this regard, it’s instructive that Section 8A (1) of the Banking Act provides that “No institution shall open a branch or establish a subsidiary outside Kenya, except with the prior approval of the Minister.”

Although the application for opening branches outside Kenya is usually made through the CBK, an approval is granted by the Minister.

The amendment allows the CBK to grant approvals to any Kenyan company providing financial or banking services to provide such services through banking institutions outside the country, without need for the Minister for Finance’s approval.

3.       The Section refers to “its customers” although the work is not defined in the Finance Act. Since the Interpretations and General Provisions Act, Cap 2 of the Laws of Kenya doesn’t also define “customer”, recourse must be had to literal interpretation, and therefore customer would mean persons or entities for which customer relationship has been established, and not new or potential customers.

4.       The amendment presents opportunity for business expansion into other jurisdictions by providers of financial and banking service providers in Kenya. For instance, the CBK may now grant Co-operative Bank the power to work with other banking institutions established outside Kenya without the need for establishment of branches or subsidiaries in foreign jurisdictions.

BENEFITS OF THIS AMENDMENT

The benefits of this amendment can be summarized as follows:

a)       It eliminates the bureaucratic processes and inordinately long delays for approval of applications for grant of licences.

b)       It makes establishment of business in foreign jurisdictions cheaper as the local banks and providers of financial services such as electronic money transfer can cost-effectively contract with other banking institutions in other jurisdictions in provision of services to customers located in those jurisdictions.

AMENDMENT II: RESTRICTIONS ON OWNERSHIP OF SHARE CAPITAL OF AN INSTITUTION

Section 13 of the Banking Act deals with Restrictions on Ownership of Share Capital of an Institution – a bank or financial institution or a mortgage finance company.

A “financial institution” means a company, other than a bank, which carries on, or proposes to carry on, financial business and includes any other company which the Minister may, by notice in the Gazette, declare to be a financial institution for the purposes of Banking Act.

“Financial Business” on the other hand means:

(a)     the accepting from members of the public of money on deposit repayable on demand OR at the expiry of a fixed period or after notice; AND

(b)     the employing of money held on deposit or any part of the money, by lending, investment or in any other manner for the account and at the risk of the person so employing the money.

This definition of financial business is cumulative and for an entity to qualify as conducting a financial business, it must be able to demonstrate the performance or intention of performance of the two functions above simultaneously.

It prohibits the direct or indirect holding or having beneficial interest of more than 25 % of shares of an institution by an individual person. However, other banks, government of Kenya, government of a foreign sovereign state, State Corporation or a foreign company which is licensed to carry on the business of an institution in its country of incorporation may hold and or have beneficial interest in more than 25 % of the share capital of an institution.

Further, it prohibits FINANCIAL INSTITUTION or MORTGAGE FINANCE COMPANY from acquiring or holding, directly or indirectly, any part of the share capital of, or otherwise have beneficial interest in, any bank. As such, only banks (as an example of financial institution) may hold shares in any other bank.

Section 13 (3) of the Banking Act (as it then was) did not require body corporates holding shares in banks to disclose the beneficial ownership of shares held by them where such shares were in fact held on trust. Section 42 of the Finance Act, 2012 now amend section 13 (3) of the Banking Act by introducing the concept of “other body corporate” as part of the entities which must disclose the person in whose trust shares in banks are held, and reads:

“Where any share is held by a company, other body corporate or by a nominee on behalf of another person, the company, other body corporate or the nominee, as the case may be, shall disclose to the institution and to the Central Bank the full particulars of the individual who is the ultimate beneficial owner of the share.”

Accordingly, if corporate entities hold shares in a bank as nominees, they are now required to disclose in whose trust the shares are held.

Banks should therefore comply with this provision and advice such nominee shareholders to disclose to the bank and to the Central Bank the full particulars of the individual who is the ultimate beneficial owner of the share.

AMENDMENT III: PUBLICATION OF INFORMATION

Section 31 of the Banking Act permits the Minister or CBK to publish of information furnished to either of them so long as such information doesn’t disclose the financial affairs of any person or unless consent for which publication is obtained/granted in writing. The Section criminalized disclosure of any information which comes to the knowledge of any person in course of performance of any function under the Banking Act. The law however allows the CBK to share information with other financial regulatory authorities, within or outside Kenya for the effective performance of their distinct functions.

The law also allows CBK and institutions licensed under the Banking Act, to exchange such information as is reasonably required for the proper discharge of their respective functions subject only on to such manner and extent as the Minister may determine through regulations.

Section 43 of the Finance Act amends Section 31 of the Banking Act by including not only CBK and institutions licensed under the Banking Act, but also institutions licensed under the Microfinance Act, 2006 as authorized to share information with stakeholders in the banking and financial services industry.

Institutions licensed under the Microfinance Act, 2006 may therefore share information with other financial institutions as is reasonably required for the proper discharge of their respective functions.

CONCLUSION

We hope that the above will suffice your concerns regarding implications of the Finance Act, Act No. 4 of 2012 on commercial banks. Nonetheless, please feel free to contact us at ceo@stralexgroup.co.ke or okelloted@sichangi.com for further any further information or clarification. You may also reach us on +254 773 865 798 or +254 715 310 677.

Yours faithfully,

FOR: STRATEGIC LEGAL SOLUTIONS GROUP LIMITED

Centre for Legal Research & Policy Development – a participating consultancy in the SLS Group of consultancies.