CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2017 1 TABLE OF CONTENTS VISION STATEMENT VII THE BANK’S MISSION VII MISSION OF BANK SUPERVISION DEPARTMENT VII THE BANK’S CORE VALUES VII GOVERNOR’S MESSAGE VIII FOREWORD BY DIRECTOR, BANK SUPERVISION X EXECUTIVE SUMMARY XII CHAPTER ONE STRUCTURE OF THE BANKING SECTOR 1.1 The Banking Sector 2 1.2 Ownership and Asset Base of Commercial Banks 4 1.3 Distribution of Commercial Banks Branches 5 1.4 Commercial Banks Market Share Analysis 5 1.5 Automated Teller Machines (ATMs) 7 1.6 Asset Base of Microfinance Banks 7 1.7 Microfinance Banks Market Share Analysis 8 1.8 Distribution of Foreign Exchange Bureaus 10 CHAPTER TWO DEVELOPMENTS IN THE BANKING SECTOR 2.1 Introduction 12 2.2 Developments in Information and Communication Technology 13 2.3 Financial Inclusion and Policy Development Initiatives 15 2.4 New Products 17 2.5 Operations of Representative Offices of Authorized Foreign Financial Institutions 18 2.6 Residential Mortgages Market Survey 2017 18 2.7 Employment Trend in the Banking Sector 21 2.8 Future Outlook 21 CHAPTER THREE MACROECONOMIC CONDITIONS AND BANKING SECTOR PERFORMANCE 3.1 Global Economic Conditions 23 3.2 The Regional Economy 23 3.3 The Domestic Economy 24 3.4 Inflation 24 3.5 Exchange Rates 25 3.6 Interest Rates 25 3.7 Balance of Payments 25 3.8 Fiscal Developments 25 CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2017 III TABLE OF CONTENTS 3.9 Performance of the Banking Sector 26 3.10 Commercial Banks Balance Sheet Analysis 26 3.11 Sectoral Distribution of Gross Loans, Loan Accounts and Gross Non-Performing Loans 27 3.12 Asset Quality 27 3.13 Capital Adequacy 29 3.14 Liquidity 30 3.15 Profit and Loss 30 3.16 Performance Rating 31 3.17 Compliance with Supervisory and Regulatory Requirements 32 3.18 Performance of Microfinance Banks 33 3.19 Agency Banking 34 3.20 Credit Reference Bureaus 36 3.21 Money Remitance Providers 37 CHAPTER FOUR DEVELOPMENTS IN SUPERVISORY FRAMEWORK 4.1 Introduction 40 4.2 Cyber Security Guidance Note 40 4.3 International Financial Reporting Standard 9 (IFRS 9) 41 4.4 Developments in Anti-Money Laundering and Combating Financing of Terrorism 42 CHAPTER FIVE REGIONAL AND INTERNATIONAL DEVELOPMENTS AND INITIATIVES 5.1 Introduction 44 5.2 Regional and International Initiatives 44 • Monetary Affairs Committee • East African Monetary Union • Common Market for Eastern and Southern Africa (COMESA) • The Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) • Alliance for Financial Inclusion (AFI) • Financial Stability Board’s Regional Consultative Group for Sub-Saharan Africa • IMF’s East Africa Technical Assistance Centre (East-AFRITAC) • African Rural and Agricultural Credit Association (AFRACA) • Bank Supervision Application (BSA) • Institute of International Finance (IIF) • Knowledge Exchanges • Memorandum of Understanding (MOU) 5.3 Kenyan Banks Regional Footprint 50 TABLES 1 Ownership and Asset Base of Commercial Banks 4 2 Commercial Banks Market Share Analysis 6 3 ATM Networks 7 4 Microfinance Banks Balance Sheet Analysis 8 CENTRAL BANK OF KENYA IV BANK SUPERVISION ANNUAL REPORT 2017 TABLE OF CONTENTS 5 Microfinance Banks Market Share Analysis 9 6 Distribution of Foreign Exchange Bureaus 10 7 Growth of Deposits Account Holders Compared to Number of Staff 15 8 Business Activities Facilitated by Representative Offices in 2017 18 9 Residential Mortgage Market Survey – December 2017 20 10 Employment in the Banking Sector 21 11 Exchange Rate Developments 25 12 Global Balance Sheet Analysis 26 13 Sectoral Distribution of Loans, Loan Accounts and Non-Performing Loans 27 14 Asset Quality and Provisions 28 15 Risk Classification of Loans and Advances 28 16 Capital Adequacy Ratios 29 17 Income and Expenditure Items as a Percentage of Total Income/ Total Expenses 30 18 Banking Sector Performance Rating 31 19 Performance of Microfinance Banks 33 20a Agency banking data for banks – Number of Transactions 34 20b Agent Banking data for banks – Value of Transactions 35 21 Number of Credit Reports requested since August 2010 36 22 Distribution of MRPs Agents 38 23 Knowledge Exchanges Undertaken in 2017 49 24 Branches of Kenyan Banks Subsidiaries in the Region 50 CHARTS 1 Structure of the Banking Sector 2 2 Bank Supervision Organogram 4 3 Ownership and Asset Base of Commercial Banks 5 4 Commercial Banks Market Share 6 5 Risk Classification of Loans and Advances 29 6 Total Monthly Credit Report Requests 36 APPENDICES i Banking Sector Balance Sheet 53 ii Banking Sector Profit & Loss Account 54 iii Banking Sector Other Disclosures 55 iv Banking Sector Market Share 56 v Banking Sector Profitability 57 vi Banking Sector Gross Loans and Non-Performing Loans (NPLs) 58 vii Banking Sector Capital and Risk Weighted Assets 59 viii Banking Sector Access to Financial Services 60 CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2017 V TABLE OF CONTENTS OUR VISION OUR MISSION ix Banking Sector Protected Deposits 61 The Vision of the Bank is To formulate and implement monetary “To be a World Class policy for price stability, foster a stable x Microfinance Banks Balance Sheet 62 Modern Central Bank.” market-based financial system and xi Microfinance Banks Profit and Loss Account 63 ensure a sound national payment xii Microfinance Banks Other Disclosures 64 system. xiii Residential Mortgages Market Development Survey, December 2017 65 xiv Banking Circulars Issued in 2017 66 xv A Summary of Signed MOUs 67 xvi Banks Branch Network by County 68 xvii Directory of Commercial Banks and Non-Banks 69 Professionalism and Relevance xviii Directory of the Microfinance Banks 81 Commitment The Board and staff will always endeavour to offer quality xix Directory of Credit Reference Bureaus 84 The Board and staff are committed to services to its internal and external customers, diligently implementing the Bank’s mandate as observing high professional standards at all times and xx Directory of Foreign Exchange Bureaus 85 stipulated in the Constitution of respecting the rules and regulations set by the Bank. All xxi Directory of Money Remittance Providers 91 Kenya and the CBK Act. initiatives and activities undertaken remain relevant to the Bank’s strategic objectives in pursuit of its core mandate. OUR VALUES Innovativeness Efficiency & Effectiveness The Bank will encourage, nurture and support The Bank will at all times undertake its creativity and the development of new ideas and operations in the most cost efficient processes for the continued improvement of and effective manner while maintaining organisational performance. high standards of performance in execution of its mandate. Mutual Respect and Teamwork: Transparency, Diversity and Inclusiveness: Accountability and Integrity: The Bank appreciates and embraces Mutual respect shall at all times be observed the differences in its employees’ skills internally amongst colleagues and when dealing The Board and staff will always act in a sets and abilities and encourages with the Bank’s external clients. In addition, the transparent and accountable manner consultations and inclusiveness in Board and staff will cooperate and collaborate to when handling all the affairs of the pursuit of its mandate across enhance performance and create a healthy work Bank both internally and with external departments. This is aimed at environment. parties so as to uphold the Bank’s maximising productivity and enhancing image at all times. In addition, the Bank the Bank’s overall performance. will uphold high standards of ethics, integrity and honesty as guided by the Constitution, act in an ethical manner as guided by the Leadership and Integrity Act and the Public Officers’ Ethics Act, and observe high moral standards. CENTRAL BANK OF KENYA VI BANK SUPERVISION ANNUAL REPORT 2016 OUR VISION OUR MISSION The Vision of the Bank is To formulate and implement monetary “To be a World Class policy for price stability, foster a stable Modern Central Bank.” market-based financial system and ensure a sound national payment system. Professionalism and Relevance Commitment The Board and staff will always endeavour to offer quality The Board and staff are committed to services to its internal and external customers, diligently implementing the Bank’s mandate as observing high professional standards at all times and stipulated in the Constitution of respecting the rules and regulations set by the Bank. All Kenya and the CBK Act. initiatives and activities undertaken remain relevant to the Bank’s strategic objectives in pursuit of its core mandate. OUR VALUES Innovativeness Efficiency & Effectiveness The Bank will encourage, nurture and support The Bank will at all times undertake its creativity and the development of new ideas and operations in the most cost efficient processes for the continued improvement of and effective manner while maintaining organisational performance. high standards of performance in execution of its mandate. Mutual Respect and Teamwork: Transparency, Diversity and Inclusiveness: Accountability and Integrity: The Bank appreciates and embraces Mutual respect shall at all times be observed the differences in its employees’ skills internally amongst colleagues and when dealing The Board and staff will always act in a sets and abilities and encourages with the Bank’s external clients. In addition, the transparent and accountable manner consultations and inclusiveness in Board and staff will cooperate and collaborate to when handling all the affairs of the pursuit of its mandate across enhance performance and create a healthy work Bank both internally and with external departments. This is aimed at environment. parties so as to uphold the Bank’s maximising productivity and enhancing image at all times. In addition, the Bank the Bank’s overall performance. will uphold high standards of ethics, integrity and honesty as guided by the Constitution, act in an ethical manner as MISSION OF BANK SUPERVISION DEPARTMENT guided by the Leadership and Integrity To promote and maintain the safety, soundness and integrity of the banking Act and the Public Officers’ Ethics Act, and observe high moral standards.