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CENTRAL BANK OF KENYA BANK SUPERVISION ANNUAL REPORT 2012 2012 Central Bank of Kenya TABLE OF CONTENTS Page VISION STATEMENT V THE BANK’S MISSION V MISSION OF BANK SUPERVISION DEPARTMENT VI BANK’S CORE VALUES VI GOVERNOR’S MESSAGE VIII FOREWORD BY DIRECTOR, BANK SUPERVISION X CHAPTER ONE STRUCTURE OF THE BANKING SECTOR 1.1 The Banking Sector 1 1.2 Ownership and Asset Base of Commercial Banks 4 1.3 Distribution of Banks Branches 5 1.4 Banks Market Share Analysis 5 1.5 Automated Teller Machines (ATMs) 7 1.6 Asset Base of Deposit Taking Microfinance Institutions 8 1.7 Deposit Taking Microfinance Institutions Market Share Analysis 9 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 12 2.3 Financial Inclusion and Policy Development Initiatives 14 2.4 FinAccess Survey 2012 15 2.5 FinBusiness Survey 2012 16 2.6 Agency Banking 17 2.7 New Products 18 2.8 Operations of Representative Offices of Authorized Foreign 19 Financial Institutions 2.9 Residential Mortgages Market Survey 2012 21 2.10 Employment Trend in the Banking Sector 24 2.11 Future Outlook 24 CHAPTER THREE MACROECONOMIC CONDITIONS AND BANKING SECTOR PERFORMANCE 3.1 Global Economic Conditions 25 3.2 The Regional Economy 25 3.3 The Domestic Economy 25 3.4 Inflation 26 i Bank Supervision Annual Report 2012 Central Bank of Kenya 3.5 Exchange Rates 26 3.6 Interest Rates 27 3.7 Balance of Payments 29 3.8 Fiscal Developments 30 3.9 Performance of the Banking Sector 30 3.10 Commercial Banks Balance Sheet Analysis 31 3.11 Asset Quality 32 3.12 Capital Adequacy 34 3.13 Liquidity 35 3.14 Profit and Loss 35 3.15 Performance Rating 37 3.16 Compliance with Supervisory & Regulatory Requirements 37 3.17 Performance of Deposit Taking Microfinance Institutions 39 3.18 Credit Reference Bureaus 40 CHAPTER FOUR DEVELOPMENTS IN SUPERVISORY FRAMEWORK 4.1 Introduction 42 4.2 Finance Act, 2012 42 4.3 Revised and New Prudential and Risk Management Guidelines Is- 44 sued in 2012 4.4 Consolidated Supervision and Establishment of Supervisory Col- 46 leges 4.5 Developments in Anti-Money Laundering and Combating Financing 48 of Terrorism 4.6 Establishment of the Financial Reporting Centre 49 4.7 Upgrade of BSA System 51 CHAPTER FIVE REGIONAL AND INTERNATIONAL DEVELOPMENTS AND INITIATIVES 5.1 Introduction 52 ii Bank Supervision Annual Report 2012 Central Bank of Kenya 5.2 Regional & International Initiatives 52 • Monetary Affairs Committee • COMESA • ESAAMLG • Alliance for Financial Inclusion • G20 Global Partnership for Financial Inclusion • Financial Stability Board Regional Consultative Group • IMF’s East Africa Technical Assistance Centre (East-AFRITAC) • African Rural and Agricultural Credit Association (AFRACA) • Financial Services Volunteers Corps (FSVC) • Bank Supervision Application (BSA) • Knowledge Exchanges • Memorandum of Understanding 5.3 Kenyan Banks Regional Footprint 64 TABLES 1 Ownership and Asset Base of Commercial Banks 5 2 Banks Market Share Analysis 6 3 ATM Networks 7 4 DTMs Balance Sheet Analysis 9 5 DTMs Market Share Analysis 10 6 Distribution of Operating Forex Bureaus 11 7 Growth of Deposit Account Holders compared to Number of Staff 13 8 Type, Number and Values of Transactions undertaken through 18 Agent Banking 9 Residential Mortgage Market Survey 2012 23 10 Employment in the Banking Sector 24 11 Kenya Shilling Exchange Rate Against Major Currencies 27 12 Global Balance Sheet Analysis 31 13 Sectoral Distribution of Loan Accounts, Gross Loans and NPLs 32 14 Asset Quality and Provisions 33 15 Risk Classification of Loans and Advances 34 16 Capital Adequacy Ratios 34 17 Income and Expenditure Items as a Percentage of Total Income 36 iii Bank Supervision Annual Report 2012 Central Bank of Kenya 18 Banking Sector Performance Rating 37 19 Performance of Deposit Taking Microfinance Institutions 39 20 Knowledge Exchanges undertaken in 2012 63 21 Branches of Kenyan Banks Subsidiaries in the Region 64 CHARTS 1 Structure of the Banking Sector 1 2 Bank Supervision Organogram 3 3 Ownership and Asset Base of Commercial Banks 5 4 Banks Market Share 6 5 Short-term Interest Rates 28 6 Commercial Banks Rates 29 7 Risk Classification of Loans and Advances 33 APPENDICES i Banking Sector Balance Sheet 67 ii Banking Sector Profit & Loss Account 68 iii Banking Sector Other Disclosures 69 iv Banking Sector Market Share 70 v Banking Sector Profitability 71 vi Banking Sector Capital and Risk Weighted Assets 72 vii Banking Sector Access to Financial Services 73 viii Banking Sector Protected Deposits 74 ix DTMs Balance Sheet and Profit & Loss Account 75 x DTMs Other Disclosures 76 xi A Summary of Signed MOUs 77 xii Residential Mortgages Market Development Survey, December 78 2012 xiii Banks Branch Network by County 79 xiv Banking Circulars Issued in 2012 80 xv Directory of Commercial Banks and Non-Banks Financial 81 Institutions xvi Directory of Foreign Exchange Bureaus 99 iv Bank Supervision Annual Report 2012 Central Bank of Kenya CENTRAL BANK OF KENYA VISION STATEMENT The Bank’s vision statement is to be a world class modern central bank. The Bank will pursue its mandate in support of economic growth, guided by law, national development agenda and international best practices. THE BANK’S MISSION To formulate and implement monetary policy for price stability and foster a stable market-based inclusive financial system. The Bank’s objectives are: • To formulate and implement monetary policy directed to achieving and maintaining stability in the general level of prices; • To foster the liquidity, solvency and proper functioning of a stable market-based financial system; • To formulate and implement foreign exchange policy; • To hold and manage its foreign exchange reserves; • To licence and supervise authorized dealers; • To formulate and implement such policies as best to promote the es- tablishment, regulation and supervision of efficient and effective pay- ment, clearing and settlement systems; • To act as banker and advisor to, and as fiscal agent of the Govern- ment; and • To issue currency notes. v Bank Supervision Annual Report 2012 Central Bank of Kenya MISSION OF BANK SUPERVISION DEPARTMENT To promote and maintain the safety, soundness and integrity of the banking system through the implementation of policies and standards that are in line with international best practice for bank supervision and regulation. BANK’S CORE VALUES In pursuing our vision and mission, we shall at all times practice the following values: 1. Commitment 2. Professionalism and relevance 3. Efficiency and effectiveness 4. Transparency, accountability and integrity 5. Innovativeness 6. Mutual respect and teamwork 7. Diversity and inclusiveness vi Bank Supervision Annual Report 2012 Central Bank of Kenya The Bank Supervision Annual Report, prepared by the Central Bank of Kenya, is available on the internet at: www.centralbank.go.ke vii Bank Supervision Annual Report 2012 Central Bank of Kenya GOVERNOR’S MESSAGE Bank assets stood The Kenyan banking sector recorded enhanced performance in 2012 rid- at Ksh. 2.33 ing out turbulences in the macro-economic environment. The sector re- trillion in 2012. corded a 15.3 percent growth in total net assets from Ksh. 2.02 trillion in December 2011 to Ksh. 2.33 trillion in December 2012. Similarly cus- tomer deposits increased by 14.8 percent from Ksh. 1.49 trillion in De- cember 2011 to Ksh. 1.71 trillion in December 2012. Inflation declined The Central Bank continued pursuing a tight monetary policy from the in 2nd half of fourth quarter of 2011 through to June 2012. This was targetted at tam- 2012. ing inflationary pressures and stabilization of the exchange rate. The sec- ond half of 2012 saw the easing of the monetary policy with the overall inflation rate declining from 18.3 percent in January 2012 to 3.2 percent in December 2012. During the year 2012, CBK partnering with the Government registered significant progress with regard to strengthening the country’s Anti-Mon- ey Laundering and Combating the Financing of Terrorism (AML/CFT) le- gal and regulatory framework. Some of the notable developments include: AML regulatory i) The Proceeds of Crime and Anti Money Laundering (Amendment) Act framework 2012 which was enacted in October, 2012 and assented to by His strengthened in Excellency the President in December 2012. The main objective of 2012. this Act is to further strengthen the provisions of the Proceeds of Crime and Anti-Money Laundering Act 2009. ii) The Prevention of Terrorism Act, 2012 which was passed by Parlia- ment in September, 2012 and assented to by His Excellency the Pres- ident in October 2012. This Act criminalizes terrorism financing. iii) The operationalization of the Financial Reporting Centre (FRC), Ke- nya’s financial intelligence unit in April 2012. The FRC is an inde- pendent body created under Section 21 of the Proceeds of Crime and Anti-Money Laundering Act, 2009. FRC’s responsibilities in- clude receiving and analyzing suspicious transaction reports from viii Bank Supervision Annual Report 2012 Central Bank of Kenya institutions and submitting to relevant law enforcement authorities for appropriate action. CBK seconded four staff members to the FRC to kick start its operationalization. The Central Bank of Kenya continued to play a key role within the Alli- CBK remained ance for Financial Inclusion in 2012. The Alliance for Financial Inclusion an active (AFI), is a global network of financial policymakers from developing and member of AFI emerging countries working together to increase access to appropriate in 2012. financial services for the poor. CBK served as the inaugural chair of the Network’s Steering Committee from September 2009 to September 2012. The Network currently has 95 member institutions up from 35 member institutions in 2009.
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