Capital and liquidity requirements

Describe how capital and liquidity requirements impact the structure of bank loan facilities, including the availability of related facilities.

Guideline 4.1.3 of the Central Bank of Kenya (CBK) Guideline on Capital Adequacy (CBK/PG/03) sets the minimum absolute core capital requirement for banks, mortgage finance companies and financial institutions as follows:

  • banks and mortgage finance companies: 1 billion shillings; and
  • financial institutions: 200 million shillings.


Although there was a proposal in the 2016–2017 fiscal budget to raise the core capital for financial institutions to 5 billion shillings, the proposal was rejected by the Kenyan parliament, and the requisite amendments to the Banking Act were, therefore, not effected. This was the second time the proposal was rejected before parliament, the first being in 2015. In July 2015, the Finance Committee chair, Billow Kerrow, presented a report by the then National Treasury cabinet secretary Henry Rotich to the Senate, which referred to 21 commercial banks that met the 5 billion-shilling core capital requirement issued by the CBK. The senators demanded that the CBK governor appear before them to shed light on the reason behind the upscaling of the minimum capital requirement for commercial banks to 5 billion shillings without consultation.

The CBK notably objected to the proposals for increasing the core capital, which were seen as locking out smaller lenders. On 16 November 2016, the CBK issued a Guidance Note on the Internal Capital Adequacy Assessment Process, which, rather than prescribing fixed capital thresholds, requires institutions to ‘[ensure] that total capital levels are adequate and consistent with their strategies, business plans, risk profiles and operating environment on a going-concern basis’.

Further, the CBK issued Banking Circular No. 3 of 2018 on 6 April 2018, that being the Guidance Note on Implementation of International Financial Reporting Standard (IFRS) 9 on Financial Instruments. Kenya adopted IFRS 9 to meet the mandatory global compliance deadline of 1 January 2018. IFRS 9 replaced International Accounting Standard (IAS) 39 for organisations dealing with accounting treatment of financial assets. The pivotal shift introduced by IFRS 9 is in the concept of provisioning for expected losses, which requires banks to set aside funds in anticipation of losses. Under IAS 39, those provisions would only be made after default had occurred and the loan was classified as non-performing. The CBK noted that this new model of provisioning will greatly impact capital and may lead to a decline in compliance with the capital adequacy requirements. It has given banks a five-year window within which to recapitalise. A similar circular has been issued for microfinance institutions.

The requirement to make provision for expected losses under IFRS 9 means that the strain on credit availability in the market will remain.

The lending capabilities of local lenders, especially in the form of loans for bigger projects, are limited. This has led to loans being offered through loan syndications, a practice that is gaining popularity in Kenya. In addition, foreign banks with higher core capital have improved lending capabilities by lending directly to local borrowers or through their subsidiary institutions in the country.

Disclosure requirements

For public company debtors, are there disclosure requirements applicable to bank loan facilities?

Typically, there are no disclosure requirements applicable. A debtor may be required to disclose its existing loans under statutory reporting requirements, such as in its annual returns filed by companies under the Companies Act and under the Capital Markets Act if they are listed on the securities exchange. However, where the facility is for a substantial amount, the public company debtor may be required by the lender to disclose, among other things, details of the management (directors), shareholders, audited accounts and pre-existing debts.

Use of loan proceeds

How is the use of bank loan proceeds by the debtor regulated? What liability could investors be exposed to if the debtor uses the proceeds contrary to regulations? Can investors mitigate their liability?

The bank typically stipulates in the loan agreement what the loan proceeds must be used for as the law does not otherwise regulate this.

The Proceeds of Crime and Anti-Money Laundering Act, the Prevention of Fraud (Investments) Act, the Prevention of Terrorism Act No. 30 of 2012, the Prevention of Organised Crimes Act, the Anti-Corruption and Economic Crimes Act and the Banking Act are also relevant, to the extent that these laws make it an offence for any individual or organisation to open, operate, finance, recruit or assist any person or organisation engaged in terrorist activities.

Section 6 of the Prevention of Organised Crime Act No. 6 of 2010 (the POC Act) criminalises attempting, aiding, abetting, counselling, procuring or conspiring with another to commit an offence under the Act. The maximum penalty upon conviction is a fine of 1 million shillings, imprisonment for a term not exceeding 14 years, or both. A lender could, therefore, be held directly liable for facilitating the offences under section 6 of the POC Act. The Proceeds of Crime and Anti-Money Laundering Act accords immunity and protection to institutions and officers in respect of obligations carried out under the Act in good faith, such as reporting of suspicious transactions.

Under section 15(1) of the POC Act, a lender could be required to produce all information and to deliver documents and records regarding any business transaction conducted by or on behalf of any person where the Attorney General of Kenya has reasonable ground to suspect that person of committing an offence under the POC Act. A lender’s premises can also be searched and any documents or records removed for this purpose.

The use of loan proceeds by a debtor is also regulated through the provisions of the loan documentation; for instance, making it an event of default if the borrower acts in contravention of the law or provisions of the documentation.

Guideline 10.3.4 of the Risk Management Guidelines 2013 on lending principles requires, among other things, that where funds are being used for a project, institutions should satisfy themselves that the funds are not used for purposes other than financing the project.

Prudential Guideline CBK/PG/08 on Anti-Money Laundering and Combating the Financing of Terrorism requires that the board of directors of a financial institution:

  • establish adequate internal control measures to address potential money laundering and terrorist financing risks;
  • obtain, verify and maintain proper identification of customers wishing to open accounts or make transactions whether directly or through proxy;
  • obtain and maintain adequate records, and enable the identification of unusual or suspicious transactions;
  • train staff on a regular basis on the prevention, detection and control of money laundering and the identification of suspicious transactions; and
  • monitor and report any suspicious transactions or activities to the CBK that may indicate money laundering or other attempts to conceal the true identity of customers or ownership of assets.


The fulfilment of these requirements is a way of negating liability on the part of the bank.

The CBK also published Banking Circular No. 12 of 2015, dated 11 December 2015, that being the Guidance Note on compliance with Anti-Money Laundering and Countering the Financing of Terrorism. Laws, regulations and prudential guidelines introduced template quarterly questionnaires to capture data on the exposure of institutions to these risks and an annual self-assessment questionnaire to evaluate system controls of an institution.

Another CBK circular on the subject is Banking Circular No. 3 of 2018, dated 23 March 2018, that being a Guidance Note on Conducting Money Laundering/Terrorism Financing Risk Assessments, which is intended to set clear standards and parameters that inform resource allocation into risk areas and policies.

Banking Circular No. 2 of 2019, which was issued by the CBK on 18 May 2019, directed banks, microfinance institutions and mortgage finance institutions to nominate an independent external third party to undertake a review of the institution’s anti-money laundering measures and its compliance with combating terrorism financing. The CBK directed a contracted third party to independently submit the report of the review to the CBK by 31 May 2019. It is likely that the review may be an annual requirement by the CBK.

Cross-border lending

Are there regulations that limit an investor’s ability to extend credit to debtors organised or operating in particular jurisdictions? What liability are investors exposed to if they lend to such debtors? Can the investors mitigate their liability?

There are no regulations limiting an investor’s ability to extend credit to debtors organised or operating in particular jurisdictions. Because of the shift to risk-based supervision in bank operations, certain edicts or public policy statements may, from time to time, affect an investor’s ability to lend to persons in certain jurisdictions. An example would be the Kenyan government’s 2015 closure of money remittance or transfer firms in response to the threat of Al-Shabaab (an Al-Qaeda affiliate based in East Africa), which affected investments in Somalia (this ban was subsequently lifted). Compliance with the relevant laws, regulations and prudential guidelines is a way of mitigating liability.

Debtor’s leverage profile

Are there limitations on an investor’s ability to extend credit to a debtor based on the debtor’s leverage profile?

Yes. Banks, financial institutions and mortgage finance companies in Kenya are prohibited from granting to any person, or permitting to be outstanding, any advance or credit facility, or giving any financial guarantee, or incurring any other liability on behalf of any person, such that the total value of the advances, credit facilities, financial guarantees and other liabilities in respect of that person at any time exceeds 25 per cent of its core capital, unless authorised by the CBK.

Interest rates

Do regulations limit the rate of interest that can be charged on bank loans?

The law that was introduced in 2016 restricting the rate of interest that banks can charge to their customers was lifted in November 2019. Banks are now free to set and vary interest rates on loans at their discretion.

At the time the interest rate cap was in place, there were increasing calls for the restriction to be scrapped. The CBK, through Banking Circular No. 1 of 2019, issued the Kenya Banking Sector Charter (KBSC) to banking, microfinance and mortgage finance institutions. The KBSC was introduced as a measure to correct market failures that led to the introduction of the interest rate cap. Compliance with the KBSC is expected to improve the credit pricing of loans by allowing banks to implement a risk-based credit scoring technique that will mean customers receive differential credit pricing based on credit information.

Section 44A(1) and (2) of the Banking Act limits the maximum amount that a bank can recover from a debtor. The maximum amount is the sum of the following:

  • the principal owing when the loan becomes non-performing;
  • interest as agreed contractually between the debtor and the bank, not exceeding the principal owing when the loan becomes non-performing; and
  • expenses incurred in the recovery of any amounts owed by the debtor.


This section does not, however, apply to limit any interest under a court order that accrues after the order is made.

The Consumer Protection Act also contains provisions relating to certain types of credit agreements, requiring lenders to disclose whether interest would accrue on the unpaid amounts, and if such interest is accruing, the lender must disclose the interest rate, the absence of which the lender is treated as having waived the interest.

Currency restrictions

What limitations are there on investors funding bank loans in a currency other than the local currency?

There is no formal exchange control regime in force in Kenya after the repeal of the Exchange Control Act in 1995. However, there are certain limited conditions and procedural requirements that apply in connection with the repatriation of foreign currency from Kenya.

In 2016, the CBK introduced guidelines for large cash transactions. Under the CBK’s additional guidelines, for any cash transaction above the equivalent of US$10,000, commercial banks must obtain documentary evidence to support the transaction, such as the source of funds, details of the beneficiary, why a large deposit is necessary and the purpose of the funds.

Further, section 7 of the Foreign Investments Protection Act allows for the transfer of profits out of Kenya by a holder of a certificate, in respect of the approved enterprise to which the certificate relates. This includes the principal and interest of any loan specified in the certificate. The transfer should, however, be in an approved foreign currency and at the prevailing rate of exchange.

Other regulations

Describe any other regulatory requirements that have an impact on the structuring or the availability of bank loan facilities.

Imposition of prepayment premiums or penalties by lenders on a borrower in respect of loans is prohibited under section 62(1) of the Consumer Protection Act.

Sections 441 to 443 of the Companies Act 2015 prohibit a public company from giving financial assistance to a person or entity for the purchase of the company’s shares except in certain circumstances.

Withholding tax is charged at a current rate of 15 per cent in respect of interest on loans. However, exemptions apply to loans from financial instructions licensed by the CBK as the structuring of the loan facility will be affected by withholding tax requirements and may influence the pricing of the loan.

Under section 516 of the Companies Act, 2015, a company that is a public company is not permitted to, among other things, exercise a borrowing power unless the registrar has issued it with a trading certificate under the section.

The Banking Act prohibits a banking institution from granting or permitting to be outstanding:

  • any advance or credit facility to any company against the security of the company’s own shares;
  • any advance, credit facility or financial guarantee to or in favour of any company in which the banking institution holds, directly or indirectly or has a beneficial interest in more than 25 per cent of the share capital of that company;
  • any unsecured advances in respect of any of its employees or their associates (however, facilities granted to staff members within schemes approved by the board and serviced by salary through a check-off system are allowed);
  • any advances, loan or credit facilities, which are unsecured, or which are not fully secured to any of its officers or their associates; where facilities to insiders are secured by guarantees, these guarantees should be supported by tangible or other securities with proven market value that are duly charged and registered in favour of the institution;
  • any advance, loan or credit facility to any of its directors or other persons participating in the general management of the institution unless the advance, credit or loan is approved by the full board of directors or is made in the normal course of business;
  • any advances or credit facilities, or giving any financial guarantees or incurring any other liabilities, to, or in favour or on behalf of, a person mentioned above and his or her associates, amounting in the aggregate for him or her and all his or her associates to more than 25 per cent of the core capital of the company;
  • advances or credit facilities, or giving any financial guarantee or incurring any other liabilities, to, or in favour or on behalf of, its associates and the persons mentioned above, amounting in the aggregate to more than 100 per cent of the core capital of the institution; and
  • any advance or credit facility, giving a guarantee, incurring any liability, entering into any contract or transaction or conducting its business or part thereof in a fraudulent or reckless manner or a manner that is otherwise non-compliant with the provisions of the Act.


In compliance with constitutional requirements on consumer protection requiring the provision of information necessary for the consumers to gain the full benefits of goods and services, the Kenya Bankers Association, in conjunction with the CBK, introduced the annual percentage rate (APR) pricing mechanism, which requires banks to disclose the total costs associated with a loan in a loan-repayment schedule (Guideline 3.4.4 of the Prudential Guidelines). The APR takes into account the interest rate component, bank charges and fees, and third-party costs, including legal fees, insurance costs, valuation fees and government levies.

Following the introduction of the interest rate cap law, lenders in the market attempted to raise arrangement fees, tariffs, commissions and other costs as a way of recovering additional returns on loans. However, under Banking Circular No. 6 of 2016, the CBK clarified that any arbitrary increment of charges is illegal pursuant to:

  • section 44 of the Banking Act, which provides that no institution shall increase its rate of banking or other charges except with the prior approval of the Cabinet Secretary of Finance; and
  • Regulation 2 of the Banking (Increase of Rate of Banking and Other Charges) Regulations 2006, which provides that an application for approval of an increase in the rate of banking or other charges under section 44 of the Act must be submitted to the cabinet secretary through the governor of the CBK.

Law stated date

Correct on

Give the date on which the above content is accurate.

13 June 2020.