Financial Crisis in Kenyan Financial System

FINANCIAL CRISIS IN THE KENYAN FINANCIAL SYSTEM – THE CASE OF COMMERCIAL BANKS

APRIL 2007
Executive Summary

The focus of this paper is a controversial topic both in the available literature and studies done. The paper is organized broadly into two categories, the first focuses on the aspect from a theoretical perspective and the second section has a focus on the Kenyan market.

The paper has avoided the controversy as to what are the specific actual causes because there this is yet to be resolved. The paper is largely a desk review of materials, books, journals, and articles available on the topic of financial crisis.

Within the large aspects of financial crisis that could be sparked by one entity in the financial system but whose effects are normally economy wide. The baking sector plays an important role in the economy both in credit allocation as well as a transmission mechanism for the central bank policies.

This paper traces the causes and the effects of financial crisis in the banking sector in Kenya. Suggestions have been made for the way forward.

INTRODUCTION
Financial institutions play very critical roles in the development of modern societies, perhaps, the most significant catalyst to economic development. However these roles can only be effectively accomplished in a climate of stable financial system.
The stability of a financial system does get adversely affected by forces within the internal and external environments such as political, economic and social factors, thus leading to a financial crisis.
1.1 Definition
Financial crisis would be defined as a disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive opportunities. As a result, a financial crisis can drive an economy away from equilibrium with high output in which the financial markets perform well to one in which output decline sharply. Financial crisis has effects over and above those resulting from bank panics. This provides a rationale for the central bank to use the discount window to provide liquidity to the banking system. Banks operate within the framework of financial system, and hence banking crisis would refer to a loss of confidence in the banking system that leads to a run on banks as individuals and companies withdraw their deposits.
2.0 HISTORICAL BACKGROUND OF BANKING CRISIS IN KENYA
Before independence, financial sector in Kenya was dominated but foreign banks, key among them being the National Bank of India which subsequently became the national Grind lays Bank. Soon after independence in 1963, two indigenous Kenyan banks were quickly setup: Cooperative Bank of Kenya and the National Bank of Kenya. The post-independence period was one of tremendous economic growth characterized by conscious Government Policy to transfer economic activity into the hands of indigenous-Kenyans. This triggered formulation of a macroeconomic policy that aimed at establishment of indigenous financial institutions notably Non Banking Financial Institutions (NBFIs) and deepening of the financial system in the country. Owing to the popularity and spectacular growth of NBFIs the formal banks reacted vigorously by creating their own finance houses to compete with NBFIs as well as appealing to the Government for a policy shift that made it difficult for NBFIs to survive. As a result all parastatals and public bodies such as local authorities and cooperative unions were required to withdraw their institutional funds from the NBFIs, deposit with the major banks. This set the stage for the first post-independence banking crisis in Kenya- Several NBFIs developed acute liquidity problems.
In spite of Treasury and Central Bank efforts to bail out the ailing institutions, one institution was closed in December 1984. This crisis and failure exposed the inadequacy of the safety net and resolution mechanisms existing at the time.
This in effect, precipitated amendments to the Banking Act in 1985 to expand the safety net and improve the bank failure resolution mechanism. A deposit insurance scheme to provide cover for small depositors and act as liquidator to banks which could not be salvaged was established. The same amendments gave Central Bank of Kenya the responsibility of risk minimization through prudential regulation, supervision and surveillance.
Although operations of these measures commenced on 1st September, 1986, activities at the initial period to 1989 involved establishment of the necessary administrative and operational procedures as well as laying the foundation and building up seed capital to ably meet any future payments of protected deposits and its other objectives. However, before the scheme came into full operation, two more institutions collapsed in August 1986 followed by a third one in January 1987.
The Fund was not equipped to deal with these failures and hence the institutions were placed under liquidation by the Official Receiver, a Government office under the Attorney General’s Chambers.
Hardly two years passed before the next crisis came and in 1989 seven institutions were found to be incurably ill and drastic corrective action needed to be taken. A consolidation scheme was crafted whereby a new entity, Consolidated Bank of Kenya was formed to take over the assets and liabilities of the seven institutions. The fund learned crucial lessons from the consolidation exercise and was ready to play its full role by the time the next crisis struck.
The early 1990s were characterized by intensive political activity with the resurgence of multi-party politics. This was matched by a mushrooming of “politically correct” banks licensed for political reasons. During 1993, fourteen institutions were placed under liquidation. Thirteen of these were under the deposit protection scheme while one went into voluntary liquidation. The fund grew from strength to strength and had no problem dealing with subsequent bank failures, namely, two in 1994, three in 1996, one in 1997, five in 1998, one in 1999, one in 2001, two in 2003 and one building society in 2005. In the middle of all the trials, the fund has grown in financial terms and now reports assets in excess of Kshs.13.8billion (USD 189million). It is also liquidating a total of 24 institutions

3.0 INDICATORS OF FINANCIAL CRISIS
Indicators of financial crisis can be put into two major categories: macroeconomic and institutional variables.
3.1 Macroeconomic variables
Macroeconomic include real output growth, exchange rate changes, real credit growth, real interest rates, inflation, changes in asset prices, and the ratio of international reserves to the money stock. However, only two of the macro variables are systematically correlated with the onset of banking sector distress: declines in real output and declines in asset values (reflected by equity values). The likelihood of a serious banking problem would be expected to raise when recessions occur (associated with more bankruptcies and problem loans) and when asset prices fall (indicating a decline in collateral values, which is frequently associated with a depressed real estate sector).
3.2 Institutional variables
Institutional features, such as the regulatory and supervisory structures, deposit insurance and financial liberalization may signal the financial crisis. In this context, the most important institutional feature was a period of financial liberalization through interest rates deregulation specifically on the pricing of financial assets, flexibility in the types of assets allowed and the development of more open and competitive financial markets.


4.0 CAUSES OF FINANCIAL CRISIS
4.1 Widespread banking weaknesses
If non-performing loans and other losses cause the failure of a bank, losses to depositors are often cushioned through the acquisition of the insolvent bank through official deposit insurance schemes. But if several banks get into trouble this can undermine the whole financial system. Banks may be unwilling or unable to take over their weak competitors. Insurance schemes may break down from the sheer size of the losses. Furthermore, the weakness or failure of a growing number of banks undermines confidence in the financial system as a whole. Unable to distinguish between sound and weak banks (asymmetric information again), clients may fear that a few bank’s problems may just be the tip of the iceberg and may perceive their deposits everywhere as unsafe. This may cause a so-called run on banks or a “panic” as depositors try to withdraw their money regardless of the health of the bank. For depositors who do not know which bank is weak and which one is strong it is perfectly rational to withdraw their money everywhere. In a panic, even a healthy bank may not be able to pay back depositors because it does not have enough cash and it cannot call in loans quickly enough (as deposits are often more short term than lending). This can broaden the crisis from a number of weak institutions to the entire financial system.
4.2 Inadequate macroeconomic policies.
There are three main domestic reasons for financial crises: macroeconomic policy errors, inadequate financial regulation and supervision, and inappropriate government financial market interventions. Poor macroeconomic management puts pressure on financial systems. For instance, if a government introduces expansionary monetary policies by lowering interest rates, this permits easy financing of investment projects and consumer credit. The economy picks up, and as long as spare capacities are better utilized such policies can even be non-inflationary.

Continued monetary expansion is likely to lead to economic overheating as domestic demand begins exceeding supply leading to increases in asset prices such as stocks or real estate. The government then has to raise interest rates to “cool off” the economy. Often, the correction comes too late and asset prices have already appreciated so much that their prices are mainly justified by anticipated further increases and not by rents or profits. If investors find themselves with debt from buying these assets which is not justified by the returns, and higher interest rates raise the financing costs of debt, they will try to sell their assets. If many of them do this, the asset prices tumble. Highly indebted investors may find themselves with negative equity, i.e., the sales price would not cover their debt. In that situation, many investors may have literally lost everything and default on their loans. This results in the non-performing loans which undermine corporate and bank balance sheets. If asset prices fall strongly, banks may have to write down the value of these assets in their books, which reduces the value of their capital, and limits their ability to extend new loans. If many banks are affected by these adverse effects on assets, a financial crisis may emerge.
4.3 The threats of deflation and hyperinflation
If monetary policies (and possibly prudential standards) are relaxed and the central bank extends credits to troubled banks and companies this can trigger hyperinflation. On the other hand, an excessively tight monetary stance may worsen the situation for banks if the resulting high real interest rates drive more companies into default on their loans. If tight monetary policies are followed by deflation, real interest rates rise as nominal interest cannot fall below zero. Besides, the real value of companies’ debt grows, thereby undermining corporate and (indirectly) bank balance sheets.
4.4 Overvalued exchange rates followed by devaluation.
Fixed and overvalued exchange rates can contribute to boom-bust cycles and financial crisis through their implications on the balance-of-payments and on relative prices. If the exchange rate is fixed to a currency with relative price stability like the US$, and if expansionary monetary policies start causing inflation, the exchange rate appreciates in real terms.
This raises, in particular, the price of goods and services which are not tradable (such as real estate) as compared to goods which are tradable (such as cars) because increases in the price of the latter products are kept under some control by competition from world markets. Expansionary policies also cause aggregate demand to outstrip domestic supply, the counterpart of which is a growing current account deficit. In the balance of payments this shows up as imports growing more quickly than exports. Strong demand draws in imports while the real currency appreciation makes exporters less competitive. The growing current account deficit has to be financed either through falling reserves or capital inflows. Investors may not be able to pay their loans to both domestic and foreign banks. Confidence declines, new financing becomes unavailable, and capital flight sets in. This, coupled with inadequate reserves, may then force the country to abandon its fixed exchange rate. Devaluation increases the real (domestic currency) value of foreign currency-denominated debt significantly (Mishkin, 1998).
This may be bearable for companies with hard currency export earnings. But companies with local currency revenue to finance foreign currency debt are much harder hit. Corporate bankruptcies follow, with the above mentioned consequences for non-performing loans and bank balance sheets.
4.5 Poor banking regulation and supervision.
When banks are under-capitalized they are less able to weather major shocks. Inadequate licensing and management requirements result in poorly managed and weak banks. If bankruptcy policies are not in place, and banks can continue operating even when they are in trouble, managers have an incentive to be more careless in extending risky loans (to recover their losses). Poor risk management has also been singled out as a main problem area in many countries (Kono et al., 1997; IMF, ICM, 1998).
Lack of transparency is almost always criticized in the context of financial crisis. If, for example, a country’s accounting rules do not require the timely and appropriate disclosure of non-performing loans, this can delay a timely response to emerging difficulties and exacerbate boom-bust cycles.
It is now widely held that lack of transparency, allowing non-performing loans to be hidden and delay adjustment in the financial sector facilitated complacency, prevented early warning, and contributed significantly to the depth of the financial crisis.
Excessive exposure to one single borrower and lending to related parties is also often seen as leading to financial difficulties. If a bank makes a significant share of its loans to just one borrower, a default by the latter would most likely cause the bank to fail as well. Lending to bank employees and managers or companies who have a stake in the bank has often led to imprudent decisions and later difficulties. Negligence by regulators and supervisors in these areas has frequently been reported in past incidences of financial crisis. Finally, good regulation is not enough. Supervisors are often unwilling (because of poor incentives) or unable (because of inadequate means and skills) to perform their tasks satisfactorily.If supervisors do not discover underreporting of non-performing loans, management errors, fraud etc. and do not demand corrective action, financial stability will suffer.
4.6 Inappropriate financial sector interventions.
Various types of government intervention can undermine the health of the financial sector. Governments in many countries have burdened the financial system with costs which should normally be borne by the budget. An example of such policies is directing credits to priority firms and individuals at below market interest rates. This includes so-called political lending to friends and relatives of the ruling establishment. A related type of intervention aims at reducing government debt servicing costs. The most popular means is financial repression when financial institutions are forced to hold government debt at below market interest rates. Such interventions distort credit allocations and thereby reduce the growth potential of an economy. They can also undermine financial stability. The costs of subsidized credits or subsequent non-performing loans have to be met by earnings from other activities. If financial institutions are unsuccessful in making a compensatory profit elsewhere, or if they are not allowed to do so, their balance-sheets are weakened.

It should also be noted that financial sector interventions are often accompanied by restrictions against foreign financial service providers. This isolates the financial system and shields the financial sector from healthy competition and innovation which, in turn, distorts investment and financial flows. In fact restrictive regimes in financial services trade may have resulted in more distorted capital flows and less financial stability.
4.7 International influences on financial stability
Terms of trade shocks and international interest rate hikes can undermine financial stability in a similar manner as boom-bust cycles. Two types of external shocks have contributed to financial crisis in the past: declines in the terms of trade and world interest rate increases. When countries experience negative terms of trade shock, governments and corporate borrowers experience a fall in revenue which may make them unable to pay for their financial obligations at home and abroad. Undiversified exporters of commodities with much price variability are most likely to suffer financial crisis because much of the economy-wide loans are linked with the commodity sector.
4.8 Lack of transparency and implicit debt guarantees.
The volatility of international capital flows can also contribute to financial crisis, especially in an un-transparent economic and policy environment. First, strong capital inflows can undermine countries’ macro-management. Capital inflows raise the money supply but anti-inflationary interest rate increases may then attract even more foreign money. Foreign money which finances asset acquisition and excess demand can also exacerbate asset price fluctuations. And poorly informed foreign investors are likely to continue “flocking” into a “fashionable” market when the lack of profitability of investment opportunities and financial difficulties are “disguised”. When the prices shoot up, investors lose confidence and display “herding behavior. Exaggerated inflows turn into excessive outflows which exacerbate the contraction of asset prices and, thereby, the pressure on financial systems. Poorly informed investors are also more likely to invest only for the short-term.

This distorts the structure of capital flows and makes countries more vulnerable to changing investor sentiment (Kono and Schuknecht, 1998).
4.9 Protectionist responses during financial crisis.
Financial crisis can spread through protectionist trade policies. At first, protection seems to be a ready means to raise the profitability of domestic producers which can then indirectly help strengthen the financial system. Protection raises the price of imports. If these are inputs for domestic producers competing in world markets, their competitiveness and financial position suffers. Furthermore, protection can hurt foreign producers if they lose export business for which they have incurred fixed costs or if they can only sell such products elsewhere at a loss.
This undermines the financial health of foreign producers and, indirectly, financial stability abroad. Finally, protectionist retaliation is likely and this, in turn, will hurt domestic exporters. The net effect of trade protection on the financial sector at home and abroad is, therefore, likely to be negative.
5.0 FINANCIAL CRISIS IN THE KENYAN CONTEXT.
In the immediate post-independence Kenya, the banking and financial industry was highly controlled. However, after 1982, the government relaxed the hitherto stringent rules in the issuance of licenses, especially licenses to operate non-bank financial institutions (NBFI). The low capital requirement of only Ksh. 5 million for a non-bank financial institution brought about the mushrooming of these institutions in the country. The relaxed regulatory and supervisory systems with which the banking and financial institutions operated at this time brought with it poor governance and management culture in the industry. The regulatory and supervision systems have been issued by the Central Bank of Kenya. Some banks have also developed own in-house systems to ensure this. More in-house systems are further recommended so that those systems that have been introduced through statutes can be supplemented by the in-house systems and enforcement.



Expedient solution to the stalemate on the Central Bank of Kenya (Amendment) Act 2000 which was declared retrospective and inconsistent with the Constitution of Kenya. Following this ruling, various conflicting legal interpretations have been published which most banks find confusing. Issues of delays in decision making due to the existing legal framework should be addressed. Duplication of supervisory and regulatory procedures arising from the same should also be addressed. The eighties thus witnessed the collapse of a number of banking institutions. The first casualty was the Rural Urban Credit Finance Company Limited which was placed in interim liquidation in 1984. The institution was eventually liquidated. After the first failure, the government made extensive changes in both the Banking Act and the Central Bank of Kenya Act so as to stem further instability in the industry. The changes saw the capital adequacy requirement increased to Ksh. 15 million for banks and Ksh. 7.5 million for non-bank financial institutions. Another major change was the creation of Deposit Protection Fund – and insurance scheme paid for by the contributions by member banks to meet liabilities of small depositors. The capital was further tied to deposits with a maximum gearing ratio of 7.5 percent. To further protect the core capital from erosion by bad and doubtful advances, statutory reserve fund was established to be funded by banks’ declared profits. Of such profits, 12.5 percent were to be transferred to reserves to guard against future loses. Such reserves were to be invested in government securities.

It worth noting however, that despite the government’s effort to streamline the banking sector by introducing statutory regulatory measures of containment more banks, 32 to be precise, have been liquidated or put under receivership in the period that followed the introduction of these control mechanisms. During this period, more banks collapsed due to the weak internal controls and bad governance and management practices. For instance, the Continental Bank of Kenya Limited and Continental Credit Finance Limited collapsed in 1986, Capital Finance Limited collapsed in 1987, and seven banks which had collapsed were merged in to the Consolidated Bank of Kenya limited in 1989, thirteen banks collapsed in 1993 and five banks collapsed between 1996 and 1999.
In 1999 Trust Bank, the sixth largest bank in Kenya – in terms of deposits - collapsed due mainly to insider lending to directors and share holders. The most recent bank failure was witnessed in June 2001 when Delphis Bank Limited, formerly the local operator of the BCCI, was placed under receivership. It is argued that that the major reasons for the financial crisis in Kenya could be attributed to:
· weak corporate governance practices,
· poor risk management strategies,
· lack of internal controls,
· weaknesses in regulatory and supervisory systems,
· insider lending and conflict of interest.
Benefits of a stable banking system.
· spur confidence among the investing public,
· expand the range of their services,
· expand the band of savers and borrowers,
· reduce high cost of administration of debts.



6.0 IMPLICATIONS OF FINANCIAL CRISIS
Financial crisis has an implication on macroeconomic variables, such as growth, money and the availability of credit, fiscal deficits, and the current account balance. These implications include:-
6.1 Credit crunch and depression in economic activities.
If banks experience significant non-performing loans, they may come under pressure to improve their balance sheets. One way to do so is to reduce the loan portfolio by calling in old loans while not extending new ones. The resulting “credit crunch” is magnified in a full-fledged financial crisis when the lack of confidence and uncertainty makes banks even more reluctant to extend new loans to customers whom they cannot easily identify as “good” risks. Even healthy companies may find it difficult to obtain new credit when the banks which know about their good standing are in difficulties or out of business, and other banks do not know their creditworthiness.

Uncertainty about future exchange rates (and thereby the profitability of activities) and the value of assets (which could serve as collateral) can worsen the “credit crunch”. As a result, firms will find it difficult to get new financing for investment projects, and sometimes even capital for their production and trading activities. The corporate sector may be unable to repay called-in loans, and in extreme circumstances contracts may not be honoured due to lack of capital. All these factors depress economic activity. They may even lead to a vicious cycle of declining activity triggering more non-performing loans and bankruptcies which, in turn, again depress output.


6.2 Financial crises can have repercussions on growth abroad
Financial crisis can also depress economic activity abroad. If banks have to cover for unpaid debt, they may have to scale back their lending activities not only in the crisis country but also abroad. Similarly, a company experiencing losses from unpaid trade bills or diminished export opportunities may want to cut investment. These spillovers and growing import competition from crisis countries are likely to depress economic activity in non-crisis countries as well. Repercussions are likely to be strongest in countries with close trade links and a large financial exposure to crisis countries.
6.3 Financial crisis can undermine monetary and fiscal stability
Monetary management is very difficult during financial crisis.
If a country attempts to “solve” a crisis through extending central bank credit, such monetary expansion can lead to hyperinflation. Financial crises put pressure on government finances mainly through three channels. First, they raise public expenditure on social obligations such as unemployment benefits and social assistance. At the same time, revenue, especially from corporate profits, tends to fall. Thirdly, fiscal deficits and public debt rise when governments have to bail out the financial system with public money. In fact, weakening public sector accounts and loss of confidence in holding domestic currency debt can almost force the government to print money and, in a vicious cycle, cause hyperinflation and further economic deterioration.
6.4 Unemployment and poverty constitute the social costs of crisis
Financial crisis can cause considerable social hardship. As economic activity slows down, and banks and companies close or work at less than full capacity, people are laid off and real wages fall. The unemployed and those at the lower end of the wage scale who have to feed large families are most likely to suffer and are possibly even pushed below the poverty line. Social assistance programs become over-stretched, health and nutrition levels fall and the poorest may not be able to pay school-related expenditure for their children anymore.
Acknowledging these costs, governments in crisis countries and the international community emphasize social safety nets and human capital formation in their assistance programs.
6.5 Credit shortages effect on imports.
There are important trade implications for a country affected by financial crisis First, the credit crunch following financial crisis adversely affects imports. Credit financed investment projects (which usually have a large component of imported capital goods) are scaled back. Consumer credit is also likely to suffer, and together with falling consumer confidence, is likely to affect especially imports of consumer durables such as cars and luxury items.

The credit crunch can also adversely affect export and import volumes through raising the costs of trade financing. In a financial crisis, credits to finance imports or to advance export payments, like any other form of financing, will face higher interest rates. Premiums for export guarantees are bound to rise, as agencies find it more difficult to assess the creditworthiness of trading partners in crisis countries.
In severe crises with significant short term private debt and exchange rate volatility, producers may find it difficult to finance their trading activities at all. First, domestic banks may not be solvent enough to finance imports which are needed to produce exportable. Similarly, working capital may be hard to come by, even if the export orders for which the capital is needed have already come in. Second, uncertainty about the solvency of domestic producers may also undermine their ability to obtain credit. Third, exchange rate volatility may make banks reluctant to extend foreign currency letters of credit


6.6 Declining growth reduces.
The decline in domestic demand accompanied by rising unemployment and declining business and consumer confidence depresses import volumes. Domestic producers whose home markets are eroded by crisis may increase their sales abroad to seek alternative business and to service their financial obligations. This is likely to increase exports. On the other hand, in third countries, the loss of export opportunities to crisis countries and potential repercussions from financial problems can undermine growth. This in turn reduces the opportunities for exporters from crisis countries to sell abroad (second-order effects).
6.7 Devaluation and international financial support.
If a country devalues relative to its main trading partners, domestic producers of traded goods and services become more competitive at home and abroad. As a consequence, export volumes are likely to increase, while import growth slows down or even becomes negative. This can undermine trading activities as financing is withheld and corporate solvency is threatened. The costs of such financial turmoil may outweigh the benefits from a more competitive exchange rate in the short run, until financial markets have stabilized.

International financial support allows countries in crisis to sustain higher import levels. In as much as this takes pressure from the financial system, sustains economic activity and restores confidence, it can also be good for a country’s export performance. Bulgaria, for example, experienced a virtual collapse in the financial and productive sector and a severe contraction in exports and imports in 1996 and early 1997, before an international support package arranged through the IMF stabilized the economy and revitalized trade.


Furthermore, financial crises can spread across countries because of growing financial interdependence. When investors with internationally diversified portfolios take financial problems in one country as an indication that there must be problems in seemingly similar countries as well, they can create so-called contagion. The underlying cause is often the same as for domestic bank runs and capital flight: asymmetric information. Investors do not know which financial systems are healthy and indiscriminately lose confidence in countries which are perceived as similar, and withdraw their funds from all these countries. This happened in many emerging markets after the onset of the Asian crisis. Growing financial interdependence can also contribute to contagion through another channel. Losses in one market, for example, can force investors to withdraw funds from another market for prudential reasons.


7.0 SUGGESTED SOLUTIONS TO FINANCIAL CRISIS
7.1 Careful government intervention.
Liberal trade policies and trade-related financial policies which help trade to flourish are key variables in preventing and solving financial crises. Breakdowns in trade-financing and trade protection can trigger and re-enforce a vicious circle of financial crisis and declining growth. It is noteworthy, that banks typically do not have an incentive to cut off (relatively low risk) trade credit lines during financial crisis as this would undermine borrowers’ ability to pay their debt. But creditors and borrowers have an incentive to draw attention to trade financing problems strategically if they think that governments and international agencies might step in and provide more favourable financing. A careful assessment of the extent of the problem is therefore important before initiating such action.

In addition, private export credit agencies, government guarantees, or central bank schemes to secure trade financing and working capital can be useful complements in times of financial crisis. However, the incentive effects and financial liabilities arising from such schemes should be carefully assessed. The perception that public money is available can induce producers to “create” a problem. Government intervention through across-the-board guarantees can also produce considerable short term public liabilities. It can drive out private agencies, and prevent useful market differentiation between “good” and “bad” risks.


7.2 Trade growth.
During financial crisis, governments sometimes contemplate trade protection to provide relief to domestic producers. However, the effect on input prices, the distortions it creates, and the danger of retaliation do not make this an advisable option to deal with financial crisis. By contrast, trade liberalization has featured prominently in a number of countries to escape from financial crisis. Liberalization enhances economic efficiency and lowers input prices, and thereby helps the economy to escape from crisis through trade.

Trade liberalization is probably more feasible when combined with the correction of an overvalued exchange rate. This dual approach allows the efficiency gains to be reaped from freer trade for domestic and export-oriented industries while compensating import competing industries with the import-price-boosting effect of devaluation. Liberalization cum devaluation can then trigger a strong output response in the tradable goods sector which helps to re-ignite the economy and absorb unemployment. Devaluation alone could also boost the competitiveness of the export sector which, in turn, could help improve corporate balance sheets, repay debt, and speed up crisis resolution.
7.3 Liberal financial services.
The financial crisis has shown that even countries with a seemingly favourable policy environment are not immune from financial crisis. Domestic financial institutions suffer from directed and political lending. At the same time, certain protectionist policies in the financial services sector may have encouraged an over-emphasis on short-term lending in foreign financing (Kono and Schuknecht, 1998). A better information base for investors and deeper and broader financial markets are likely to generate a more balanced maturity and instrument structure of foreign debt which is less conducive to financial crisis.
7.4 Proper macroeconomic policies.
Much attention has been paid to macroeconomic management to prevent and to solve financial crisis. Some basic principles include; cautious monetary and fiscal policies to prevent economic overheating. Both can help avoid a boom-bust cycle. Fiscal and monetary transparency is also important conditions for improving macro-economic management.

Interest rate ceilings and financial repression weaken the financial system. Such policies should be replaced by indirect monetary policy instruments and market-based debt financing (coupled with fiscal consolidation if deficits are too high). This strengthens financial institutions and promotes financial market development. Political or directed lending should also be avoided as frequent losses from such loans weaken financial systems.
7.5 Strong prudential regulation and supervision.
Weak financial regulation and supervision in many countries and the globalization of financial activities has induced the development of the so-called Basel Core Principles for Effective Banking Supervision. These are guideposts for evaluating and reforming a country’s regulatory and supervisory policies. They have now been accepted by many industrialized and developing country governments, and they are fully consistent with multilateral commitments, although they may not be sufficient to deal with all relevant challenges.
7.6 An adequate capital base.
The capital of the banking system is like a safety net to depositors. A bank with a large capital base is perceived to be more trustworthy and stable because depositors are more likely to get back their money even in hard times. A large capital base will also allow the bank to extend new loans when profitable investment projects are coming up. The Basle standards specify a number of additional elements of effective banking regulation and supervision.

Licensing, transfer of bank shares and ownership, corrective measures and liquidation procedures shall ensure that only competent and financially “healthy” banks offer financial services. Management has to be capable, and risk management needs to be up to scratch so that banks are not weakened from within.
Supervisors must carry out their tasks effectively with adequate means and training, and political influence on supervisors should not undermine their role. Much attention, however, has focused on increasing transparency. Accounting and auditing standards need to secure full transparency over the financial position of companies and financial institutions.
7.7 Government intervention aiming at preventing the recurrence of crisis
In the case of isolated bank failures, governments may be well advised to take a hands-off approach and let those institutions be liquidated or taken over. This also provides a ready warning for other institutions. In case of a “systemic” crisis, however, governments can hardly watch the banking system collapse. But governments should not just provide financial support. They should also secure that orderly procedures for the liquidation, restructuring or recapitalization are in place and they should also create the regulatory and macroeconomic policy framework which prevents the recurrence of crisis in the future. On the procedural level, laws and regulations for bankruptcy and corrective action are very important. Very weak banks often should not be allowed to continue operating as they are likely to take on excessive risk and, thereby, raise the costs of crisis unnecessarily.

Lender of last resort facilities can help protecting the payments system, avoid runs, and prevent illiquidity which could lead to insolvency. Speedy, collateralized short term lending at penalty rates could be made available to the financial system. A deposit insurance scheme can also provide a safety net for depositors but a number of pitfalls must be avoided. When non-performing loans are very extensive and wide spread, the banking system may need to be rehabilitated.
The weakest institutions may be closed down while public funds could save distressed but viable banks. Governments can re-capitalize the latter directly.
7.8 Herding behaviour and moral hazard
A number of international standards have been developed to improve the transparency and the regulation and supervision of financial markets. These include the Basle standards, securities and insurance regulation standards, the IMF fiscal and monetary standards, and the development of international accounting and corporate governance standards. Private sector efforts aim at improving and coordinating payment systems to reduce foreign exchange settlement risks over different time zones. These initiatives enhance the institutional infrastructure, the international comparability of companies’ and financial institutions’ health, and the soundness of macroeconomic and regulatory policies.
7.9 Rapid intervention to reduce the severity and duration of crisis.
The effect of crisis on trade and growth depends on the speed and determination with which policy makers address the crisis. A country which speedily implements far-reaching reforms is more likely to come out of the crisis quickly with less protracted declines in trade and growth. Mexico, for example, experienced a steep decline in growth and imports in 1995 before a strong rebound only one year later. Japan, by contrast, had not been able to implement adequate reforms until 1998, several years after financial difficulties had started undermining economic growth.





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8.0 COMMERCIAL BANK STABILITY.
Stability is crucial in the banking sector as lately become highly exposed to public scrutiny and has learned, in a costly manner, the risk of attracting adverse publicity through failings in governance and stakeholder relationships – for example the case of the Euro Bank, Daima Bank, Trust Bank – a few cases to mention in the recent past. According to the Financial Stability Forum (2001), among the main factors in support of stability of any country’s financial system includes:
· good corporate governance
· effective marketing discipline,
· strong prudential regulation and supervision,
· accurate and reliable accounting in financial reporting systems,
· a sound disclosure regimes,
· the enforcement of effective laws,
· an appropriate savings deposit protection system.
8.1 Reasons for ensuring banking stability
· First, banks have an overwhelmingly dominant position in developing-economy financial systems, and are extremely important engines of economic growth.
· Second, as financial markets are usually underdeveloped, banks in developing economies are typically the most important source of finance for the majority of firms.
· Third, as well as providing a generally accepted means of payment, banks in developing countries are usually the main depository for the economy’s savings.
· Fourth, many developing economies have recently liberalized their banking systems through privatization/disinvestments and reducing the role of economic regulation. Consequently, managers of banks in these economies have obtained greater freedom in
· Fifthly, globalization, deregulation and technological advances are increasing the risks in banking systems. Moreover, unlike other companies, most of the funds used by banks to conduct their business belong to their creditors, in particular to their depositors. Linked to this is the fact that the failure of a bank affects not only its own stakeholders, but may have a systemic impact on the stability of other banks. All the more reason therefore to try to ensure that banks are properly managed.”
8.2 Proportion of non performing loans
The Central Bank of Kenya also notes that the high level non-performing loans continue to be an issue of major supervisory concern in Kenya. The level of non-performing loans has been increasing steadily from Ksh. 56 billion in 1997, Ksh. 83 billion in 1998 to Ksh. 97 billion in 1999. The bank states that there are two main reasons for the increase of non-performing loans. First, the depressed performance in the economy and secondly, the Central Bank of Kenya in corporation with external auditors has strictly enforced the classification guidelines and hence a sizeable portion of the increase is attributed to better identification. It is also observable that while the non-performing advances are high, the banks were holding Ksh. 54 billion in provisions against the debts and could write off the debts to clean up the balance sheets.

Given this scenario, several remedies have been proposed to assist in reducing the level of non-performing loans and these include:

1. Formation of Credit reference agency where banks can exchange information on the bad borrowers. Even though this mechanism now exists, lack of legislation allowing information exchange among the banks has hampered the operations of such reference agencies.
2. Improvement in the court system so as to enhance quick solution to the problems of non-performing loans as presented in the courts. A quick and efficient judicial and court system.
3. Non-performing Assets Recovery Trust (NPART) – this is an initiative which is still under proposal stage. It is intended to take over the non-performing assets from the banking system. It is hoped that this proposal would work better in resolving problems of non-performing loans in the Government owned banks compared to private sector banks.
4. Management of lending rates is also a major problem which is occasioned largely by lack of effective competition, use of outdated systems and procedures, poor risk assessment and weak corporate governance.
8.3 The Banking system structure
Kenya features a commercial banking system dominated by numerous commercial banks and a small number of non bank financial institutions which concentrate mainly on mortgage finance, insurance and other related financial services. Over the years the sector has grown into a more complex scene of banking institutions of different types and ownership. According to statistics by the Central Bank of Kenya by the end of the year 2003, according to the Central Bank of Kenya, there were 51 banking institutions including 52 foreign exchange bureaus broken down as follows:
· 43 commercial banks,
· 2 non-bank financial institutions,
· 2 mortgage finance companies,
· and 4 building societies, and;
· 52 foreign exchange bureaus.
Of all the banks, 35 are locally owned. The commercial banks and the non-banking financial institutions offer corporate and retail banking service but a small number, offer other services which include investment banking. In addition there are 10 specialised organizations set up by the government to assist the specific sectors of the economy; these include:
· The Agriculture Finance Corporation,
· Agriculture Development Corporation,
· Industrial and Commercial Development Corporation,
· Kenya Industrial Estates, and;
· Industrial Development Bank


According to the Bank the number of banking institutions declined to 51 from 54 in November 2002 due to mergers and liquidations. The number of foreign exchange
bureaus increased to 52 in November 2003 from 48 in November 2002 following the
licensing of 26 new foreign exchange bureaus, 4 of which are already operational – see table 1 below

Table 1: Banks in Kenya
TYPE OF INSTITUTION NOV 2002 NOV 2003
Commercial Banks
(a) Operating(b) Under CBK statutory management. 44 1 42 1
Building Societies
(a) Operating(b) Under CBK statutory management. 4- 31
Mortgage and finance companiesNon Bank Financial Institutions 23 22
Total 54 51
Foreign Exchange Bureaus 48 52
Source: Central Bank of Kenya- 2003

Of all the 43 commercial banks, 9 control 74% of the total assets in the sector. As a part of cost and business rationalization measures, a number of banks closed some branches resulting to the branch network of commercial banks declining to 488 by the end of June 2003 from 497 in June 2002. Assets of the banking sector were mainly made up of loans and advances (47%), investment in government securities (25%) and balances with Central bank (6%), foreign assets (6%) and cash and other assets (16%). The Central Bank reports that during the period 2002/2003, the banking sector’s total assets increased by 9.3% to KSh 491.3billion from KSh 449.4 billion while deposit liabilities increased by 12.4% or KSh 43.5 billion to KSh 392.8 billion at the end of October 2003.
Total loans and advances, accounting for 54 % of total assets, increased by 5.3 % to KSh 265.1 billion in October 2003 from KSh 251.7 billion in October 2002. They attribute the increase in loans and advances to lending to private households, transport and communications and agriculture. Loans and advances continued to form the major share of the sector’s asset portfolio. The ratio of total non-performing loans to total loans declined to 27.7% from 29.8% whereas the absolute level of non-performing loans declined to KSh 73.5 billion from KSh 75.1 billion in October 2002 . The banking sector held KSh 31.3 billion in specific provisions and an estimated value of securities of KSh 32.3 billion against the loans. The pre-tax profits of the banking sector increased substantially by 79.2% to KSh.12.9 billion during the ten months of 2003 from KSh. 7.2 billion over a similar period in 2002.

The sector experienced high non-performing loans. The Bank reports that while the proportion of non-performing to total loans declined to 28.8% in June 2003 from 29.2% in June 2002, the absolute amounts of non-performing loans increased to Ksh. 73.2 billion from Ksh. 71.5 billion. However, the CBK reports that the threat of these loans was mitigated by provisions already made amounting to Ksh. 32.3 billion and securities held by banks estimated at Ksh. 33.8 billion.

The increasingly advanced levels of information technology embraced by banks have had a positive impact in the sector. The new and dynamic information systems adapted by most banks have enabled them to process data faster and efficiently. This has enabled them to downsize their branch operations, thereby cutting on cost and improving service delivery to their customers. After the liberalization of the banking sector and exchange controls lifted in 1995, the non-bank financial institutions have exhibited an ability to compete with commercial banks, particularly because of the less restrictive regulatory framework within which they operate. On paper, NBFIs operate as merchant or investment banks. In practice, they operate as commercial banks, taking deposits and making short-term loans.
In June 1994, the Central Bank instructed NBFIs to convert and operate as commercial banks. So far 18 NBFIS have become banks and 7 merged with parent commercial banks. Kenya, already a regional leader, is expected to develop one of the largest commercial banking industries in Africa. Despite the existence of a relatively developed and sophisticated financial system, Kenya's capital market is still in its infancy.

In the recent years, according to Central Bank, a number of mergers and acquisitions have taken place in the banking sector in Kenya. Some mergers have been occasioned by the need to meet the increasing minimum core capital requirements and to enhance the institution’s market share in the local banking environment. Between 1994 and 2001 there were 23 successful mergers. Some of the mergers that took place for example in the year 2001 were:
· Southern Credit Banking Corporation Ltd and Bullion Bank Ltd forming Southern Credit Banking Corporation Ltd.
· The Kenya Commercial bank Ltd (KCB) acquired the operations of its subsidiary Kenya Commercial finance Company Ltd (KCFC).
· Citi Bank N.A. acquired most of the assets and liabilities of ABN AMRO Bank.


Table 2: Mergers of institutions since 1994
INSTITUTION MERGED WITH CURRENT NAME
1 Indosueze Merchant Finance Banque Indosuez Credit Agricole Indisueze
2 Transnational Finance Transnational Bank Ltd Transnational Bank Ltd
3 Ken Baroda Finance Ltd Bank of Baroda (K) Ltd Bank of Baroda (K) Ltd
4 First American Finance Ltd First American Bank Ltd First American Bank (K) Ltd
5 Bank of India Bank of India Finance Ltd Bank of India (Africa) Ltd
6 Stanbic Bank (K) Ltd Stanbic Finance (K) Ltd Stanbic Bank (K) Ltd
7 Mercantile Finance Ltd. Ambank Ltd Ambank Ltd
8 Delphis Finance Ltd Delphis Bank Ltd Delphis Bank Ltd
9 CBA Financial Services Ltd Commercial Bank of Africa Ltd Commercial Bank of Africa Ltd
10 Trust Finance Ltd. Trust Bank (K) Ltd Trust Bank (K) Ltd
11 National Industrial Credit Bank Ltd African Mercantile Banking Corp NIC Bank Ltd
6 Giro Bank Ltd Commerce Bank Ltd Giro Commercial Bank
7 Guardian Bank Ltd First National Finance Bank Ltd Guardian Bank Ltd
8 Diamond Trust Bank (K) Ltd Premier Savings and Finance Ltd Diamond Trust Bank (K) Ltd
9 National Bank of Kenya Ltd Kenya National Capital Corp National bank of Kenya Ltd
10 Standard Chartered Bank (K) Ltd Standard Chartered Financial Standard Chartered Bank (K)
11 Barclays Bank of Kenya Ltd Barclays Merchant Finance Ltd Barclays Bank of Kenya Ltd
12 Habib A. G. Zurich Habib Africa Bank Ltd Habib Bank A.G. Zurich
13 Guilders International Bank Ltd Guardian Bank Ltd Guardian Bank Ltd
14 Universal Bank Ltd Paramount Bank Ltd Paramount Universal Bank Ltd
15 Kenya Commercial Bank Ltd Kenya Commercial Finance Co. Kenya Commercial Bank Ltd
16 Bullion Bank Ltd Southern Credit Bank Ltd Southern Credit Banking Corp
17 Citibank NA ABN Amro Bank Ltd Citibank NA
Source: Central Bank of Kenya


TABLE 3: CONVERSIONS OF INSTITUTIONS SINCE 1994
Financial Institution (Old Name) Commercial Bank (New Name)
1 Universal Finance Ltd Universal Bank Ltd
2 Akiba Loans and Finance Ltd Akiba Bank Ltd
3 Diamond Trust Company Ltd Diamond Trust Bank Ltd
4 Credit Kenya Finance Ltd Credit Bank Ltd
5 Consolidated Finance Ltd Africa Banking Corp Ltd
6 Imperial Company Ltd Imperial Bank Ltd
7 Finance Institution of Africa Ltd FINA Bank Ltd
8 Lake Credit Finance Ltd Reliance bank Ltd
9 Habib Kenya Finance Ltd Habib African Bank Ltd
10 City Finance Ltd City Finance Bank Ltd
11 Credit Finance Corp Ltd CFC Bank Ltd
12 First National Finance Ltd First National Finance Bank Ltd
13 Prudential Finance Ltd Prudential Bank Ltd
14 Equatorial Finance Co. Ltd Equatorial Commercial Bank
15 Combined Finance Ltd Paramount Bank Ltd
16 Southern Credit Finance Ltd Southern Credit Bank Corp Ltd
17 National Industrial Credit Ltd National Industrial Credit Bank Ltd
18 Euro Finance Ltd Euro Bank Ltd
19 Victoria Finance Co. Ltd Victoria Commercial Bank Ltd
20 Fidelity Finance Ltd Fidelity Commercial Bank Ltd
21 Co-operative Finance Ltd Co-operative Merchant Bank Ltd
22 Investments and Mortgages Ltd Investment and Mortgages Bank Ltd
23 Credit and Commerce Finance Ltd Commerce Bank Ltd
24 Development Finance Company Development Bank of Kenya Ltd
25 Charterhouse Finance Ltd Charterhouse Bank Ltd
26 Industrial Development Bank Ltd Industrial Bank Ltd
Source: Central Bank of Kenya

It has been noted however, that in spite of the efforts made by the Central Bank to encourage mergers the rate of mergers has not been as high as expected. This has been attributed to the inability of individual institutions to get to the negotiating table and integrate their diverse business philosophies and corporate cultures.
The Central bank notes that the convergence has been made difficult by the nature of ownership of banks in Kenya where shareholding is mainly family or community based.
Under the prudential regulations, all banks are required to have at least 5 directors so as to enhance the quality of board deliberations and the shareholders are encouraged to elect directors from different fields of experience. However, as at the end of 2001, there were only 3 institutions whose boards comprised not less that 5 persons. It is also recommended tat bans should have more non-executive than executive directors. Also, under the prudential regulations, local branches of foreign incorporated banks are required to appoint a local committee to oversee the local operations – there were five foreign banks that were being run by local committees.

Some major developments that have taken place so far in the banking sector in Kenya include the implementation of risk focused supervision by the Central bank, amendments of banking legislation, off-site data processing and surveillance and inspections. It is observed that the issues affecting banking in Kenya include:
· changes in the regulatory framework, where liberalization exists but the market still continue to be restrictive,
· declining interest due to customer pressure leading to mergers and reorganizations,
· increased demand for non-traditional services including the automation of a large number of services and a move towards emphasis on the customer rather than the product, and;
· introduction of non-traditional players who now offer financial services products.



9.0 THE LEGAL FRAMEWORK OF BANKING IN KENYA

The Banking industry in Kenya is governed by the Companies Act, the Banking Act and the Central Bank Act and other prudential guidelines which are normally issued by the Central Bank. The Central Bank and the Capital Markets Authority are the main regulators of banks in Kenya. The Central bank of Kenya is the regulating and supervising agency and the manager of monetary policy operations in Kenya. The Central Bank Act, Chapter 492 laws of Kenya empowers it to formulate and implement monetary policy and foster the liquidity, solvency and proper functioning of the financial system.

The principal objects of Central Bank are to formulate and implement monetary policy directed at achieving and maintaining stability in the general level of prices, and foster the liquidity, solvency and proper functioning of a stable market-based financial system. In addition, one of the secondary objectives of the Bank is to license and supervise authorized dealers in the money market. The Bank also promotes a sound and stable banking system in Kenya by enforcing the requirements of the Banking Act and prudential regulations, fostering liquidity and solvency of banking institutions, ensuring efficiency in banking operations and encouraging high standards of customer service.

The Bank also works closely with the Institute of Certified Public accountants of Kenya (ICPAK) to ensure that the banking sector leads the other sectors in the implementation of International Accounting Standards (IAS). Subsequently, the Central Bank undertook several measures to enhance stable banking. Some of the measures were undertaken:

· introduction of an effective legal and regulatory framework
· development of prudential regulations,
· increased interaction with other regulatory authorities, directors and external auditors,
· amendment of the Banking Act – for example:
i. Section 24 (5) gives the Central Bank to arrange trilateral meetings with an institution and its auditor.
ii. Section 31 (3) allows sharing of information between institutions.
iii. Section 11 requires that facilities to a director be approved by the full board of directors and further empowers the Central Bank to remove directors from office if their loans are non-performing.
iv. The banking regulations that empower the Minister of Finance and the Central Bank to levy penalties for non-compliance with corporate governance principles and other violations of the Banking Act.
· all prudential regulations were also reviewed in the year 2000 to ensure enhanced corporate governance in the Banking Sector.
In January 2002 the Capital Markets Authority while responding the growing importance of corporate governance, issued a Gazette Notice spelling out the guidelines, adherence to which is mandatory to all public listed banks. The Central bank observes that many of the requirements are already taken care of either in the Banking Act or in prudential regulations, but notes further that even though this may be the case, there are some other issues contained in the guideline that the banking sector is yet to adopt and these include;
· Disclosure of the ten major shareholders of the company,
· Requirement that no person should hold more than five directorship in any public listed companies at any one time,
· Executive directors to have affixed service contact not exceeding five years with a provision for renewal,
· No person to hold more than two chairmanships in any public listed company at any one time, and;
· Inclusion of a statement on corporate governance in the annual accounts.

The Central Bank has also gone a step further to request all banks including those that are not public quoted to include a statement on corporate governance in their annual accounts. The Central Bank is also committed to encouraging all financial institutions and especially the private ones to adopt the Capital markets Authority guidelines and Commonwealth principles on corporate governance.
All the banks operate under the following legal frameworks:
· The Banking Act.
· The Central bank of Kenya Act.
· The Companies Act.
· Capital Markets Authority Act.
· Finance Act
· Central Depository System Act
· Capital Market Regulations (Corporate Governance Guidelines, Securities, Public offers and disclosures, Collective Investment Scheme, Takeovers and Mergers, Rating Agency Approval Guidelines).
· Income Tax Act.
· The State Corporations Act .
It is expected that a formal and transparent procedure in the appointment of directors to the board and all persons offering themselves for appointment, as directors should disclose any potential
9.1 Strengths of the legal environment
· Ensures good accounting systems.
· Provides for efficient and sustainable banking systems and procedures.
· Ensure efficiency and supervision.
· As measure to ensure prudent fiduciary management
9.2 Weaknesses of the legal environment
· Promotes delays in decision making.
· Enhances duplication of supervisory and regulatory procedures.
· Promotes bureaucracy.
· Enforcement is not streamlined
· Some are confusing.
9.3 Effectiveness of Kenyan regulatory and supervisory systems
The regulatory and supervision systems have been issued by the Central Bank of Kenya. Some banks have also developed own in-house systems to ensure this.
These systems have effectively promoted a sound and stable market based banking system in Kenya by:
· Fostering liquidity and solvency of banking institutions,
· Ensuring efficiency in banking operations, and:
· Encouraging high standards of customer service.
This has been achieved through the enforcement of the Banking Act and the prudential regulations by the Central Bank of Kenya.


10.0 CONCLUSIONS AND RECOMMENDATIONS

All the banks operate under the following legal framework, the Banking Act, the Central Bank of Kenya Act, the Companies Act, Capital Markets Authority Act, Finance Act, Central Depository System Act, Capital Market Regulations (Corporate Governance Guidelines, Securities, Public offers and disclosures, Collective Investment Scheme, Takeovers and Mergers, Rating Agency Approval Guidelines) and Income Tax Act. The State Corporations Act only applies in the case of State owned banks. All the banks have regulatory and supervisory systems under which they operate.

Like all financial markets the Kenyan market wick never be immune from a crisis. The factors responsible for causing financial crises are so wide that no single government can have effective control. In fact that desire to effectively control the market can in itself be a driver for the crisis. Todays inter connected financial systems and improved technology means that financial crisis can easily be exported to other economies across nations and even continents in a split of a second.





REFERENCES

Bacchetta and Van Wicoop (1998): Capital flows to emerging markets: Liberalization, Overshooting and Volatility
Central Bank of Kenya (2003) Kenya Monthly Economic Review. CBK.
Central Bank of Kenya (2002) Annual Report. CBK.
Central Bank of Kenya (2001) Bank Supervision Annual Report, Eighth Edition. CBK.
Central Bank of Kenya (2000) Prudential Guidelines. CBK
Central Bank of Kenya website
Kono et al 1998, IMF and ICM 1998: Trade, Finance And Financial Crisis
Kono and Schuknett (1998) Trade In Financial Services: Pro Competitive Effect And Growth Performance, World Trade Organization.



APPENDIX

List of all Financial Institutions in Kenya

1. African Banking Corporation Limited
2. Akiba Bank limited
3. Bank of Baroda (Kenya) Limited
4. Bank of India
5. Barclays Bank of Kenya Limited
6. CFC Bank Limited
7. Chase Bank (Kenya) Limited
8. Charterhouse Bank Limited
9. Citibank NA
10. City Finance Bank Limited
11. Commercial Bank of Africa Limited
12. Consolidated Bank of Kenya Limited
13. Cooperative Bank of Kenya Limited
14. Corporative Merchant bank
15. Credit Agricole Indosueze
16. Credit Bank Limited
17. Development Bank of Kenya Limited
18. Diamond Trust Bank Kenya Limited
19. Dubai bank Kenya Limited
20. Equatorial Commercial Bank Limited
21. Fidelity Commercial Bank Limited
22. FINA Bank Limited
23. First American Bank of Kenya Limited
24. Guardian Bank Limited
25. Giro Commercial Bank Limited
26. Habib Bank A. G. Zurich
27. Habib Bank Limited
28. Imperial Bank Limited
29. Industrial Development Bank Limited
30. Investment and Mortgages Bank Limited
31. Kenya Commercial bank Limited
32. K-Rep Bank Limited
33. Middle East Bank Kenya Limited
34. National Bank of Kenya Limited
35. National Industrial Credit Bank Limited
36. Paramount Universal Bank Limited
37. Prime Bank Limited
38. Southern Credit Banking Corporation Limited
39. Stanbic Bank Kenya Limited
40. Standard Chartered Bank Kenya Limited
41. The Delphis Bank Limited
42. Trans-National Bank Limited
43. Victoria Commercial Bank Limited
44. Bank Of India Finance Kenya Limited.
45. Devna Finance Limited.
46. Prime Capital and credit Limited
47. Housing Finance Company Kenya Limited
48. Saving and Loan Kenya Limited
49. East African Building Society
50. Equity Building Society
51. Family Finance Building Society
52. Prudential Building Society

SOURCE: CENTRAL BANK OF KENYA