Central Bank of Kenya is conducting fresh background checks on the directors and senior managers of all the 42 operational banks, its chairman Mohamed Nyaoga has said.
The move, he says, aims to install stronger governance measures and restore confidence in the banking sector.
“The re-vetting has been necessitated by recent bank failures that threatened to crush the confidence in Kenya’s banking system,” he said on Friday during the launch of the corporate governance conference in Nairobi.
During the event, the Nyaoga launched a continent-wide network of good corporate governance champions, which will be led by the Centre for Corporate Governance in a bid to ensure the transformational role of best practices is felt in various organisations.
Doubts arose on the welfare of banking institutions in Kenya following the placement of Imperial and Chase banks under receivership.
Imperial Bank was placed under receivership by the Central Bank of Kenya on October 2015 following the loss of Sh42 billion.
Chase Bank followed suit on April 7 for having liquidity problems, after a series of panic withdrawals triggered by massive insider loans. Chase Bank is now operational and CBK plans to take it out receivership before the end of March.
“Most of the banking problems we have had were related to weak corporate governance perpetuated through internal fraud,” he said adding
“CBK has put in place stronger governance measures, among them re-vetting of directors and senior managers when they are under any disciplinary action or for any violation of the law or suspected malpractices.”
According to the chairman, the other key reform requires banks to update their websites with details of the shareholders who own more than five per cent or more shareholding.
"Shareholders are at the core of instilling corporate governance in banks. The disclosure of the bank shareholders signas adherence to corporate governance as well as instilling confidence and stability in specific banks and the sector as a whole," he said.
On the other hand, external auditors of banks are required to ensure insider lending practices conform with the requirements of the Banking Act and Prudential Guidelines.
The guidelines indicate that the scope of audit engagement must have regard to the institution’s financial reporting risk areas and requires the external auditor to include specific procedures to test the institution’s internal controls over financial reporting in relation to the loan and investment portfolios.
These procedures should include a review and validation of management’s processes for determining the adequacy of provisions for loan impairments and values ascribed to financial instruments.
“Insider loans have been shown to undermine the sustainability of a bank, hence the need to ensure that loan facilities are granted to insiders at arm's length,” Nyaoga said.