CBK sanctions on Absa bank Kenya: Regulatory over-reach?

In Summary

• On his part renowned economist David Ndii, was categorical that CBK is propping up the shilling by intimidating banks. He termed CBK actions as regulatory over-reach.

Absa bank launch.
Absa bank launch.
Image: FILE

On the 9th April 2020, the Central Bank of Kenya (CBK) through a press release announced that it had taken regulatory action against Absa Bank Kenya PLC (formerly Barclays Bank of Kenya). One of the regulatory action taken by CBK included directing that Absa Bank ceases to transact as an authorized foreign exchange dealer in the Kenyan Market for a period of seven days from the 9th April to the 15th April 2020.

According to CBK, the regulatory action was taken against ABSA Bank due to the bank’s failure to provide information about some specific foreign exchange trades that it conducted in March 2020. CBK further accused the bank of not ensuring the standard checks on anti-money laundering and combatting financing terrorism (AML/CFT) and know-your-customer (KYC) requirements were applied.

ABSA Bank on its part released a statement, in which the bank acknowledged receipt of the official notice from CBK. The Bank further stated that it has in place stringent and world benchmarked AML/CFT and KYC policies which are applied rigorously in all their operations.

The decision by CBK has been criticized by a number of legal analyst and economists.

Through social media platform twitter Senior Counsel (SC) Ahmednasir Abdullahi, accused CBK Governor of micro-managing banks. He further claimed that the Governor was using coercive administrative tools to strengthen the shilling against market forces and intimidate banks.

On his part renowned economist David Ndii, was categorical that CBK is propping up the shilling by intimidating banks. He termed CBK actions as regulatory over-reach.

Did the CBK have the legal authority to take the administrative action against ABSA Bank Kenya?

CBK is established under Article 231 of the Constitution. CBK is an independent as provided for in the Constitution and should not be under direction of any person or authority while exercising its powers and functions. One of the main responsibility function of CBK as per the provisions of Article 231(2) of the Constitution is to be responsible for formulating monetary policy, promoting price stability, issuing currency and performing other functions conferred on it by an Act of Parliament.

Among the principal objects of CBK as per Sections 4 and 4A of the Central Bank of Kenya Act include foster the liquidity solvency and proper functioning of a stable market-based financial system, formulate and implement foreign exchange policy, hold and manage its foreign exchange reserves, license and supervise authorised dealers, among others.

The role of CBK is to regulate Kenyan currency in order to ensure that the Country’s economy is not at risk. Being an independent institutions, CBK plays an active role in promoting financial stability which includes forex trading. CBK should be mainly concerned with the liquidity in order to ensure that there is cash and flexibility needed to protect the Kenya shillings.

It is the responsibility of CBK to licence a person who wishes to transact foreign exchange business. Part VIA of CBK Act provides for Regulations of Foreign Exchange Dealings. Section 33B(1) provides that “A person proposing to transact foreign exchange business shall, before commencing such business, apply to the Bank for a licence.”

The oversight role of CBK in the foreign exchange market is a continuous one even after the grant of a licence. Section 33D(1)(b) of CBK Act provides that the Bank (CBK) may revoke or suspend a licence for such period as it may specify, if the authorized dealer fails to comply with the provisions of the Act or any conditions attached to a licence.

In ABSA Bank matter, CBK press release stated that the Bank (ABSA Bank) failed to provide information on specific foreign exchange trade conducted in March 2020. Leading CBK to impose penalties.

Penalties by CBK required ABSA Bank to put in place a robust framework that ensures all relevant documents for such foreign exchange transactions are available as required and also ensure the AML/CFT and KYC requirements are adhered to, reverse the market positions that were created as a result of the flagged transactions, and cease to transact as an authorized foreign exchange dealer in Kenyan market from April 9th to April 15th 2020.

According to the provisions of Section 57 of Central Bank Act, CBK has power to make Regulations to give effect to the various provisions of Act. Section 57(2) provides that CBK may prescribe penalties in the regulations to be paid by authorized dealers who fail or refuse to comply with guidelines of directions of CBK.

In exercise of its powers under Section 57 of CBK Act, CBK made Central Bank of Kenya (Foreign Exchange Business) Regulations, 2007 and Central Bank of Kenya (Foreign Exchange Bureau) (Penalties) Regulations, 2009.

Regulation 6 of Central Bank of Kenya (Foreign Exchange Business) Regulations, 2007 provides for suspension or revocation of licence. Under Regulation 6, a foreign exchange bureau is required to furnish CBK with information in an accurate and complete manner and comply with guidelines as may be issued by CBK. Failure to do so may lead to suspension or revocation of the licence granted.

The main thrust of CBK position appears to be the failure by ABSA Bank to provide information. Regulation 2(a)(ii) of Central Bank of Kenya (Foreign Exchange Bureau) (Penalties) Regulations, 2009 is to the effect that it shall constitute a violation by a foreign exchange bureau of the guidelines or directions of the Bank under the Act to fail to furnish at such time and in such a manner as CBK may direct, information in an accurate and complete manner as CBK may require to properly discharge its functions under the Act.

Decisions taken by CBK are important in forex trading and will reflect on economic stability of the Country. It is clear that the said decision by CBK has an effect on various aspects of the economy especially on foreign exchange. CBK therefore is a public policy agency that must ensure that whatever decision it takes is within its mandate and its decisions are not seen as a regulator over reach.


DISCLAIMER: The views and opinions expressed in this article are those of the author and do not reflect the official policy or position of the Office of the Director of Public Prosecutions.