The Central Bank of Kenya (CBK) has introduced new draft prudential guidelines aimed at boosting board independence in banks. The regulations require banks to increase their board of directors from a minimum of five to seven directors. This move is expected to enhance accountability and ensure that banks have a more robust decision-making process. The new guidelines also require that the chair of the board be an independent non-executive director.
The new regulations cap the tenure of a bank's chairman at nine years, while also requiring that they be independent non-executive directors. This means that chairmen must not have served as executives in the bank in the last five years, hold more than five percent stake, and not be associated with a significant shareholder. The CBK reckons that a director gains vested interest in the bank after nine years, prompting the introduction of the cap.
The requirement that chairmen must be independent directors will shine the focus on serving chairmen believed to be associated with significant owners of the banks. Founders and significant shareholders of banks have previously enjoyed the privilege of appointing chair of the board. For instance, James Ndegwa, whose family owns a significant stake in NCBA Group, serves as chairman of the top-tier lender.
The CBK has also introduced a fresh layer of vetting for chairpersons of banks, even on occasions when the regulator had earlier reviewed and approved their appointment as directors. This move is in response to instances where banks, especially those associated with the government, have replaced their chair without notifying the regulator.
Current long-serving chairmen will have a window to continue serving, with the regulator recommending that their terms start anew from next year when the regulations take effect. Some of the industry's long-serving directors currently serving as chairs in banks include John Murugu of Cooperative Bank and Lazarus Muema of Family Bank, who are both in their ninth year at the helm.
The CBK is leaning on new prudential guidelines to entrench new requirements on the industry, including higher capital buffers to ensure stability and the reclassification of large players as Domestic Systemically Important Banks (D-SIBs). Large lenders whose collapse or distress would cause disruption in the local economy and regional market will be required to hold an additional buffer of between 0.5 to 2.5 percent of their loan book.
The regulator will also require banks whose Common Equity Tier 1 capital (CET) is less than 8.625 percent of its loan book to not issue any dividend, even if they are compliant with the minimum requirement of 8 percent. The new regulations are set to take effect in January and will impact the banking industry's governance and capital requirements.
Key points
- The Central Bank of Kenya has increased the minimum number of directors in banks from five to seven.
- The tenure of a bank's chairman has been capped at nine years.
- Chairmen of banks must be independent non-executive directors with no association with significant shareholders.
