Structure of Kenya’s Financial Sector ARIEMBA JARED MOGAKA SOUTH EASTERN UNIVERSITY COLLEGE (A CONSTITUENT COLLEGE OF THE UNIVERSITY OF NAIROBI) BACHELOR OF COMMERCE LECTURE II
The financial market deals with the purchase and sale of money. It therefore involves obtaining money from those who have more than they need by attracting it either as: deposits through commercial banks; premiums through insurance companies; units or shares through Mutual Funds or shares or bonds through investment banks. The money drawn from the savers is then pooled and allocated throughout the economy by giving it out as loans, common or corporate bonds, treasury bills inter alia.
The financial market in Kenya can be said to have two major functions: it allocates money capital through identifying those with surplus funds, attracting the funds into a pool and then distributing them to those who need to spend more than they have. The other function of the financial market is the distribution of the economic risk through the creation and distribution of securities.
Principally, financial market in Kenya comprise: commercial banks, non-bank financial institutions, mortgage companies, forex bureaus, development finance institutions, pension schemes, SACCOs the insurance sector and the stock market.
Structure of Kenya’s financial system In the current structure, the firm’s legal status (bank, broker or insurance company) determines which regulator is responsible for supervising its activities. There are five key agencies and regimes for prudential regulation: Central Bank of Kenya (CBK) for banks and payments settlement; Insurance Regulatory Authority (IRA) for insurance; the Capital Markets Authority (CMA) for capital markets Retirement Benefits Authority (RBA) for pensions. SACCO Societies Regulatory Authority (SASRA), which has been mandated to license and supervise SACCOs. The chief regulator is however considered to be the Ministry of Finance.
Central Bank of Kenya it is established under Article 231 of the new Constitution. The Constitution does not expressly state the regulating function of the Central Bank but under sub-article 2 it is prescribed that an Act of Parliament shall provide for other functions conferred on the Bank.
The Central Bank of Kenya Act Cap 491 Laws of Kenya is such kind of an Act and it also establishes the Bank under section 3. Section 4A(1) of the Act then provides that the Central Bank of Kenya shall license and supervise authorised dealers and also formulate and implement such policies as best promote the establishment, regulation and supervision of efficient and effective payment, clearing and settlement systems. These two functions clarify the regulatory functions of the bank.
The Central Bank of Kenya oversees the robust and systemic supervision of commercial banks, non bank financial institutions, mortgage companies, forex bureaus, building societies and micro finance institutions The Central Bank supervises commercial banks through ensuring the enforcement of the Banking Act regulations, for instance banks are not allowed to grant a loan to an individual borrower in excess of 25% of the capital to avoid overexposure. This was also established in the case of Stanley Githunguri v Jimba Credit Corporation Ltd. Cap 488 Laws of Kenya
The Central Bank supervises several activities in commercial banks including interest rates, information and reporting requirements, inspection and control of the institution inter alia. The Central Bank of Kenya also launched the revised Forex Bureau Guidelines 2011 on 18 March 2011. These guidelines were revised in consultation with the stakeholders of the forex bureaus sub- sector.
Insurance Regulatory Authority The Insurance Regulatory Authority (IRA) was established in 2006 as a governmental agency tasked with the regulation, supervision and development of the insurance industry in Kenya. The body is also mandated to assist in the administration of the Insurance Act Cap 487 Laws of Kenya. IRA also provides advice to the government on insurance policy issues.
The Authority is in charge of supervision of insurance companies, insurance brokers, and agents, assessors and adjustors and health management organisations (HMOs).
Capital Markets Authority The Capital Markets Authority (CMA) was established in December 1989 under the Capital Markets Authority Act, renamed the Capital Markets Act in 2000 after amendments. The CMA is responsible for the licensing, regulation and supervision of all capital markets participants. The CMA also disseminates rules and regulations within its jurisdiction, and is empowered to carry out enforcement and sanctions. Cap 485A Laws of Kenya Section 5 of the Act establishes the Capital Markets Authority
All companies that issue securities are regulated under the Capital Markets Act, the Companies Act, and the CMAs regulations. The CMA is mandated to supervise securities exchanges, fund managers, Central Depository Systems, custodians, investment banks, collective investment schemes, investment advisers, stock brokers, securities dealers, listed companies, credit rating agencies and venture capital firms.
Retirement Benefits Authority The Retirement Benefits Authority (RBA) is established under section 3 of the Retirement Benefits Act No.3 of 1997. The objects and functions of the Authority are established under section 5 of the Act as follows: regulate and supervise the establishment and management of retirement benefits schemes; protect the interests of members and sponsors of retirement benefits sector; promote the development of the retirement benefits sector; advise the Minister on the national policy to be followed with regard to retirement benefits schemes and to implement all Government policies relating thereto and any other functions as are conferred on it by any legislation.
The Authority regulates retirement benefit schemes, pooled schemes, the National Social Security Fund (NSSF), administrators, fund managers and custodians.
SACCO Societies Regulatory Authority (SASRA), SACCO Societies Act of 2008, and the SACCO Societies (Deposit-taking SACCO Business) Regulations of 2010 provide for the establishment of SASRA. (SASRA)has been mandated to license and supervise SACCOs in the country
All SACCOS operating FOSA services are required to apply for an annual renewable license from SASRA.