(NAIROBI, KENYA) – Kenya’s banking regulator has proposed new rules requiring lenders to seek approval before transferring business, assets or liabilities between subsidiaries within a banking group.
The Central Bank of Kenya (CBK) published draft prudential guidelines to govern hive-down transactions, where a bank moves a business unit, assets, liabilities or a specific operation to a newly created or existing subsidiary.
CBK will require details of the proposed transfer of banking business as a going concern, asset and liability transfer schedules, customer migration and continuity plans, group structure charts before and after restructuring, details of any proposed non-operating holding company (NOHC), and transitional services arrangements between group entities.
The rules require a bank operating as a group to seek the regulator’s approval before conducting internal restructuring because it alters the company’s legal structure, risk profile and balance sheet.
“The Central Bank shall treat a hive-down as a combination of transfer of business and liabilities; and establishment or reorganization of a licensed institution requiring prior approval,” CBK said in the guidelines.
“A hive down does not constitute the creation of a ‘new bank’ in substance where the business continues uninterrupted. It constitutes a material restructuring of a licensed institution and requires approval by the Central Bank.”
Hive-down transactions have been used by banks in developed economies to separate high-risk investment operations from day-to-day retail activities, as well as to manage divestments and distressed assets.
Without regulation, a bank could move assets and liabilities to the detriment of creditors such as depositors and financiers. A bank can also transfer some business as it prepares to sell specific divisions.
In its assessment, the regulator will consider the protection of depositors, the financial condition of the resulting institution, continuity of critical banking services and systemic risk implications.
Recent transactions that could have required such detailed review include the restructuring of Co-operative Bank of Kenya into a non-operating holding company.
Co-op Bank created a new bank at its annual general meeting in May to carry over the Kenyan banking business.
“The reorganization proposed structure is as hereunder; the transfer of the company’s banking business, including certain assets, liabilities, rights and obligations, to the NewBank as a going concern,” read Co-op Bank’s circular to shareholders.
The bank sought approvals from CBK, citing guidelines on ownership disclosures by banks and the Capital Markets Authority.
KCB Group also absorbed its mortgage lending business, previously conducted through a subsidiary that traded as Savings & Loan (S&L).
KCB recently retained assets worth KES 2.02 billion ($15.6 million / GBP 11.8 million) from National Bank of Kenya (NBK), which it sold to Nigeria’s Access Bank.
The Nigerian lender already had a banking business in Kenya and intends to merge it with NBK to create a larger institution.
Several Kenyan banks operate in a group structure, creating a window to move business across subsidiaries that will now require CBK approval.
Institutions with group operations include KCB, Equity Group, I&M Group and NCBA Group.
Some smaller lenders also operate as groups, with most having subsidiaries in bancassurance.