(NAIROBI, KENYA) – Kenya’s banking regulator has raised the minimum number of directors in banks and capped the tenure of board chairmen at nine years, in new draft rules aimed at strengthening board independence.
The Central Bank of Kenya (CBK) proposed in draft prudential guidelines that chairmen must be independent non-executive directors, a requirement that would bar holders from having served as executives in the bank in the past five years, holding more than a 5% stake, or being associated with a significant shareholder.
Presently, there is no term limit for bank chairs and one only needs to be a board member not serving from the executive team.
CBK believes a director gains a vested interest in the bank after nine years, prompting the introduction of the cap.
“To achieve appropriate checks and balances, the chair of the board must be an Independent Non-Executive Director,” the draft guidelines read. “An independent non-executive director loses their independence after serving for longer than nine years,” it adds.
Current long serving chairmen will have a window to continue serving after the regulator recommended their terms start anew from next year when the regulations take effect, avoiding a major board shakeup.
Some of the industry’s long serving directors currently serving as chairs include John Murugu of Cooperative Bank and Lazarus Muema of Family Bank, who are both in their ninth year at the helm.
Isaac Macharia has chaired Equity Group Holdings for six years having served earlier as chair of the bank’s Kenyan subsidiary since 2017.
The rule requiring chairs to be independent will focus attention 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.
James Ndegwa, whose family owns a significant stake in NCBA Group, serves as chairman of the top tier lender. Prime Bank chair Rasik Kantaria is also the founder of the bank, which is majority owned by his family.
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.
“The requirement to obtain Central Bank approval for the appointment of a Chairperson applies even when the proposed nominee is serving as a Non-Executive Director previously approved by the Central Bank,” the guidelines read.
CBK is responding to instances where banks, especially those associated with the government, have replaced their chair without notifying the regulator.
Banks will also need to increase the size of their board of directors after the regulator raised the minimum membership from five to seven directors.
“Due to the special nature of deposit-taking institutions which gives them an added responsibility of safeguarding the interests of the depositors, the Central Bank requires all institutions licensed under the Banking Act, to have at least seven directors,” the regulations set to take effect in January read.
The requirement to have seven directors is set to push small banks to reconstitute their boards, which will also have to include at least four non-executive directors.
“The non-executive directors should not be less than three-fifths of the directors in order to enhance accountability in the decision-making process,” the guidelines state.
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) whose supervision will be to higher standards than the rest of the industry.
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% and 2.5% of their loan book.
The regulator will look at the size of a lender, its interconnectedness with other institutions, complexity and substitutability, or difficulty in being replaced in a specific service, to determine if it will be classified as a domestic systemically important bank.
CBK has further guided that banks whose Common Equity Tier 1 capital (CET), primarily made up of ordinary shares and retained earnings, is less than 8.625% of their loan book, or total risk weighted assets, will not issue any dividend even where they comply with the minimum requirement of 8%.