In a 2007 report, titled "Kenya: Poverty Reduction Strategy Annual Progress Report - 2004/2005," the International Monetary Fund (IMF) enumerates the financial sector reforms that Kenya has been planning, and notes that Kenya is in the process of implementing a new regulatory framework that would enhance good governance and competitiveness. According to the IMF report, the plan includes, inter alia, developing a financial sector strategy that involves transferring licensing, regulatory and disciplinary authority from the Ministry of Finance to the Central Bank of Kenya (CBK); enhancing the supervisory capacity of the CBK; improving the prudential framework in relation to non-performing loans; tightening provisioning regulations to conform to international best practice and stepping up the remedial measures against undercapitalized institutions; implementing anti-money laundering legislation; and altering the legal framework to remove uncertainties in the banking sector. Furthermore, according to the 2006 Annual Report by the CBK, the authorities have initiated a review of the Banking Act so as to align it with the Basel Core Principles (BCPs) for Effective Banking Supervision. However, commenting on the expressed intention of Kenya to initiate financial sector reforms, the IMF in another 2007 report on Kenya states that there have been considerable delays in the development of a financial sector strategy and stresses the need to accelerate reform. Moreover, the IMF finds specific reforms that still need to be completed. These include restructuring and privatizing the National Bank of Kenya and other state owned banks, and strengthening the regulatory oversight of the banking sector. There is little further information publicly available as to Kenya's actual compliance with the BCPs.

General Overview

The IMF, in its 2007 publication titled "Kenya: Poverty Reduction Strategy Annual Progress Report - 2004/2005," enumerates the financial sector reforms that Kenya has been planning and is in the process of implementing with the aim of creating an enabling environment for private sector savings and investments, and lowering interest rate levels and spreads. The target of the proposed reforms is to establish a new regulatory framework that would enhance good governance and competitiveness. According to the Report, the plan includes, inter alia, developing a financial sector strategy and a state-owned bank restructuring and privatization policy; transferring banking system licensing, regulatory and disciplinary authority from the Ministry of Finance (MoF) to the Central Bank of Kenya (CBK) and enhancing the supervisory capacity of the CBK; reducing non-performing loans; carrying out a comprehensive examination of small and medium sized banks and enforcing remedial measures on undercapitalized institutions; strengthening the Deposit Protection Fund to enhance deposits; removing regulation on banks charges and commissions and tightening provisioning regulations to conform to international best practice; implementing anti-money laundering legislation; and making changes in the legal framework to remove uncertainties in the banking sector.

Commenting on Kenya's expressed intention to initiate financial sector reforms, the IMF states in its 2007 report "Kenya: Poverty Reduction Strategy Papers - 2003/2004 and 2004/2005 - Joint Staff Advisory Note" that the implementation has been tardy with considerable delays in the development of a financial sector strategy and stresses the need to accelerate reform. The IMF finds specific reforms that still need to be completed, including restructuring and privatizing the National Bank of Kenya and other state owned banks, and strengthening the regulatory oversight of the banking sector. The 2006 World Bank Report on the "Status of Projects In Execution - Fy06," published in 2006, talks about the six-year Financial and Legal Sector Technical Assistance Project undertaken by Kenya since 2004 with the World Bank assistance, aimed at creating a sound financial system. The World Bank, however, reports that implementation of the project has been slow, with scarce achievement till 2006.

According to a 2004 World Bank report, a joint World Bank/IMF Financial Sector Assessment Program (FSAP) was completed for Kenya in late 2003. It provided a broad overview of potential financial sector vulnerabilities and developmental needs, and also conducted an assessment of relevant standards and codes, including the Basel Core Principles (BCPs) for Effective Banking Supervision. Overall, the FSAP indicated that the major elements of a well-developed financial system are in place in Kenya, but the financial system remains fragile, with non-performing loans and weaknesses in financial supervision. Major regulators suffer from a lack of independence from government influence and are often handicapped in enforcing prudential regulations. However, the 2003 FSAP is not publicly available on the IMF or WB websites. The 2004 World Bank report states that a series of follow-up analytical work has been initiated to move the reform process closer to implementation. A task force comprising of Kenyan and international experts was assembled to produce a Strategy Paper for the reform of the banking sector.

The 2004 Annual Report by the CBK's Financial Institutions Supervision Department (FISD) states that one of the two principal objectives of the CBK is to ensure the liquidity, solvency and proper functioning of a stable market-based financial system. Further, the FISD carries out the CBK's responsibility for the soundness and stability of the financial system by undertaking the supervision of banks, non-bank financial institutions, building societies, and foreign exchange bureaus. According to the Report, the CBK continued to enhance and develop the regulatory framework in 2004 in order to strengthen the stability and soundness of the banking system. In a similar vein, the CBK's Bank Supervision Annual Report of 2006 states that the CBK has introduced various amendments to the Banking Act to strengthen its supervisory role, as well as the corporate governance framework, provisioning methodologies, and risk based supervision in the banking sector. A comprehensive review of the Banking Act aims to enhance the supervisory and regulatory framework in Kenya and bring the Act in line with best practices as outlined in the BCPs. The 2004 FISD Annual Report notes that that Kenya is a member of the Committee of Common Market for East and Southern Africa (COMESA) and according to information provided on the COMESA website, in a November 2004 meeting of Central Bank Governors of COMESA, a resolution was made to implement the 25 BCPs.

The 2007 IMF Report notes that the Kenyan banking sector remained substantially stable during the 2004-2005 fiscal year, owing to a favorable macroeconomic environment. However, it observes that Kenya has not yet satisfactorily implemented all planned reforms to the financial sector, but was in the process of implementing a majority of them. The IMF reports that the reform environment has fostered positive developments. Money supply growth declined by 1.6 percent to 11.3 percent in 2004-2005, mainly due to increased net foreign assets; and, credit to the private sector expanded by 20.9 per cent, significantly exceeding the target of 8.9 percent. The FIRST Initiative website also finds Kenya's financial system to be among the more developed in Sub-Saharan Africa, with a large banking sector comprised of one non-bank financial institution (NBFI), 2 mortgage financial companies, 2 building societies, 15 microfinance institutions, 3800 savings and credit cooperatives, 89 foreign exchange bureaus and 42 commercial banks, with the six largest accounting for about two-thirds of all assets, loans and deposits of the banking system.

The 2006 Bank Supervision Annual Report by the CBK states that overall financial performance of the banking industry improved compared to 2005. Total deposits and assets held by financial institutions both recorded growth rates of 19 percent. The sector also recorded an impressive 31 percent growth to Kenyan Shilling (Ksh.) 27 billion in pre-tax profits during the year, due to increased volume of transactions and related fees and commissions charged. The Report attributed the stability in the sector to the stable macroeconomic environment and stringent supervisory oversight by the CBK. However, the Report mentions that despite the increase in banking sector profits over the years, the distribution of profits remained skewed with four major banks reporting a market share of 46 percent, and contributing 54.3 percent of the sector's total pre-tax profits.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

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The 2004 Annual Report by the CBK's FISD states that one of the two principal objectives of the CBK is to ensure the liquidity, solvency, and proper functioning of a stable market-based financial system. Further, the FISD carries out the CBK's responsibility for the soundness and stability of the financial system by undertaking the supervision of banks, non-bank financial institutions, building societies, and foreign exchange bureaus. According to the report, the CBK continued to enhance and develop the regulatory framework in 2004 in order to strengthen the stability and soundness of the banking system. In a similar vein, the CBK's Bank Supervision Annual Report of 2006 informs that the CBK has introduced various amendments to the Banking Act to strengthen its supervisory role, as well as the corporate governance framework, provisioning methodologies and risk based supervision in the banking sector. These measures aim to enhance the supervisory and regulatory framework in Kenya and bring its legal structure in line with best practices as outlined in the BCPs. However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

1.(2) Operational independence and adequate resources.

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The 2005 Report on the Observance of Standards and Codes (ROSC) by the IMF on Kenya's data dissemination policies finds that the CBK enjoys statutory independence in performing its statistical functions and in implementing its recruitment and promotion policies that are based on professional competence. Further, it has adequate personnel and material resources, including sufficient computer equipment and software. Salary levels and staff benefits are competitive, and staff turnover is manageable. In addition, measures to ensure effective use of available resources are being implemented. However, the joint World Bank/IMF FSAP completed for Kenya in late-2003 indicated that although the major elements of a well-developed financial system were in place, major regulators suffered from a lack of independence from government influence and were often handicapped in enforcing prudential regulations.

The Country Commercial Guide 2007 published by the U.S. Department of Commerce also notes that the Central Bank of Kenya Act enhanced the security of tenure for the Governor, increased the CBK's operational autonomy and strengthened its bank supervision functions. However, there is no further information publicly available regarding Kenya's compliance with this Principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

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The 2005 Poverty Reduction Strategy Paper on Kenya published by the IMF also enumerates the financial sector reform plans of the Kenyan government. Among the financial sector reforms envisaged were to address poor governance and market structure by establishing a new regulatory framework and enhancing competitiveness. New regulations were expected to strengthen the supervisory and enforcement capacity of the CBK by transferring banking system licensing, regulatory and disciplinary authority from the Ministry of Finance (MoF) to the CBK tighten provisioning regulations to conform to international best practice and implement anti-money laundering legislation. In this regard, the Country Commercial Guide 2006 published by the U.S. Department of Commerce mentions the amendment to the Banking Act in December 2004 which delegates the power to register and deregister commercial banks and financial institutions from the MoF to the CBK. In addition, the 2004 Annual Report by the CBK notes that section 33B of the Central Bank of Kenya Act specifies the legal basis for licensing of foreign exchange bureaus. The Banking Act, which provides the legislative framework for regulating banking business, empowers the CBK to issue guidelines to be followed by institutions in order to maintain a stable and efficient financial system. However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

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The 2004 Annual Report by the CBK notes that the CBK continued to enhance and develop the regulatory framework in order to strengthen and ensure the stability and soundness of the banking system. The enforcement of compliance requirements by the CBK, particularly through the introduction of penalties resulted in reduced incidences of non-compliance (from 31 in December 2003 to 19 in December 2004). The number of noncompliant institutions declined from 12 in December 2003 to 8 in December 2004. However, there is insufficient information publicly available addressing Kenya's compliance with this Principle.

1.(5) Legal protection for supervisors.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

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According to a 2006 report by the CBK, the CBK has laid out a detailed guideline on "Prohibited Business," and this guideline is intended to prevent prohibited business practices as specified in Part III of the Banking Act and as restricted elsewhere in the Act. It applies to all transactions conducted by an institution and reflected on the balance sheet or reflected as off-balance sheet items. However, there is no further publicly available information that directly addresses Kenya's compliance with this Principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

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According to a 2006 report by the CBK, the CBK, in 2006, laid out a detailed guideline on Corporate Governance in its Prudential Guidelines. The guideline stipulates the minimum standards required from directors, chief executive officers and management of an institution so as to promote proper standards of conduct and sound banking practices, as well as to ensure clarity and effectiveness in the exercise of their duties and responsibilities. However, the guideline states that it does not intend to restrict or replace the proper judgment of the management and employees in conducting day-to-day business, and therefore requires each institution to formulate its own special policies taking into account its special needs and circumstances, on the duties, responsibilities and conduct of its directors, chief executive officers and management. The Guideline further makes the shareholders responsible for the appointment of a competent and dedicated board of directors, and management responsible for taking decisions in accordance with prudent banking practices.

The Country Commercial Guide 2007 published by the U.S. Department of Commerce mentions that under the Central Bank of Kenya Act, the security of tenure for the Governor is enhanced. However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

4. Authority to review and reject transfer of ownership.

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The 2006 Prudential Guidelines published by the CBK includes a guideline on licensing of new institutions, and it provides information and guidance on the conditions governing the securing of a license to conduct business of a bank, financial institution or mortgage finance company in Kenya in compliance with Sections 3, 4 and 5 of the Banking Act. The guideline authorizes the CBK to appraise the application upon receipt and make appropriate recommendations to the Minister for Finance. However, there is little publicly available information regarding Kenya's compliance with this Principle.

5. Authority to review major acquisitions and investments.

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The 2006 Prudential Guidelines published by the CBK includes a guideline on mergers, amalgamations, and transfer of assets and liabilities, pursuant to section 9 and section 13(4) of the Banking Act. The guideline aims to assist institutions intending to merge or amalgamate and/or transfer assets and liabilities and to facilitate transfer of significant shareholding. It specifies application procedures and the minimum conditions that must be fulfilled by merging or amalgamating institutions and forms to accompany applications for the transfer of significant shareholding. The guidelines make the shareholders and directors responsible for ensuring that the provisions are adhered to by the institutions intending to merge, amalgamate and/or transfer assets and liabilities. Further, the institutions require approval from the Minister for Finance through the CBK for the name under which they intend to register in case of change of name; and have to submit a due diligence report signed by directors of the institutions involved. The CBK, in its 2004 Annual Report mentions that the Banking (Amendment) Bill, 2004 had proposed amendments aimed at transferring the authority to approve mergers and acquisitions from the MoF to the CBK. However, there is insufficient information publicly available addressing Kenya's compliance with this Principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

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The 2006 Prudential Guidelines published by the CBK states that Section 18 of the Banking Act empowers the CBK to prescribe the minimum ratios to be maintained by institutions between their core capital and total capital on one hand and their risk weighted assets and off-balance sheet items on the other, and for that purpose, may also determine the method of classifying and evaluating assets. Further, the CBK is empowered to continuously monitor the institutions' minimum core capital levels and to review them from time to time. However, there is insufficient information publicly available regarding Kenya's compliance with this Principle.

The guideline on capital adequacy (CBK/PG/03), included the 2006 report by the CBK, is intended to ensure that each institution maintains a level of capital that (1) is adequate to protect its depositors and creditors, (2) is commensurate with the risk associated with activities and profile of the institution, and (3) promotes public confidence in the institution. The guideline makes the board of directors of each institution responsible for establishing and maintaining an adequate level of capital at all times. Under normal circumstances, a fundamentally sound, well-managed institution having no material financial or operational weaknesses is required to maintain a minimum (1) core capital of not less than eight per cent of total risk weighted assets plus risk weighted off -balance sheet items; (2) core capital of not less than eight percent of its total deposit liabilities; and (3) total capital of not less than twelve percent of its total risk weighted assets plus risk weighted off- balance sheet items. However, higher capital ratios may be required for individual institutions facing huge losses, exposure to large risks, deficiencies in ownership and management, rapid growth, or a very large volume of poor quality assets.

The guideline envisages that the risk based approach to capital adequacy measurement applies to both on and off - balance sheet items. The focus of this framework is credit risk, as well as interest rate risk, market risk, operational risk, concentration risk and underlying collateral risk. Institutions are required to assess and provide for these risks in the evaluation of their respective capital adequacy levels. The 2006 Annual Report of the CBK mentioned that the banking sector remained well capitalized with capital and reserves increasing by 18.5 percent to Ksh. 97.6 billion in 2006. The increase in capital and reserves in the sector was a result of fresh capital injection and retention of profits. The sector's total capital increased by 10 percent to Ksh. 87.7 in 2006. Total risk assets increased by 8.8 percent to Ksh. 513.0 billion over the period. Consequently, the sector's capital adequacy index remained constant at 16 percent, well above the minimum 8 percent requirement.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

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According to a 2006 report by the CBK, the CBK has laid out a detailed "Guideline on Risk Classification of Assets and Provisioning" under Section 33(1) of the Banking Act, intended to ensure that all assets are regularly evaluated using an objective internal grading system as prescribed; and that timely and appropriate provisions and write offs are made to the provisions account in order to accurately reflect the true condition and operating results of institutions. The guideline also encourages institutions to develop effective workout plans for problematic assets in accordance with this guideline. The joint World Bank/International Monetary Fund Financial Sector Assessment Program (FSAP) was completed for Kenya in late-2003. Overall, the FSAP indicated that although the major elements of a well-developed financial system were in place, the financial system remained fragile with non-performing loans in the banking system at around 26 percent of gross loans and advances. However, there is insufficient information publicly available regarding Kenya's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle. Nonetheless, according to a 2006 report by the CBK, the CBK has laid out a detailed "Guideline on Risk Classification of Assets and Provisioning" under Section 33(1) of the Banking Act, empowering the CBK to advice and direct business of institutions for the general carrying out of the purposes and provisions of the Banking Act. As the guideline spells out, the CBK is authorized to prescribe guidelines and ensure that institutions maintain adequate provisions for bad and doubtful debts prior to declaring profits or dividends.

The 2006 Bank Supervision Annual Report by the CBK states that overall financial performance of the banking industry improved compared to 2005. Further, the introduction of Risk Management Programs also improved credit appraisal and administration standards contributing to the overall decline in the non-performing loans portfolio. The decline amounted to 4.8 percent to Ksh65.4 billion in 2006, and asset quality, measured by the ratio of net non-performing loans to gross loans, improved from 7.1 percent in 2005 to 5 percent in 2006. This decline in the level of nonperforming loans, claims the report, was as a result of enhanced corporate governance and risk management as well as the enforcement of strict provisioning policy by the CBK. Further, there was a marked shift of loans classification in 2006 with a reduction in the proportion of loans in the loss category. This reduction owed itself to the improved quality of loan portfolio in the market.

The joint World Bank-International Monetary Fund Financial Sector Assessment Program (FSAP) was completed for Kenya in late-2003. The 2004 World Bank report notes that, overall, the FSAP indicated that although the major elements of a well-developed financial system were in place, the financial system remained fragile with non-performing loans in the banking system at around 26 percent of gross loans and advances. The 2005 IMF Report observed that Kenyan authorities were enforcing reforms to tighten provisioning regulations, making them conform to international best practice.

9. Prudential limits and management information system on concentration of exposure.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

10. Arm's length rule and monitoring for connected lending.

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The Prudential Guidelines published by the CBK in 2006 states that sub-section 11(1) (e) of the Banking Act prohibits institutions from granting or permitting to be outstanding any advance or credit facility to any of its directors or other person participating in the general management of the institution unless such advance, loan or credit facility is approved by the full board of directors of the institution upon being satisfied that it is viable, and is made in the normal course of business and on terms similar to those offered to ordinary customers of the institution. The institution is also required to notify the CBK of every approval given within seven days. However, there is no further publicly available information directly addressing Kenya's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

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The Prudential Guidelines published by the CBK in 2006 includes the Guideline on Foreign Exchange Exposure Limits, which stipulates that the overall foreign exchange risk exposure of an institution should not exceed 20 percent of the institution's core capital. Further, the foreign exchange risk exposure in any single currency is be determined by the individual institution provided it remains within the overall exposure limit of 20 percent of its core capital. The guideline also requires banks to take every reasonable action to immediately correct any and all foreign exchange risk exposures which exceed the limits set forth in this regulation and in its board-adopted policy. Under the terms of the guideline, if a bank fails to correct any noncomplying risk exposure by the closure of business on the following day, the CBK can impose administrative sanctions set forth in the guideline. However, there is insufficient information publicly available that directly addresses Kenya's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

13. Comprehensive risk management processes.

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The CBK issued the Risk Management Guidelines in 2005 in order to provide guidelines to all financial institutions on the development of risk management systems and frameworks. The CBK states that the guidelines are in line with international best practices. As the guidelines spell out, the management of financial institutions should attach considerable importance to improve their ability to identify, measure, monitor, and control the overall levels of risks undertaken. Also institutions that do not have independent risk management structures must immediately set up units to concentrate fully on the risk management function which, in order to ensure independence, reports directly to the board. The guidelines further stipulate that the risk management program of each financial institution should contain at least the following elements of a sound risk management system: (1) Active Board and Senior Management Oversight; (2) Adequate Policies Procedures and Limits; (3) Adequate Risk Monitoring and Management Information Systems (MIS); and (4) Adequate Internal Controls. However, there is little information publicly available regarding Kenya's compliance with this principle.

14. Adequate internal controls.

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The CBK issued the Risk Management Guidelines in 2005 in order to provide guidelines to all financial institutions on the development of risk management systems and frameworks. The CBK states that the guidelines are in line with international best practices. As the guidelines spell out, the management of financial institutions should attach considerable importance to improve their ability to identify, measure, monitor, and control the overall levels of risks undertaken. Also institutions that do not have independent risk management structures must immediately set up units to concentrate fully on the risk management function which, in order to ensure independence, reports directly to the board. The guidelines further stipulates that the risk management program of each financial institution should contain at least the following elements of a sound risk management system: (1) Active Board and Senior Management Oversight; (2) Adequate Policies Procedures and Limits; (3) Adequate Risk Monitoring and Management Information Systems (MIS); and (4) Adequate Internal Controls. However, there is insufficient information publicly available directly addressing Kenya's compliance with this principle.

15. Strict "know-your-customer" rules and high ethical and professional standards.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle. The CBK, however, has laid out a detailed "Guideline on Proceeds of Crime and Money Laundering (Prevention)," applying to all institutions licensed to transact business under the Banking Act. It highlights methods of prudent customer identification, record keeping, identification and reporting of suspicious activities to the appropriate authority for further investigation. The guideline spells out that it is the responsibility of the board of directors and management of an institution to establish appropriate policies and procedures and to train staff to ensure adequate identification of customers, and their source and use of funds so as to effectively detect, control, and prevent possible money laundering activities and terrorism financing. The CBK also prohibits the institutions from opening and the maintaining of anonymous accounts or accounts in obvious fictitious names. Further, an institution is required to identity its customer when establishing initial business relations, when undertaking occasional or one-off transactions, when there is cause to be suspicious, and when there is doubt about the veracity or adequacy of previously obtained customer identification information.

The 2004 Annual Report of the CBK states that during its on-site inspection process, the CBK ensured that banking institutions abided by prudential requirements and implemented adequate controls that allowed them to 'know' their customers. The main requirements of the Know Your Customer (KYC) principles were geared towards designing and implementing appropriate policies and procedures for customer identification and for effective transactions monitoring, particularly of high risk accounts by financial institutions.

The 2006 CBK Annual Report informs that the Kenyan Parliament introduced the Proceeds of Crime and Anti Money Laundering Bill in November 2006, but the Bill lapsed with the end of the parliamentary session in December necessitating its republication. The Bill is scheduled to be tabled in Parliament again in 2007. The Bill, according to the Report, meets the Financial Action Task Force's (FATF) 40 Recommendations and it inter alia, (1) places a duty on financial institutions and designated non financial businesses and professionals (reporting institutions) to report suspicious unusual transactions to the FRC; (2) introduces a mandatory KYC policy for the financial sector in the areas of customer identification, financial status, nature of business, and source of funds; (3) outlaws the maintenance of anonymous bank accounts; (4) requires banks to store financial records for a minimum of 7 years; and (5) introduces mandatory reporting for any suspicious transactions and cash reporting transactions above US$ 10,000 threshold, after amending the banks secrecy laws to protect the reporting banks from liability.

16. Effective supervisory system consisting of on-site and off-site supervision.

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In its 2006 Prudential Guidelines, the CBK states that upon licensing, it visits all authorized institutions and carries out an on-site inspection to confirm existence of comprehensive risk management policies and operating manuals, and determine adequacy of premises, insurances, alarm systems etc. as required by CBK Prudential Guidelines on Minimum Security Standards. The guideline on licensing new institutions further elaborates that the CBK also conducts an on-site inspection within the first six to twelve months after commencement of operations, and periodic inspections thereafter to advise appropriately and ensure that the institution is on the right track in terms of compliance with guidelines.

The 2004 Annual Report by the CBK details that the supervisory activities of the CBK continues to be directed at the promotion of a sound and stable banking system, and includes on-site examination, off-site surveillance and enforcement of the requirements of the Banking Act and Central Bank Prudential Regulations. During on-site inspections, the CBK ensures that banking institutions abide by prudential requirements and implement adequate controls that allows them to 'know' their customers. However, there is no further publicly available information addressing Kenya's compliance with this Principle.

17. Regular contact with bank management and understanding of bank's operations.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

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The 2005 Annual Report by the CBK informs that the Internal Audit and Risk Management Department of the CBK expanded its mandate in 2005 to include identification, assessment and evaluation of risks in the CBK's operations. It would henceforth also advise management on appropriate corrective and preventive measures in addition to independently appraising the CBK's processes, procedures and systems for adequacy and effectiveness of internal controls. However, there is no further information publicly available regarding Kenya's compliance with this Principle.

20. Ability to supervise on a consolidated basis.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

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The CBK according to its 2006 report titled, "Central Bank of Kenya: Prudential Guidelines for Institutions Licensed Under the Banking Act," requires all institutions to periodically publish their financial statements in order to provide timely information to all stakeholders. It also stipulates that the board of directors of each institution shall be responsible for the adherence and compliance with the provisions of this regulation. Further, all financial statements and other disclosures to be published should first be submitted to the CBK for clearance at least two weeks before publication. The financial statements must be signed by the Chief Executive Officer and at least one director of the institution. If an institution fails to comply with this guideline, the CBK is authorized to pursue any or all corrective actions provided under Sections 33, 34 and 55 of the Banking Act, as well as administrative sanctions against the institution.

The 2004 Annual Report of the CBK mentions that Kenya adopted International Financial Reporting Standards (IFRS) in 1998. The Prudential Guidelines were also being reviewed partially in response to changes in IFRS. In the financial year ending December 31, 2003, banks in Kenya started implementing IFRS 39, which deals with recognition, measurement, and disclosure of financial instruments. However, there is little publicly available information regarding Kenya's compliance with this Principle.

22. Adequate supervisory measures to ensure timely corrective action.

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In its 2006 Prudential Guidelines, the CBK states that if an institution contravenes any of the provisions of the guidelines or is not in compliance with the guidelines, the CBK has the authority to take remedial measures as specified in the Legal Notice No. 77 of June, 1999. In addition to the remedial measures available to it, the CBK may also impose administrative sanctions on the institution, its board of directors, or its officers. Further, the Guideline on Enforcement of Banking Laws and Regulations has been formulated to provide information and guidance to the banking industry on the approach the CBK will take in issuing supervisory directives and corrective orders to institutions. It will also serve to provide an outline of specific corrective/remedial measures, including appropriate time frames and goals for achievement of compliance and will be communicated to each individual institution as and when the need arises. The guideline adds that the enforcement actions contained enumerated are not exhaustive and the CBK is at liberty to prescribe any remedial action that it considers appropriate in light of the lapses or violations being addressed.

The 2004 Annual Report of the CBK states that the CBK enforces compliance with the banking laws and prudential regulations and imposes penalties as a deterrence mechanism. It deployed the Banking Supervision Application System - an integrated Information and Communication Technology (ICT) solution developed to automate banking supervision workflows and risk analysis within the East and Southern African Central banks - between November 2004 and January 2005. The system, according to the Report, greatly reduces the time taken to conduct analysis and produce management reports. However, there is insufficient publicly available information addressing Kenya's compliance with this Principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

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There is insufficient information publicly available regarding Kenya's compliance with this Principle.

24. International exchange of information with other supervisors.

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The 2004 Annual Report of the CBK mentions that the CBK is engaged in a number of international and regional cooperation initiatives to facilitate information exchange and closer cooperation with other regulatory and supervisory organizations and international bodies. However, there is no further information publicly available regarding Kenya's compliance with this Principle.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

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There is insufficient information directly addressing Kenya's compliance with this Principle.