The Central Bank of Kenya has ordered external auditors of all commercial banks and mortgage finance companies to conduct a special audit on insider lending and the report to be submitted before 31st of May 2016, The Kenyan Wallstreet has learnt.
The CBK through a circular addressed to the Managing Partners of the auditors and copied to the CEOs of the respective banks and Kenya Bankers Association boss says the purpose of the special audit is to confirm if all insider lending was carried out in accordance with the provisions of section 11 of the banking act.
The circular from the director of Supervision and signed by the CBK Governor Dr Patrick Njoroge noted with concern that the information currently being disclosed on insider-related credits is inadequate for assessing the nature and effects of such transactions on banks’ overall operations. In the final report, CBK orders the external auditors to disclose full information on all related-party insider loans i.e banking staff, significant shareholders, their associates and even the companies associated with the individuals.
The auditors have been asked to review all documents in regards to insider lending to ascertain whether the credit facilities were fully secured and approved by the credit board after satisfaction that the project financing was realistic. The CBK also needs to know whether the procedures used in securing the credit facilities was made under the normal terms the ordinary customers undergoes and if the notification of the lending was done to CBK within seven days after the authorization.
The external auditors have also been asked to certify that the amount granted to one person and their associates does not exceed more than 20% of the institution’s core capital.
This comes at a time when the Central Bank has adopted stringent measures in regards to supervision of the Banking sector leading to three bank’s to be put under receivership in less than nine months since Njoroge was appointed to lead the institution. Insider loans have been a major concern for the banking sector given that this is what led to the Bank’s recent closure by CBK after the top management was accused of violating prudential lending limits.