Public Urged to Give Views on CBK’s Draft Guidelines for Financial Institutions

Kenya public and stakeholders are being urged to have their say on the recently proposed draft guidelines on Internal Capital Adequacy Assessment Process (ICAAP) by the Central Bank of Kenya (CBK) that seeks to enable institutions in determining the level of capital adequate to cover for their respective risks.

ICAAP is a capital management approach which enables institutions to determine the level of capital that is adequate to support the nature and scope of institutions’ risks. With a comprehensive ICAAP, institutions are better placed to set internal capital targets that are consistent with their business plans, risk profile and operating environment.

Under the guideline all institutions (banks and mortgage finance institutions) are required to formulate their own ICAAP that ensures that overall internal capital levels are adequate and consistent with their strategies, business plans, risk profiles and operating environments on a going concern basis.

Though the CBK acknowledges that there is no single correct approach to conduct the ICAAP, their focus on guidance will lead to better supervision of the financial system as they have to review and evaluate the soundness of institutions ICAAP.

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General Rules for ICAAP

Institutions are required to develop an ICAAP that is:-

1. a) Formalized and documented.
2. b) Detailed and sufficiently indicates the current and prospective total capital necessary to support all material risks that the institution is exposed to.
3. c) Subject to internal review and approval by board and management.
4. d) Comprehensive in coverage of risks. The ICAAP should adequately identify and measure the risks associated with the institution’s business and the assessment of how much capital is needed to support these risks.
5. e) Indicative of the interactions between the various risks under both normal and stressed conditions. Institutions should identify all risks including external risk factors that may arise from the regulatory, economic or business environment.
6. f) Relates the institution’s capital adequacy goals to risks, strategic focus and business plan.
7. g) Ensures the integrity of the overall management process by the inclusion of a process of internal controls, independent reviews and audits.
8. h) Integrates adequate policies, controls and procedures to validate, on a regular basis, the methodology, data and the robustness of the systems and processes involved in modelling the probabilities of occurrence, and the potential consequences of individual risks and their aggregation.
9. i) Exhibits a simple and intuitive presentation.

Under the CBK guidelines, an effective ICAAP should comprise of:

• Corporate Governance oversight,
• Sound capital planning,
• comprehensive identification and assessment of risk,
• stress testing,
• monitoring and reporting, and
• Internal control review.

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Analysts in the market led by Cytonn Investments have welcomed the move as it will improve supervision and ease the regulator’s supervisory role as they involve the financial institutions in this process and they don’t have to handle it on their own.

“Subsequently, this will also lead to banks being required to have a capital base depending on the amount of risk appetite they possess. This move is commendable as each bank is unique and will be able to manage based on their peculiar business strategy.”

The public have until 9^th of September 2016 to give their comments and suggestions on the draft Guidance Note.

The Director Bank Supervision Department Central Bank of Kenya

P.O.Box 60000 – 00200 Nairobi,

Tel: +254 20 2863005 E-mail: fin@centralbank.go.ke