The Central Bank of Kenya (CBK) has directed that Banks will have to get approval before declaring dividends for the current financial year.
According to CBK, the directive is to ensure that the banks have enough capital that will enable them to respond appropriately to the COVID-19 pandemic.
The CBK has given guidance to lenders asking them to revise their ICAAP (Internal Capital Adequacy Assessment Process) based on the pandemic.
Key to note, ICAAP is a process through which banks assess whether their capital levels are adequate and consistent with their business plans, strategies, risk profiles, and prevailing operating environment.
ICAAP was introduced by the CBK in August 2016 allowing banks to determine the level of capital needed to support the nature and scope of the risks they would be undertaking.
Banks have up-to 30th October 2020 to submit their revised capital levels based on the adjustments. Subject to the submission of the revised Internal Capital Adequacy Assessment Process, (ICAAP), CBK will determine if it will endorse the board’s decision to pay out dividends.
The move is in line with what has been implemented in other jurisdictions such as the United States, where the Federal Reserve announced on 25th June 2020 that it would cap dividend payments and prevent share repurchases up to the end of 2020 since banks suffered capital losses due to the economic slump brought about by the pandemic.
The Federal Reserve capped the dividend payout indicating that banks payout ratio in Q3’2020 should not exceed the Q2’2020 payout ratio. Additionally, their dividend payment should not exceed the average Net Income over the last four quarters.
Closer home, on 6th April 2020, the South African Reserve Bank’s Prudential Authority issued guidance to the South African banking sector advising banks not to pay out dividends this year and that the bonuses for senior executives should also be put on hold during this period as well.
The authority highlighted that this directive would ensure banks conserve their capital and as such, enable the banks to fulfill their fundamental roles. In our view, the directive by the Central Banks is a precautionary stance, in a bid to ensure that the banking sector remains adequately capitalized, which will provide them with the requisite cover to partake in core banking activities, thereby catalyzing economic growth and development in the country.