The Central Bank of Kenya (CBK) is seeking to oversee transfer of business between subsidiaries in a banking group in a bid to protect investors and depositors.
The regulator, in new draft prudential guidelines, has proposed rules to guide hive-down transactions, which refers to the process where a bank transfers a business unit, assets, liabilities or a specific operation to a newly created or existing subsidiary.
CBK will need details of the proposed transfer of banking business as a going concern, asset and liability transfer schedules, customer migration and continuity plan, group structure chart before and after restructuring, details of any proposed non-operating holding company (NOHC); and transitional services arrangements between group entities.
Some of the recent transactions that could have prompted such a detailed review from the regulator –if the proposed rules were already in force–include restructuring of Co-operative Bank of Kenya into a non-holding company.
Others were KCB Group’s absorption of its mortgage lending business which was previously conducted through a subsidiary that traded as Savings and Loan (S and L).
KCB also recently retained some assets and liabilities of National Bank of Kenya (NBK) which it sold to Nigeria’s Access Bank.
Hive-down transactions have been used by banks in developed economies for various purposes including to separate high-risk investment operations from day-to-day retail activities, as well as for managing divestments and distressed assets.
This means if not regulated, a bank can move around its assets and liabilities to the detriment of creditors such as depositors and financiers.
The regulations require a bank operating as a group to seek the regulators nod before conducting the internal restructuring as it alters the company’s legal structure, risk profile and balance sheet.
‘The Central Bank shall treat a hive-down as a combination of transfer of business and liabilities; and establishment or reorganization of a licensed institution requiring prior approval,’ said CBK in the new guidelines.
Besides hiving down to protect its assets, a bank can also transfer some of its business as it prepares for sale of specific divisions.
‘A hive down does not constitute the creation of a ‘new bank’ in substance where the business continues uninterrupted. It constitutes a material restructuring of a licensed institution and requires approval by the Central Bank,’ read the guidelines.
In its assessment the regulator will consider the protection of depositors, financial condition of the resulting institution; continuity of critical banking services and systemic risk implications.
Co-op Bank in its annual general meeting held in May this year created a new bank to carry over the Kenyan banking business.
‘The reorganization proposed structure is as hereunder; the transfer of the company’s banking business, including certain assets, liabilities, rights and obligations, to the NewBank as a going concern,’ read Co-op Bank’s circular to shareholders.
The bank sought approvals from CBK, citing guidelines on ownership disclosures by banks and the Capital Markets Authority.
In the sale of NBK to Access Bank late last year, KCB had retained assets worth Sh2.02 billion from its former subsidiary.
The Nigerian lender already had a banking business in the Kenyan market which it intends to merge with NBK to create a larger institution.
Several Kenyan banks operate in a group structure creating a window for them to move business across subsidiaries which will now require CBK’s approval.
Some of the institutions with group operations include KCB, Equity Group, I and M Group and NCBA Group.
There are also some small lenders who operate as groups with most of them having subsidiaries in bancassurance.