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THE ESTABLISHMENT OF A DEPOSIT-TAKING MICROFINANCE BANKING INSTITUTION IN KENYA

Introduction

The banking and finance sector in Kenya has seen tremendous changes since the advent of the Microfinance Act, of 2006. The government and the business community saw the need for having the sector regulated so that there is ready access to other forms of credit in the country, aside from the traditional banks, to spur economic growth in the country.   Section 2 of the Microfinance Act, 2006 defines a microfinance bank as: “a company which is licensed to carry on microfinance bank business, and includes all branches, marketing units, outlets, offices and any other place of business that may be licensed by the Central Bank of Kenya”

The Microfinance Act provides that an application for a license to carry out deposit-taking business shall be made to the Central Bank, in the prescribed form.” Every such application granted shall be effective for one calendar year and shall expire and be due for renewal every 31st December of the preceding year.

PROCEDURE FOR APPLICATION FOR LICENSE

The application for a license by the Central Bank of Kenya will require certain procedures which will be performed in stages outlined as follows;

STAGE 1; APPROVAL OF NAME

The Applicant shall submit a list of three names in the order of priority for registration as a company. Once the same is registered, the Applicant shall submit the names to the CBK for consideration and include the term “Microfinance Bank” at the end. The Applicant shall provide evidence of sources and availability of capital for the proposed microfinance. This should be done before the incorporation of the proposed entity as a company limited by shares. The name shall be valid for 12 months subject to annual renewal. The Applicant should then produce evidence of Board and Annual General Meeting resolution approving the transformation and the proposed investment including the Business Plan.

The application should be accompanied by copies of audited financial statements and due diligence report prepared by an external audit firm for a period of at least the last three years preceding the date of application.

The Applicant, upon receiving the name approval may apply before incorporating the new company by using the old name in brackets and transforming to the new name e.g. XYZ Limited may use the name XYZ Limited (in Transformation to XYZ Microfinance Bank Limited) until it is licensed. No person shall use the approved name in its operations or engage in microfinance bank business until it receives a license from the Central Bank.

CHECKLIST FOR NAME APPROVAL

 Mandatory Documents
1.

List of Names (3) for  Company Registration in order of priority

2.

List of Names (3) for  CBK registration with the name ‘Microfinance Bank’

3.

Board and AGM resolution approving the transformation and (Business Plan approved by the board).

4.

Copies of audited financial statements for at least the last three years preceding

5.

Due diligence report prepared by an external audit firm

 

STAGE 2; APPLICATION FOR LICENSE BY CENTRAL BANK OF KENYA.

During this stage, one is required to fill out and complete a Certified Form 1 of the First Schedule to the Microfinance (Deposit Taking Microfinance Institutions) Regulations 2008] to the Central Bank of Kenya.

Once the form is duly filled, it will be submitted together with accompanying documents which include; certified copies of the Certificate of Incorporation, Company’s KRA (PIN) Certificate, Memorandum and Articles of Association indicating core capital of at least Kshs. 20,000,000 (Kenya Shillings Twenty Million) for community microfinance bank OR Kshs. 60,000,000 (Kenya Shillings Sixty Million) for nationwide microfinance bank business.

Other details that will be required are the area of operation in which the applicant attaches the supporting Government administrative map(s). The official notification of the company’s registered place of business, including the prospective places of business (Head Office, branches, agency and outlets, if any) should also be indicated.

The Applicant shall also pay a non-refundable application fee to the Central Bank by Bankers cheque or by such other mode of payment as the Central Bank may prescribe. A declaration witnessed by a Commissioner of Oaths indicating that the proposed entity has no existing scheme of arrangement with its creditors. Other details of the Directors shall also be required from them indicating the earmarked funds for use by the Microfinance and Certified statements indicating that the entity and each of the shareholders and officers are tax compliant, by producing a Tax Compliance Certificate.

During the application process, the Applicant shall also be required to prepare and submit a comprehensive feasibility study and business plan of the Company. For foreign Companies intending to set up a local subsidiary, they will be required to submit further information including but not limited to;

  1. A copy of the board resolution authorizing the entity to microfinance bank business in Kenya, and the designated persons who will represent the business in connection therewith.
  2. Historical background of the foreign entity.
  3. Signed declaration by the board of directors to adhere to the Microfinance Act and Regulations issued thereunder and other relevant Kenyan laws at all times during the validity of the license.
  4. Endorsement letter (or a letter of no objection) from the home supervisory authority.

 

DOCUMENT CHECKLIST FOR THE LICENSING APPLICATION

 Mandatory Documents
1.

Certified copy of the Certificate of Incorporation

2.

Certified copy of the Company’s KRA (PIN) Certificate

3.

Certified copy of the registered Memorandum and Articles of Association indicating core capital of at least Kshs. 20,000,000 (Kenya Shillings Twenty Million) for a Community Microfinance

4.

Certified copy of the registered Memorandum and Articles of Association indicating core capital of at least Kshs. 60,000,000 (Kenya Shillings Sixty Million) for a nationwide microfinance

5.

Verified official notification of the company’s registered place of business

6.

A non-refundable application fee to the Central Bank by Bankers cheque

 

A declaration witnessed by a Commissioner of Oaths indicating that the proposed entity has no existing scheme of arrangement with creditors

7.

Bank statements of a licensed bank indicating the earmarked funds either in the name of the company, promoters, or shareholders.

8.

Certified statements indicating that the entity and each of the shareholders and officers are tax compliant.

9.

Feasibility study and business plan according to the laid standards.

10.

“Fit and Proper Forms” for all significant shareholders (at least 10% shareholding) and proposed directors accompanied by supporting documentation as required by the Bank

 For a Foreign Company
11.

A copy of the board resolution authorizing the entity to microfinance bank business in Kenya

12.

Historical background of the foreign entity

13.

Signed declaration by the board of directors to adhere to the Microfinance Act

14.

Endorsement letter (or a letter of no objection) from the home supervisory authority

 

STAGE 3:  LETTER OF INTENT

Upon assessment and fulfillment of all the requirements in stage two, the Central Bank of Kenya will issue a Letter of Intent, which is an approval in principle and advises the applicant on the next steps and requirements to be fulfilled before issuance of a license and approval to commence operations, including;

  1. Payment of license fees to the Central Bank by banker’s cheque or such other mode of payment that the Central Bank may prescribe
  2. Preparation of operating premises to meet prescribed standards [The inspection checklist is in Form 4 of the First Schedule to the Microfinance (DTM) Regulations 2008] in readiness for inspection by the Central Bank.
  3. Completion and submission of the “Fit and Proper” Forms for key senior managers (to be guided by the Central Bank) accompanied by all the supporting documentation.
  4. Preparing and putting in place the proposed management information system (MIS) and other institutional structures required to conduct the microfinance bank business. Some of these include: governance structures, Deposit mobilization strategies, Deposit mobilization strategies, and Risk management policies and internal control systems

 

CHECKLIST FOR THE LETTER OF INTENT

 Mandatory Documents
1.

Payment of license fees to the Central Bank by banker’s cheque or such other mode.

2.

Preparation of operating premises to meet prescribed standards prescribed in Form 4 of the First Schedule to the Microfinance (DTM) Regulations 2008.

3.

Completion and submission of the “Fit and Proper” Forms for key senior managers including CVs, Referees, Contact details, credit reports, 2 colored sized photos,

4.

Putting in place the proposed management information system (MIS) and other institutional structures required to conduct the microfinance bank business

 

STAGE 4: ISSUANCE OF LICENSE BY THE CENTRAL BANK OF KENYA.

This is the final stage. Once the Central Bank of Kenya is satisfied that the applicant has met all the requirements of the above three stages, they may then issue a license. The Central Bank of Kenya will duly specify the institution by placing a notice in the Kenya Gazette, thereby legally authorizing the applicants to commence microfinance bank business.

SCHEDULE OF MANDATORY FEES PAYABLE TO THE GOVERNMENT

 PAYABLE ITEMCOST   (KSHS.)
1.

Bank name a search and reservation fee

1,000

2.

Non-refundable application fee

5,000

3.

Annual License Fees

150,000 (Nationwide Microfinance)

100,000 (Community Microfinance)

 

The Application process shall take a minimum of 60 days within which the Applicant shall register the Company limited by shares, and then submit the same to the CBK for verification and adoption. The other processes by the CBK shall be tracked and complied with in the guidance of the CBK.

Conclusion

The financial sector in Kenya continues to witness tremendous growth due to increased ratings of ease of doing business in the country going to ratings of international bodies. A prospective investor is highly encouraged to invest in this market as it offers great returns on investment.

CR Advocates being a top-tier award-winning law firm in Kenya has been at the heart of the registration of four (4) of the leading Microfinance Banks in Kenya whose influence is growing regionally.  We are in a position to commence the registration process for a local and/or foreign individual or company and successfully convert the same to a Microfinance Institution in Kenya.

The information provided in this article is intended for general legal advice and does not constitute legal advice for a specific transaction or case. Since each transaction represents a unique legal context, it is advisable to retain a legal adviser for specific transactions.

To contact CR Advocates LLP, send us an email at info@cradvocatesllp.com or call +254 100979081 or Book a strategy call HERE or direct message us HERE on WhatsApp at your convenience. Our legal team will be happy to help you.