The Kenyan banking sector has been good to its investors. Even in a crowded market including 43 banks, one mortgage finance company and an increasing number of licensed deposit taking microfinance institutions, most continue to report significant year-on-year growth in profits. A number of indigenous Kenyan banks have looked beyond our borders. Previously, ownership of more than 25 per cent of the share capital of any banking institution was restricted to entities that were either themselves banking institutions, a Government, a State Corporation or a foreign company that is licensed to carry out banking business in its country of incorporation. Now, the Finance Act 2012 has introduced amendments to the Banking Act that allow for beneficial ownership of banking institutions by an approved non-operating holding company, under the supervision of the Central Bank of Kenya (CBK). This is good news for Kenya's banking sector. The spirit of the new regulations foresees these non-operating holding companies as sources of strength for their subsidiaries, paving the way for the introduction of banking groups. There are several benefits of non-operating holding companies. The immediate one for Kenyan parent banks is that they will no longer hold banking subsidiaries themselves, at least to the extent regulations in the jurisdictions of these subsidiaries permit beneficial ownership under a non-operating holding company. Investment The introduction of a group holding structure also allows for the management and oversight of the group from an entity that can better raise capital and channel it to the group's entities as appropriate. The structure may also present an easier route for acquisition or investment. The non-operating holding company could potentially host the group brand, for which it may charge royalties to the subsidiaries, or function as a shared service centre for the group. As for the implementation of non-operating holding companies, one option is to create a subsidiary under the current Kenyan parent to which the banking assets and liabilities can be transferred. Another may be to establish a new holding company above the group (as it is currently structured) and then transfer subsidiaries as appropriate. These structures present a number of challenges, particularly for the larger listed Kenyan banks with wide shareholding, which have several layers of regulatory and shareholder approvals. With the current drive towards harmonisation of banking regulation in the East African Community , successful implementation of these structures is less likely to be a tedious exercise steeped in regulatory bureaucracy and instead give rise to banking groups with a potentially easier route for regional expansion and growth. The writer is an associate director in PwC Kenya's advisory practice.
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