Section 11 of The Banking Act CAP 488: Restrictions on advances, credits and guarantees

(1) An institution shall not in Kenya—
(a) grant or permit to be outstanding any advance or credit facility against the security of its own shares; or
(b) grant or permit to be outstanding any advance or credit facility or give any financial guarantee or incur any other liability to, or in favour of, or on behalf of, any company (other than another institution) in which the institution holds, directly or indirectly, or otherwise has a beneficial interest in, more than twenty-five percent of the share capital of that company; or
(c) grant or permit to be outstanding any unsecured advances in respect of any of its employees or their associates; or
(d) grant or permit to be outstanding any advances, loans or credit facilities which are unsecured or advances, loans or credit facilities which are not fully secured—
(i) to any of its officers or significant shareholders or their associates; or
(ii) to any person of whom or of which any of its officers or significant shareholders has an interest as an agent, Director, manager or shareholder; or
(iii) to any person of whom or of which any of its officers or significant shareholders is a guarantor; or
(e) grant or permit to be outstanding any advance, loan or credit facility to any of its directors or other person participating in the general management of the institution unless such advance, loan or credit facility—
(i) is approved by the full board of directors of the institution upon being satisfied that it is viable;
(ii) is made in the normal course of business and on terms similar to those offered to ordinary customers of the institution, and the institution shall notify the Central Bank of every approval given pursuant to subparagraph (i) of this paragraph, within seven days of such approval; or
(f) grant or permit to be outstanding any advances or credit facilities or give any financial guarantees or incur any other liabilities to, or in favour of, or on behalf of, a person mentioned in paragraph (c), (d) or (e) and his associates amounting in the aggregate, for that person and all his associates, to more than twenty percent of the core capital of the institution; or
(g) grant or permit to be outstanding advances or credit facilities or give any financial guarantee or incur any other liabilities to or in favour of, or on behalf of, its associates and the persons mentioned in paragraphs (c), (d) and (e) amounting in the aggregate to more than one hundred percent of the core capital of the institution; or
(h) grant any advance or credit facility or give guarantee or incur any liability or enter into any contract or transaction or conduct its business or part thereof in a fraudulent or reckless manner or otherwise than in compliance with the provisions of this Act.
(1A) In relation to conduct contemplated under paragraph (h) of subsection (1)—
"fraudulent" includes intentional deception, false and material representation, concealment or nondisclosure of a material fact or misleading conduct, device or contrivance that results in loss and injury to the institution with an intended gain to the officer of the institution or to a customer of
the institution;
"reckless" includes—
(a) transacting business beyond the limits set under this Act or the Central Bank of Kenya Act (Cap. 491);
(b) offering facilities contrary to any guidelines or regulations issued by the Central Bank;
(c) failing to observe the institution’s policies as approved by the Board of Directors; or
(d) misuse of position or facilities of the institution for personal gain.
(1B) If the Central Bank determines that the interest of a group of two or more persons are so interrelated as to cause them to be considered as a single person or that an associate relationship exists, then for the purposes of this section, the total indebtedness of that group shall be combined and shall be deemed to be in respect of a single person or a person and the person’s associates;
(2) The prohibitions contained in subsection (1) shall apply whether or not the advance, loan or credit facility in question is granted to any person alone or with others.
(3) Where an institution contravenes any of the provisions of this section—
(a) all officers of an institution shall be liable jointly and severally to indemnify the institution against any loss arising in respect of the advance, loan or credit facility:
Provided that in the case of an advance, loan or credit facility to a person other that a director of the institution or a person participating in the general management of the institution, an officer shall not be so liable if he shows that, through no act or omission on his part, he was not aware that the contravention was taking place or was intended or about to take place, or he took all reasonable steps to prevent it taking place;
(b) the Central Bank may, in the case of an advance, loan or credit facility to a director of the institution, direct the removal of such director from the board of directors of the institution and may direct the suspension of any other officer or employee of the institution who sanctioned the advance, loan or credit facility and the institution shall comply with every direction of the Central Bank under this paragraph forthwith.
(4) If any Director removed, or officer or other employee of an institution suspended under subsection
(3) is aggrieved by such decision, he may apply to the High Court for determination of the matter and the High Court may confirm, reverse or modify the decision and make such other order in the circumstances as it thinks just; and pending the determination of any application or appeal therefrom, the order, removal or suspension shall remain in effect.
(5) A director of an institution who defaults in the repayment of any advance or loan made to him by the institution for three consecutive months shall forthwith be disqualified from holding office as such.
(6) An institution which—
(a) fails to comply with any direction of the Central Bank under subsection (3)(b); or
(b) permits a director who is disqualified by virtue of subsection (5) to continue holding office as such, shall be guilty of an offence.
(7) Where an offence under subsection (6) continues, the institution shall, in addition to the penalty prescribed under section 49, be liable to such penalty as may be prescribed for each day or part thereof during which the offence continues.
(8) The regulations under section 55 may govern the steps an institution is required to take to ensure that it does not, contrary to subsection (1)(f), permit to be outstanding anything described in that provision and, without limiting the generality of the foregoing, the regulations may impose time
limits within which the steps must be taken.
(9) The provisions of subsections (1) and (2) shall apply to a banking group on a consolidated basis.