Draft Prudential Guideline on Liquidity Management

The Draft Prudential Guideline on Liquidity Management consolidates the existing 2013 liquidity-management requirements with the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio(NSFR) standards introduced in April 2025, while adding a formal Internal Liquidity Adequacy Assessment Process (ILAAP). It also outlines stronger governance expectations, enhanced stress testing, and enhanced regulatory reporting.​

Key material changes proposed include:​

Scope extended to include banking groups​

• The draft expands the regulatory framework to include non-operating holding companies alongsidelicensed institutions. ​

• Banks will be required to monitor liquidity across individual legal entities, foreign branches,subsidiaries and the group, taking account of restrictions on the transferability of liquidity betweenentities, countries, branches or subsidiaries.​

Board oversight​

• The Board shall be required to approve the ILAAP annually, ensuring its alignment with risk appetiteand strategic decision-making.​

• The Board shall also approve a formal Liquidity Adequacy Statement (LAS), declaring that theinstitution holds sufficient liquidity resources and funding capacity to meet its obligations underboth normal and stressed conditions. The LAS must be supported by ILAAP results.​

Internal Liquidity Adequacy Assessment Process (ILAAP): ​

• The guideline requires banks to establish a formal ILAAP framework covering liquidity and fundingrisks across intraday, business-as-usual and stressed conditions. ILAAPs developed should beproportionate to the Bank’s size, nature, complexity, risk profile, and operating environment​

• The ILAAP will be reviewed by CBK through the Supervisory Review and Evaluation Process (SREP).​

Contingency funding plans (CFPs)​

• CFPs are expanded to require inclusion of early-warning indicators, activation criteria, escalationprocedures, estimated funding capacity, communication arrangements and responsibilities. ​

• The guideline specifies that CFPs be tested at least annually to ensure their effectiveness,operational feasibility and alignment with the Bank’s business continuity plans. Test results andcorrective actions shall be reported to the Board and made available to CBK on request.​

Stress testing and integration with ICAAP​

• The draft embeds stress testing within ILAAP, requiring explicit documentation of scenarios,assumptions and management actions. It also requires reverse stress testing at least annually.​

• Institutions will be required to formally align ILAAP and ICAAP stress tests in their assumptions,results and management actions.​

Integration with recovery planning​

• Institutions should demonstrate how the ILAAP is integrated with recovery planning, including theidentification of liquidity-related recovery options and an assessment of the feasibility of proposedliquidity recovery measures.​

Funding profile and intraday liquidity​

• The draft requires more detailed funding analysis, including funding mix, reliance on short-termsources, liability stability, market access, intra-group funding accessibility and projected liquidityneeds and funding sources over 1, 3, 6, 9 and 12 months.​

• Intraday liquidity is embedded as a defined component of ILAAP, requiring institutions to describethe sources and level of intraday risk, management practices and the strategy for achieving intradayliquidity objectives.​

Data management​

• The draft expands the requirements for an integrated liquidity management information system,requiring institutions to assess data reliability, accuracy, timeliness, and completeness, as well asthe extent of automation and manual intervention in liquidity reporting and stress testing.​

Independent validation and audit​

• The draft explicitly requires independent validation of stress-testing models, behavioural and cash-flow assumptions, with findings reported to senior management and the Board, while internal auditmust review ILAAP implementation and track remediation of identified weaknesses.​

Regulatory returns​

• The deadlines for the returns for maturity analysis and Liquidity Coverage Ratio (LCR) move from the10th to the 5th day of the following month. ​

• Net Stable Funding Ratio (NSFR) reporting increases from semi-annual to quarterly and should besubmitted within five days after quarter-end. ​

• Additionally, institutions will be required to submit the ILAAP report annually to CBK by 30 April.​

Contacts:

Eric Gichuki
​Associate Director, Risk Regulatory and Forensics

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Benson Githiri
Manager, Risk Regulatory and Forensics

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