Capital Markets
Treasury in new push to raise banks’ core capital
Friday December 22 2023
Cabinet Secretary, National Treasury & Economic Planning Njuguna Ndung’u. FILE PHOTO | DENNIS ONSONGO | NMG
The government will once again attempt to raise commercial banks’ core capital requirements from the current minimum of Sh1 billion in what is likely to trigger another wave of mergers and acquisitions of smaller lenders.
This is part of the changes aimed at strengthening the banking sector, with the Central Bank of Kenya (CBK), the banking sector regulator, also planning to be reviewing the licensing fees for commercial banks and mortgage financiers.
In the 2024 draft Budget Policy Statement (BPS) the National Treasury said the review of the minimum capital level is aimed at strengthening the banks and increasing their capacity to finance large projects.
The core capital is aimed at reducing the risk of a bank failure, with institutions holding more of this buffer seen as less susceptible to collapsing.
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“To further strengthen the resilience of the banking sector and increase commercial banks’ capacity to finance large projects, the CBK (Central Bank of Kenya) will review the minimum capital requirements for commercial banks,” said Treasury in the BPS, a document that sets forth the government’s policy agenda for the next three years.
“The current minimum capital requirements of Sh1 billion for commercial banks has been in effect since 2012,” added Treasury.
Currently, only Consolidated Bank of Kenya’s core capital does not meet the minimum requirement of Sh1 billion. As at September 2023, the State-owned lender had a deficiency of Sh1.4 billion in core capital.
In 2015, former National Treasury Cabinet Secretary Henry Rotich proposed to increase the minimum capital requirement five-fold to Sh5 billion over a three-year period.
The proposal was, however, rejected by the Members of Parliament who argued the move would lead to overconcentration where the market is dominated by a few large banks.
The CBK and the Kenya Deposit Insurance Corporation (KDIC) were however required by the legislators to consult the Treasury before taking any bank into receivership.
Between 2015 and 2016, there was a quick-fire closure of three distressed banks — Chase Bank, Dubai Bank and Imperial Bank.
The Treasury noted that the review seeks to align commercial banks with the transformation in the sector since 1990, with technology and innovations enabling lenders to move towards branchless banking.
“For this reason, the review will consider, among other things: the changing banking sector landscape, increased supervisory or surveillance costs, and international best practice,” said Treasury.
The Treasury noted that the banking sector has transformed since 2012, growing from an asset base of Sh2.3 trillion to over Sh7 trillion.
“The banking sector’s risk profile has also changed in the last 10 years with the growing prominence of among others, cybersecurity risk, cross-border risk and climate-related risks,” said Treasury.
Analysts say the proposal signals that the government is keen on implementing higher capital requirements this time, coming at a time when neighbouring countries are implementing similar policies.
“There has been talk about consolidation. Maybe this time that element of consolidation is going to happen,” said Eric Musau, the executive director in charge of research at Standard Investment Bank.
Mr Musau noted that since Uganda had already started a higher capital adequacy requirement, Kenya might be forced to follow suit.
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In Uganda, the minimum capital was raised to 150 billion Ugandan Shillings (Sh6.17 billion) which institutions are required to comply with by next year.
Just like Kenya, Tanzania has also had the intention to increase the minimum capital, but it is also yet to implement it. The minimum capital requirements in South Africa are Sh9 billion, Nigeria Sh8 billion and Egypt Sh6.2 billion. The three and Kenya count for the four biggest banking sectors in Africa.
