The minimum core capital requirement for banks in Kenya is currently set at Sh1 billion.
However, small banks in the country may face an uncertain future if the government hastens the reform process aimed at raising the minimum capital requirement.
A recent announcement by the treasury to review the requirement to Sh10 billion signals looming consolidations in the banking sector, especially for small lenders.
Banks that cannot raise their core capital may seek mergers, acquisitions, or face closure of their operations.
Core capital refers to the minimum amount of capital that a bank must have on hand to comply with the country’s regulations.
The Central Bank of Kenya (CBK) enforces this regulation to ensure the financial stability and resilience of the banking sector.
The core capital, also known as Tier 1 capital, consists of the bank’s equity capital and disclosed reserves.
These reserves are crucial for absorbing losses and protecting depositors.
Treasury Cabinet Secretary Njuguna Ndung’u revealed plans to grow the threshold tenfold during the budget reading on Thursday evening.
“The Central Bank of Kenya intends to progressively increase the minimum core capital for banks from the current Sh1 billion to Sh10 billion.”
“This is intended to strengthen the resilience and increase the bank’s capacity to finance large-scale projects while creating sufficient capital buffer to absorb and withstand shocks caused by continuous emerging risks associated with adoption of technology and innovation,” said Ndung’u.
The aim is to strengthen the resilience and increase the bank’s capacity to finance large-scale projects.
The move will also create a sufficient capital buffer to absorb and withstand shocks caused by continuous emerging risks associated with technology adoption and innovation.
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In 2015, former National Treasury Cabinet Secretary Henry Rotich proposed a similar increase, but it was rejected by Parliament.
The current requirement was set in 2012, and since 2017, there have been discussions to increase the minimum core capital further.
Kenya has 39 banks, with nine holding 75.1% of the total market share, making it considered overbanked compared to its Sub-Saharan African peers.
Although Kenyan banks have maintained capital adequacy and liquidity ratios above the CBK’s minimum requirements, both ratios have declined recently.
The decline indicates reduced liquidity in Kenya’s banking sector, according to Stears, a Pan-African markets research company.
“By increasing their capital reserves, banks may have greater capacity to extend credit, which could stimulate economic growth. However, larger capital buffers may also enable banks to charge higher interest rates on loans, potentially hindering borrowing and investment,” the research firm said in one of its reports.
Financial soundness has also declined, with non-performing loan ratios increasing to 16.1% in April 2024.
