NAIROBI, Kenya – In a move that could reshape the landscape of Kenya’s banking sector, the Treasury has announced plans to raise the minimum capital requirement for banks from Sh1 billion to Sh10 billion.
This significant increase signals potential consolidations among smaller lenders, who may be forced to merge, seek acquisitions or face closure.
During the budget reading on Thursday, Jun 13, Treasury Cabinet Secretary Njuguna Ndung’u unveiled the ambitious plan, aimed at fortifying the resilience of the banking sector.
“The Central Bank of Kenya intends to progressively increase the minimum core capital for banks from the current Sh1 billion to Sh10 billion,” stated Ndung’u.
This move is designed to bolster the banks’ capacity to finance large-scale projects and create a robust capital buffer to withstand technological and market risks.
Core capital, or Tier 1 capital, comprises a bank’s equity capital and disclosed reserves. This capital is vital for absorbing losses and protecting depositors, ensuring the financial stability and resilience of the banking sector.
The current requirement of Sh1 billion was established in 2012, and despite discussions to increase it, significant changes have not been implemented until now.
The last major proposal to increase the capital requirement came in 2015, when former Treasury Secretary Henry Rotich suggested a rise to Sh5 billion over three years.
This proposal was rejected by Parliament, which feared it would lead to an overconcentration of large banks dominating the market.
With 39 banks in Kenya, nine of which control 75.1p.c of the market, the sector is considered overbanked compared to other Sub-Saharan African nations.
Despite maintaining capital adequacy and liquidity ratios above the Central Bank of Kenya’s (CBK) minimum requirements of 14.5p.c and 20p.c, these ratios have shown a downward trend.
Between 2021 and 2023, the aggregate liquidity ratio dropped by 5.50 percentage points, and the capital adequacy ratio fell by 1.30 percentage points.
This decline indicates reduced liquidity in Kenya’s banking sector. Additionally, the non-performing loan ratio increased to 16.1p.c in April 2024, reflecting deteriorating financial soundness.
Raising the capital requirement to Sh10 billion will likely lead to a wave of mergers and acquisitions among smaller banks that cannot meet the new threshold.
This consolidation could enhance the stability and efficiency of the banking sector, allowing banks to extend more credit and stimulate economic growth.
However, there are concerns that increased capital buffers could lead to higher interest rates on loans, potentially stifling borrowing and investment.
