Small banks in the country could be staring at an uncertain future should the state hasten the reform process aimed at raising the minimum capital requirement for Banks.
A recent announcement by the treasury to review the requirement to Sh10 billion signify looming consolidations in the banking sector especially for small lenders.
The move will see banks that can’t raise their core capital 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 in order to comply with country’s set regulations.
The minimum core capital requirement for banks in Kenya is currently set at Sh1 billion.
This regulation, enforced by the Central Bank of Kenya (CBK), aims 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, which are crucial for absorbing losses and protecting depositors.
Treasury Cabinet Secretary Njuguna Ndung’u during the budget reading on Thursday evening revealed plans to grow the threshold tenfold.
“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 CS.
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.
However, the proposal was 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 current requirement was set in 2012 and since 2017 there have been discussions and proposals to increase the minimum core capital to further strengthen the banking sector.
Kenya, with 39 banks, where nine hold 75.1 per cent of the total market share, is considered overbanked compared to its Sub-Saharan African peers.
Although Kenyan banks have kept their capital adequacy and liquidity ratios well above the CBK's minimum requirements of 14.5 per cent and 20 per cent, both ratios have declined.
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. These declines indicate reduced liquidity in Kenya’s banking sector, according to Pan African markets research company Stears
Financial soundness has also declined, with non-performing loan ratios increasing to 16.1 per cent in April 2024
As of 2022, despite having the smallest minimum capital base for banks compared to its Sub-Saharan African peers, Kenya’s domestic credit to the private sector as a percentage of Gross Domestic Product (GDP) was the second-highest at 31.5 per cent.
“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.
This exercise will increase the capital base of Kenyan banks, leading to an expansion of their asset sizes.