Parliament's Finance and
National Planning Committee is
in talks with the Central Bank of
Kenya with a view of reviewing
the Sh10 billion core capital requirement for banks.
The discussion comes as concerns mount over the impact of
the regulation on liquidity and
lending in the financial sector.
During the committee session,
Homa Bay Town MP Peter Kaluma questioned CBK Governor
Kamau Thugge on whether the
high number of non-compliant
banks signalled a need to reassess
the requirement.
Kaluma noted that as of December 2024, 24 out of 38 banks
had not met the Sh10 billion
threshold. CBK ha,d however,
asked the 24 banks to submit board-approved capital build-up
plans by April 1st 2025.
“As a layperson, my understanding is that core capital represents the minimum amount a
bank must have to operate. By
raising it significantly, we may
be reducing the money available
for lending. Given the current
situation, would you advise Parliament to maintain the requirement at Sh10 billion or consider lowering it to enhance liquidity?” Kaluma asked.
Thugge defended
the requirement, stating that the
move was essential for strengthening Kenya’s financial sector and
aligning it with global standards.
Thugge argued that the core
capital requirement of other
countries is much higher than
Kenya, and if the country wants
to be the East Africa financial hub
then the review is necessary.
He pointed out that when the
core capital was last increased to
Sh1 billion in 2012, total banking
sector deposits stood at Sh1.5 trillion.
Today, deposits have surged
to Sh5.6 trillion, while lending
has grown from approximately
Sh1 trillion to Sh4 trillion.
“The financial sector faces increased risks, including cybersecurity threats and the need for
advanced technology. Adequate
core capital is crucial for resilience. Higher capital requirements do not necessarily reduce
lending capacity; instead, banks
can attract strategic investors
or conduct rights issues to boost
their capital,” Thugge stated.
The session also exposed the government's appetite for domestic
loans that has locked out private
sector. The committee chairperson
Kimani Kuria criticized CBK for
not proposing stronger protections for the private sector, to access funding.
“Where do we leave the private
sector when the government is
competing for loans with businesses? We wish you had said you
will protect the private sector despite these issues,” said Kuria.
This has seen the government’s
domestic debt portfolio rise to
Sh5.9 trillion as of December
2024, above the Sh5.06 trillion
foreign debts.
Data by the apex
bank shows that 45.34 per cent
of the domestic debt is owed to
Banking Institutions, while insurance firms only account for
7.18 percent of the debt.
Thugge pointed out that commercial
banks prefer lending to the government—considered a risk-free
borrower—rather than private
businesses that already struggle
with high levels of non-performing loans, there by crowding out
private sector access to credit.
“When we started this financial
year before the Finance Bill was
withdrawn, the projected net domestic borrowing was slightly below Sh400 billion. That figure later increased to Sh430 billion, and
with the second supplementary
budget, it has now risen to Sh584
billion,” Thugge said.
