The Central Bank of Kenya (Amendment) Act, 2026, which received presidential assent into law on Monday, introduces a formal framework governing Emergency Liquidity Assistance (ELA). /FILE
Banks seeking emergency financial support from the Central Bank of Kenya (CBK) will have to prove they are fundamentally sound before receiving any rescue funding under new law.
The legislation requires that only banks that are solvent, commercially viable and whose failure could threaten the wider financial system qualify for emergency liquidity from the regulator.
The changes that seek to tighten safeguards around lender-of-last-resort interventions come just weeks after the government extended the Sh10 billion core capital requirement for banks to 2032.
The Central Bank of Kenya (Amendment) Act, 2026, which received presidential assent into law on Monday, introduces a formal framework governing Emergency Liquidity Assistance (ELA).
The move represents one of the most significant reforms to Kenya's banking safety net in recent years, aligning the country's financial stability framework with international banking standards while reducing the likelihood of public resources being used to prop up fundamentally weak lenders.
“The Bill (now act) seeks to amend the Central Bank of Kenya Act to provide clear statutory separation between liquidity operations undertaken by the CBK for routine monetary policy implementation and Emergency Liquidity Assistance (ELA) provided in exceptional circumstances to preserve financial stability,” read the legislation.
Currently, the Central Bank Act does not clearly distinguish between routine liquidity operations conducted as part of monetary policy and emergency support extended to financial institutions during periods of distress.
The new law creates a legal separation between the two, setting out strict conditions under which emergency funding may be provided.
Under the framework, a bank experiencing temporary liquidity shortages but which remains solvent and viable may qualify for emergency support if its collapse would pose a systemic risk to Kenya's financial sector. Institutions that are insolvent or no longer commercially viable would not qualify for such assistance.
The changes are intended to ensure emergency liquidity serves its original purpose: preventing short-term funding pressures from escalating into broader financial crises, rather than rescuing poorly managed institutions.
For the banking industry, the amendments provide greater certainty over how the CBK would respond during episodes of financial stress.
The law also seeks to protect taxpayers by limiting the circumstances under which the central bank can deploy emergency resources.
International financial regulators increasingly require central banks to provide liquidity support only to institutions that are fundamentally healthy but facing temporary funding disruptions.
The reforms mirror principles developed under the Basel Core Principles for Effective Banking Supervision, which encourage central banks to maintain robust lender-of-last-resort frameworks while avoiding moral hazard—the risk that banks take excessive risks expecting to be rescued.
Beyond emergency liquidity, the Bill expands the Central Bank's statutory mandate by explicitly recognising financial system stability as a secondary objective after price stability.
It also introduces parliamentary approval for the appointment of Deputy Governors, provides legal backing for the Central Bank of Kenya Institute of Monetary Studies, updates outdated references in the law, and clarifies the CBK's powers to transact in gold and other precious metals as part of reserve management.
