CBK sets new capital buffer rules to cushion banks in tough times

The banking sector regulator has raised capital requirements for commercial banks in a bid to cushion the lenders from potential turmoil in the local and global financial system.

New guidelines by the regulator have given the banks 18 months to raise their capital buffers by up to 2.5 per cent of their deposits to improve their stability in times of losses and economic stress.

Introduction of the capital buffer will push the minimum ratio of core capital to total deposits up from the current eight per cent to 10.5 per cent. The ratio of total capital to credit advances will also go up to 14.5 per cent.

“In addition to the above minimum capital adequacy ratios, institutions are required to hold a capital conservation buffer of 2.5 per cent over and above these minimum ratios to enable the institutions withstand future periods of stress.

This brings the minimum core capital to risk weighted assets and total capital to risk weighted assets requirements to 10.5 per cent and 14.5 per cent respectively,” states the new guideline.

The Central Bank holds that the buffer should be made up of high quality capital, which should comprise mainly of common equity, premium reserves and retained earnings.

“Institutions that currently meet the minimum capital ratios but remain below the buffer-enhanced ratios of 10.5 per cent and 14.5 per cent should maintain prudent earnings retention policies with a view to meeting the conservation buffer within 18 months from date these provision becomes effective,” said the regulator.

Central banks have been pushing for more capital requirements and stringent financial reporting standards following the 2008 global financial crisis to bolster stability of the sector.

“These new regulations will make the banking sector more solid in terms of ability to withstand shocks and in particular the contagion shocks that may be caused by occurrence external to the domestic market, which are more difficult to read or anticipate” said Mr Habil Olaka, CEO of the Kenya Bankers Association (KBA).

Mr Olaka said that the grace period of 18 months given to the banks to ensure compliance was adequate.

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Kenya’s banking sector has expanded rapidly in the last decade pushing some of the banks to operate within thin capital margins while others have started regional operations exposing themselves to country risks.

Since the beginning of the year various banks have announced plans to raise additional capital. CFC Stanbic, Standard Chartered, Family Bank, NIC, DTB, and Oriental Bank intend to do rights issue.

Equity Bank is considering a secondary IPO next year while Co-operative Bank said it had decided to push plans of a rights issue to next year due to a harsh macro-economic environment.

“This will put into question dividend payout policies and return on equity which may push some banks to consider merging,” said Mr Francis Mwangi, an analyst with Standard Investment Bank.