CBK, Treasury differ on drive to create big banks

The Central Bank of Kenya (CBK) has differed with the Treasury on the proposed increase of commercial bank core capital to Sh5 billion, saying it would lead to rushed consolidations and make big banks more dominant.

Patrick Njoroge, the CBK governor, told Parliament to stop the proposed increase of bank capital from Sh1 billion to Sh5 billion in the next three years and instead push for smart regulation of banks.

“We need to pause and check whether we are regulating the banks smartly. If banks want to deal in more risky assets, they should provide more capital to match the risk,” Dr Njoroge told the National Assembly’s Finance, Planning and Trade committee.

The governor spoke as MPs began to debate the Finance Bill 2015, which has provisions that would require the 43 banks to increase their minimum core capital progressively to Sh5 billion by December 2018.

The Bill seeks to amend the second schedule of the Banking Act to set new core capital in case of a bank and mortgage finance.

Banks or mortgage finance institutions will be required to have a core capital of Sh2 billion by December 31, 2016, Sh3.5 billion by end of December 2017 and Sh5 billion by December 2018.

If MPs pass the Finance Bill as published, about 22 banks, including K-Rep, Habib, Oriental, UBA Kenya, Victoria and Equatorial, will be affected.

The affected banks — all of them private institutions with core capital of between Sh934 million and Sh4.6 billion as at December 2014 — will have to either make shareholder cash calls, merge or sell stakes to comply with the law.

All the Nairobi Securities Exchange (NSE)-listed lenders are compliant. KCB tops the list of compliant banks, having accumulated a core capital of Sh57.8 billion as at the end of last year.

READ: Steep rise in banks capital to Sh5bn signals mergers

Dr Njoroge said the CBK had made its views known to the Treasury and banking institutions that have different proposals on the minimum core capital.

“We have discussed minimum capital with the Treasury. It is an old proposal that was first made in 2013. Some banks have had different proposals but the CBK is quite uncomfortable with it,” Dr Njoroge told the committee chaired by Benjamin Lang’at, the Ainabkoi MP.

He said although a number of banks have core capital exceeding the proposed ceiling, the CBK prefers to regulate banks in a way that requires them to have capital that is commensurate to their risks.

“The bank that takes more risk should have more capital. This is the best practice the world over. The issue of capital is key to ensuring banks are strong but there are other aspects such as liquidity that we take seriously,” Dr Njoroge said.

He said that from the CBK’s perspective, the proposals on minimum capital would not be appropriate if the intention is to strengthen banks.

“Is the CBK in agreement with the proposal? The answer is actually no. It is not the right time to do this. It is also not the right approach,” the governor said.

Core capital has over the years steadily risen from Sh50 million to Sh1 billion and the CBK has been regulating and pushing banks not from the minimum capital perspective but based on risk weighting in order to match capital with risk.

Dr Njoroge said the proposed capital increase will instigate a rushed consolidation of banks, forcing small banks to rush for strategic investors. 

“Dominant banks will become even more dominant. Large banks are not among the ones playing the best in terms of interest rates and their spreads. Their business models will be dominant and they will close all small branches out there, resulting in a reversal of financial inclusion that we have been pushing for,” he said.

The governor further maintained that the minimum capital requirement will result to “loss of financial entrepreneurship since few people will be thinking of certain niches like tourism”.

“If we want to become a financial centre or hub in the region and beyond, we need to allow entrepreneurship to thrive under supervision. I don’t think small banks are most inefficient or most risky. It doesn’t appear so in our numbers,” he said.

Dr Njoroge warned that once Kenya goes the direction of being a very large banks market, the country will struggle under too big to fail banks that the regulator may not be able to supervise.

“They [big banks] may misbehave and take risky positions and investment because they think somebody has to come in when they misstep. We are not comfortable as CBK that we have a system that can handle a big bank if it fails. We have to pause and give it time. We must strengthen our supervision,” he said.

Dr Njoroge said that as a supervisor the CBK was afraid of very big banks that can throw their weight around but promised to apply the rules and laws “in a hardened fashion and to improve regulations”.

The committee had invited Dr Njoroge to brief it on the actions the regulator was taking to arrest the fluctuating exchange rate, inflation, growth, interest rates and spreads.