CBK mulls raising bank’s minimum capital over Sh1b
The Central Bank of Kenya could raise minimum capital requirements for banks, again. PHOTO | FILE | NATION MEDIA GROUP
What you need to know:
Banks are not allowed to lend more than 25 per cent of their core capital to a single borrower.
Central Bank of Kenya (CBK) has hinted at increasing the minimum capital requirement for banks in a move that could lock out small lenders and new entrants from the market.
The banking regulator is concerned that low levels of capitalisation will lock Kenyan lenders out of financing large infrastructure projects being undertaken in the country.
“The Sh1 billion minimum capital requirement may actually constrain financing potential of some large banks. The CBK may consider raising this minimum capital requirement to make the industry move to the level of Egypt, Angola, Nigeria and South Africa,” reads part of the Financial Sector Stability Report released last week.
Banks are not allowed to lend more than 25 per cent of their core capital to a single borrower.
KCB, Kenya’s largest bank in asset base, has a core capital of Sh52 billion, capping its lending to a single entity at Sh13 billion. Most of the infrastructural projects being put up in Nairobi require huge funding. For instance, the Lamu coal plant is expected to use an estimated Sh177 billion of which Sh130 billion will be debt.
CBK disclosed that two banks violated the minimum capital requirement last year underlining the challenges facing banks funding large projects. The capital requirements in South Africa is Sh9 billion, Nigeria (Sh8 billion), Egypt (Sh6.2 billion) and Angola at Sh2.2 billion.
Eighteen banks in Kenya have a core capital of less than Sh2 billion. Analysts pointed out that large banks were in a strong position to comply with whichever extra amount that may be required but small lenders are likely to struggle.
“The effect is dependent on the amount but I expect the key players will comply with it,” said Standard Investment Bank’s Francis Mwangi. Mr Mwangi said a regulation meant to push banks to finance infrastructure projects by raising capital may see the lenders used to micro-lending holding idle cash.
Other new businesses that will attract deep-pocketed financiers are energy projects such as wind energy in Kinangop and Meru, oil exploration in North Eastern, road construction and real estate.
The government recently entered a public-private partnership agreement with banks to finance road contractors, guaranteed by the Treasury, in a deal estimated at Sh351 billion over the next ten years.
CBK increased the minimum capital requirement in 2008 to Sh1 billion from Sh250 million, with banks given a four-year period to comply. The process was expected to see small lenders merge but most of them convinced their shareholders to inject additional capital while others invited strategic partners. A 12-fold increase in capital requirement in 2004 saw Nigerian banks shrink from 89 to 25.
Banks are currently aggressively raising additional funds from shareholders and the debt market to comply with new capital adequacy ratios coming into effect at the end of the year.
CBK requires banks to hold a capital buffer of 2.5 percentage points above current capital adequacy ratios by end of year.
