Treasury principal secretary Kamau Thugge. PHOTO | FILE
What you need to know:
Treasury expects the number of Kenyan commercial banks to drop from the current 44 to about 30 in three years as an outcome of mergers and acquisitions in the industry triggered by higher capital requirements.
The minimum core capital requirement for banks is to be steadily raised from the current Sh1 billion to Sh5 billion by 2018, affecting 22 lenders that will be forced to raise funds, merge or sell stakes to comply with the law.
Banks with bigger balance sheets should help to lower interest rates for corporate and individual borrowers as they benefit from economies of scale and cut inefficiencies associated with small banks.
The Treasury expects the number of Kenyan commercial banks to drop from the current 44 to about 30 in three years as an outcome of mergers and acquisitions in the industry triggered by higher capital requirements.
The minimum core capital requirement for banks is to be steadily raised from the current Sh1 billion to Sh5 billion by 2018, affecting 22 lenders that will be forced to raise funds, merge or sell stakes to comply with the law.
Treasury officials Monday said the consolidation will spur competition in the banking sector by enabling smaller lenders to compete with the top institutions that dominate credit and deposit-taking.
“The reason interest spread remains wide at the moment is because only five big banks control two-thirds of business in the sector at the moment,” said Treasury principal secretary Kamau Thugge.
“We expect more competition and greater efficiency as the number of banks to fall to 30 by the end of 2017.”
Banks with bigger balance sheets should help to lower interest rates for corporate and individual borrowers as they benefit from economies of scale and cut inefficiencies associated with small banks.
The Treasury secretary Henry Rotich proposed in the Finance Bill 2015 – currently before Parliament– to raise core capital for banks in what he says is part of the government’s strategy of lowering the cost of financial services.
“We started by introducing the Kenya Bankers Reference Rate but realised that small banks with small balance sheets will never lower their interest spread,” said Mr Rotich Monday.
“We are now reviewing the structures to ensure that the industry has a few banks that can compete fairly,” he said, adding that small banks have frustrated the government’s annuity roads financing programme by demanding high interest rates.
Mr Rotich noted that Nigeria successfully consolidated its banks by increasing core capital requirement and now their banks are strong enough to open up branches across the continent.
He said any small bank that does not wish to consolidate will only be allowed operate as a microfinance institution that lends to small and micro-enterprises, not as a commercial bank.
Nigeria’s commercial banks must maintain a minimum core capital equivalent of Sh8 billion.
The Kenyan banks that currently fall below the higher core capital levels include Victoria Commercial, K-Rep, Habib, Oriental, UBA Kenya and Equatorial Commercial Bank.
Their core capital ranged between Sh934 million and Sh4.6 billion as of December. All the lenders listed on the Nairobi Securities Exchange are already compliant, with KCB having the largest core capital of Sh57.8 billion as at December.
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