Kenyan banks face higher capital rules in South Sudan

Kenyan banks operating in South Sudan will have to increase the paid up capital for their subsidiaries to $25 million (Sh2.15 billion), despite the growing political risk in the country rocked by violence since last year.

The Bank of South Sudan now requires international banks to increase their paid up capital to the new level by December this year and further to $30 million (Sh2.58 billion) a year later.

KCB and Co-op Bank have confirmed that they will be pumping more capital into South Sudan.

“This capital will be increased in phases. By end of March, we increased it by $5 million to $20 million and by end of year this will be increased to $25 million. By December 2015, this will be increased by another $5 million to $30 million,” said KCB’s head of corporate and regulatory affairs Judith Odhiambo.

The requirement could open an opportunity for Co-op Bank to increase its shareholding as the South Sudan government continues to commit resources to security and rebuilding the country.

“The Co-operative Bank of South Sudan is a joint venture between the Government of South Sudan who hold 49 per cent and the Co-operative Bank of Kenya who hold 51 per cent and together the two institutions will naturally follow the applicable law,” said Co-op Bank in an email response.

Equity Bank doubled its investment in the country last year to Sh2.5 billion. Compliance with the new regulations will see higher amounts of cash held up in a country suffering from waning investor confidence and potential of business failure.

READ: South Sudan crisis alarms Kenya banks over loan defaults

However, higher risk exposure is usually associated with higher returns and South Sudan has in the past proved to be a good hunting ground for Kenyan businesses.

“The news flow out of South Sudan is surely set to delay the entry of competition into the country’s banking sector. Therefore, existing banks will enjoy spread expansion and even super-normal profits for longer,” said analyst Aly- Khan Satchu while supporting the decision by Kenyan banks to inject the additional capital.

In an investor briefing last week, Equity Bank chief executive James Mwangi said conflicts tended to favour large banks as people moved their savings to institutions they consider more stable.

Through the higher capital, the Bank of South Sudan is seeking to protect deposits mobilised in the oil rich country by ensuring the banks are well capitalised to absorb shocks that may interfere with their businesses.

The regulator said sanctions such as suspension from foreign exchange allocation and denial of licences for branch expansion would be imposed on banks that fail to comply with the requirements.

KCB operates 21 branches in South Sudan which hold Sh37 billion in deposits while Equity is estimated to hold Sh13 billion.

Co-op Bank injected Sh1.5 billion to open operations in the country last year. It posted a loss of Sh272 million ($3.2 million).

READ: Co-op Bank in Sh1.2bn South Sudan venture

The regulatory changes are also likely to lock out small banks from the young and volatile country.

“It enables them to only get large players in the market so from day one they can control the market, which is not fragmented,” said a research analyst at Standard Investment Bank, Francis Mwangi.

Family Bank, National Bank and Commercial Bank of Africa are the other Kenyan banks that have been mulling entry into South Sudan where violence interfered with banking operations last year, forcing KCB to temporarily close four branches.

Equity Bank made provisions of Sh700 million during the same period resulting in a profit drop from the unit to Sh285 million from Sh1 billion in 2012.

Kenyan traders fled back home with contractors leaving projects midstream as violence spread across the country. Before the violence South Sudan contributed close to half of total profits made by regional subsidiaries of Kenyan banks.

Other international banks operating in South Sudan include Ecobank from Togo and Commercial Bank of Ethiopia. The Kenyan banks will, however, have to be cautious that risks associated with regional business do not undermine parent companies.

The International Monetary Fund has warned that challenges in one unit could drain a company as it pumps more cash in a bid to salvage the operation.

The International Crisis Group said in early March that the South Sudan government was becoming fiscally unstable.

Kenyan businesses operating in the country faced defaults mid last year following a dollar crunch originating from stoppage of oil flows, following a standoff between South Sudan and its neighbour Sudan.

Central Bank of Kenya has since promised to open a currency exchange centre in collaboration with its South Sudan peer, but the same is yet to be set up exposing current businesses to liquidity problems.