State seeks five-fold capital increase for banking stability

The Treasury has reintroduced a proposal to raise the minimum capital requirement for banks from Sh1 billion to Sh5 billion banking on MPs passing the amendment in view of recent turbulence.

Under the original proposal tabled in last year’s budget, banks would be given three years to meet the new capital threshold. Only 20 out of the 44 banks licensed at the time would have immediately met the threshold.

MPs, however, threw out the proposal in the Finance Bill 2015, after taking into consideration strong opposition by the Central Bank of Kenya (CBK).

“I am seeking to reintroduce the proposals and I am hopeful that members will look at them more favourably in light of the recent developments in our banking sector,” said Treasury secretary Henry Rotich in yesterday’s budget statement.

The proposal will open afresh the tussle between the Treasury and CBK, which is on record arguing that small banks are necessary in the economy as they serve niche clients that contribute to overall economic growth.

The higher capital requirement is seen as one of the ways of pushing for industry consolidation.

READ: Banking sector set for mergers as lenders eye business growth

In the proposed far-reaching financial sector reforms, the Mr Rotich also wants to raise monetary penalty for violating the banking Act and Prudential Guidelines from Sh5 million to Sh20 million, saying the former is too little compared to the seriousness of some of the violations.

The Treasury will also introduce a legal framework to regulate online trading of foreign currency, which is currently attracting about 50,000 investors who use foreign brokers with links to major clearing centres in the US, UK and Japan.

This will be done through amendments to the Capital Markets Authority Act followed by additional regulations due to security concerns.

In the pensions industry, licensees under the Retirements Benefits Authority (RBA) will no longer be required to apply for annual permits after the introduction of a perpetual licensing framework similar to the one introduced for banks last year.

In addition, the Treasury is proposing a further review of the investment guidelines for pension schemes to allow them  invest in new capital markets products that include exchange-traded derivatives and listed Real Estate Investment Trusts (Reits).

Last year, the guidelines were amended to allow the schemes to invest in private equity, although the rules governing these investments are currently being crafted.

The insurance sector will also see reforms with the maximum time in which a claim should be settled reduced from 90 days to 30 days.