Steep rise in banks capital to Sh5bn signals mergers

What you need to know:

Commercial banks have three years to raise minimum shareholders’ funds to Sh5 billion from the current level of Sh1 billion.
The capital requirement could trigger mergers and acquisitions of the smaller lenders with bigger suitors.
The minimum capital requirements in South Africa is Sh9 billion, Nigeria Sh8 billion and Egypt Sh6.2 billion.
The three and Kenya count for the four biggest banking sectors in Africa.

Commercial banks face a steep increase in capital requirement after Treasury secretary Henry Rotich proposed a raise minimum shareholders’ funds to Sh5 billion from the current level of Sh1 billion.

The bankers will have three years to meet the new capital threshold.

The capital requirement could trigger mergers and acquisitions of the smaller lenders with bigger suitors.

Insurance companies also face higher capital requirements in measures the Treasury says will also help improve the capacity of financial institutions to weather shocks.

Mr Rotich said in his Budget speech that the new capital bar is necessary if Kenya is to attain the international financial centre status that calls for lenders who are able to take on large financing projects.

“I am proposing to increase the minimum core capital requirement for banks, mortgage finance companies and insurance companies. “For banks, I propose to increase the minimum core capital progressively from the current Sh1 billion to Sh5 billion by December 2018,” said Mr Rotich.

“For insurance companies, I propose to increase the minimum capital to Sh600 million for general insurance, and Sh400 million for long term insurance business by June 2018.”

The minimum capital requirements in South Africa is Sh9 billion, Nigeria Sh8 billion and Egypt Sh6.2 billion. The three and Kenya count for the four biggest banking sectors in Africa.

Kenya has 44 commercial banks, of which only 20 would meet the Sh5 billion core capital requirement today.

Regulations limit a bank to lending no more than 25 per cent of the equivalent of core capital to a single borrower, meaning that KCB, which has the highest core capital at Sh57.8 billion in Kenya, can only lend a maximum Sh14.5 billion to a single borrower.

Mr Rotich also proposed to remove the requirement for annual licensing of banks, with the Central Bank set to issue non-renewable perpetual licences instead as part of the risk based approach to supervision in the sector.

The regulator will, however, maintain periodic inspections with powers to withdraw the licence at any time.

In the insurance sector, Mr Rotich proposes to do away with the requirement that agents must be recommended by an insurer before licensing, allowing the Insurance Regulatory Authority to licence any agent with a certificate of proficiency.

He also proposes to allow retirement schemes to invest up to 10 per cent of their assets in private equity and venture capital funds licensed by the Capital Markets Authority.