More than half of commercial banks will be expected to seek new funding or merge with their rivals amid plans to raise the minimum capital requirement 10-fold to Sh10 billion.
National Treasury Cabinet Secretary Njuguna Ndung’u said the changes would be effected through a progressive increase from the current threshold of Sh1 billion.
“This is intended to strengthen the resilience and increase banks’ capacity to finance large-scale projects while creating sufficient capital buffers to absorb and withstand shocks posed by the continuous emerging risks associated with the adoption of technology and innovations as institutions expand,” he said when he presented his 2024/25 Budget statement to the National Assembly.
Core capital refers to the minimum amount of funds to be maintained by each bank which allows them to protect customers against unexpected losses.
According to data from the Central Bank of Kenya (CBK) for the year ended December 2022, only 15 out of the then 39 licensed commercial banks had core capital surpassing Sh10 billion.
This means that more than half of banks in the industry did not meet the threshold in a list that covers tier II and tier III banks.
At the end of 2022, Spire Bank, whose assets have since been acquired by Equity Bank, Consolidated Bank of Kenya, First Community Bank (now Premier Bank), and Access Bank Kenya had the lowest levels of core capital.
Core capital requirements for Kenyan banks were last revised in the post 2007-2009 financial crisis where a greater requirement of Sh1 billion was required, down from Sh250 million.
From a regulatory perspective, an increased capital base is important for financial sector stability and could lead to cost reductions from economies of scale leading to lower lending rates.
The requirement for additional funding to banks could trigger a return to mergers and acquisitions in the space where larger banks would acquire smaller banks with capital deficiencies as a means of allowing the industry to adhere to the new capital rule.
Industry players have, however, previously warned of the buildup of concentration risks from the higher capital requirements as the sector is left with only a handful of institutions.
“Other market players with an alternative perspective argue that the banking industry is already too concentrated and increasing the capital requirement further will only create more concentration,” a group of banking sector researchers noted in a paper recently submitted to the Kenya Bankers Association.
As of January 2024, the banking industry’s total assets stood at Sh7.7 trillion while deposits reached Sh5.8 trillion. The large sector’s balance sheet partly signifies the need for greater capital buffers to protect banking customers.
