Global ratings agency Moody’s sees increased competition for large Kenyan banks in the medium-term if the enhanced capital requirements force consolidation among smaller players in the sector, potentially giving customers better terms in pricing of loans and deposits.
The Business Laws (Amendment) Act, 2024 which was signed into law on December 11 requires banks to raise their minimum capital tenfold to Sh10 billion over the next five years.
Banks will progressively top up their capital, starting with an increase to Sh3 billion by the end of 2025, Sh5 billion by 2026, Sh7 billion by 2027, Sh8 billion by 2028 and finally Sh10 billion by 2029.
The agency sees this capital increase as a credit positive for the local banking sector, noting that it will improve banks’ resilience against potential unexpected financial risks such as higher credit losses, climate change shocks or cybersecurity incidents.
There is also the potential for consolidation through mergers and acquisitions, which will create larger banks that will offer enhanced competition to existing tier one lenders which control 77 percent of the sector’s net assets of Sh7.7 trillion and 77.4 percent of total deposits of Sh5.9 trillion.
“Rated banks KCB Bank Kenya, Equity Bank Kenya and Co-operative Bank of Kenya are among the largest banks in the system and will not require capital,” said Moody’s.
“However, potential consolidation and strengthening of the banking system would give rise to increased competition by 2029, potentially increasing pricing pressure. Enhanced competition could also stimulate innovation and improve operational efficiency across the sector.”
By the end of September, there were 12 banks with core capital below Sh3 billion, meaning that they will need to raise new funds before the end of 2025 in order to be compliant with the new law.
The National Treasury first proposed the increase in minimum capital in the 2024 Budget statement, arguing that this was necessary to enhance the stability of the banking sector whose assets have grown to Sh7.7 trillion from Sh2.3 trillion in 2012, when the minimum threshold of Sh1 billion was introduced.
The Treasury also noted that the banking sector’s risk profile has changed over the last decade, where there is growing prominence of cybersecurity risk, cross border risk and climate related risks.
A similar proposal in 2015 to raise minimum core capital to Sh5 billion was rejected by MPs.
The increase in capital will also bring Kenyan banks more in line with their continental peers. In Nigeria, banks are required to hold a minimum capital of 200 billion Naira, which is equivalent to about $129 million or Sh16.6 billion.
Minimum capital for Egyptian lenders stands at five billion Egyptian pounds, equivalent to $98 million or Sh12.6 billion.
