How CBK can tackle minimum core capital challenge for banks

The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya in Nairobi. 

Photo credit: File | Nation Media Group

Following the commencement of the Business Laws (Amendment) Act, 2024 on December 27, 2024, banks and mortgage finance companies will be required to maintain a core capital of Sh10 billion by December 31, 2029.

This ten-fold increase in the minimum core capital has been staggered in increments of Sh1 –Sh2 billion per year, for a cumulative increase of Sh9 billion over a five-year transition period from 2025 to 2029.

In its published report, the National Assembly’s Departmental Committee on Finance and National Planning, noted that the minimum core capital had remained unchanged for 12 years and its upward adjustment was necessary, to align with current economic and financial environment.

Further, the Committee emphasised that the role of the Central Bank of Kenya (CBK) would be pivotal in guiding the process, including through offering clear guidelines, a structured roadmap, phased benchmarks, tailored support for smaller institutions and monitoring compliance mechanisms, so as to avoid imposing undue pressure on financial institutions.

In anticipation of how CBK may approach this critical task, let us look at the experience of some central banks on the African continent, that have recently dealt with additional minimum capital for their banks.

Nigeria

In March 2024, the Central Bank of Nigeria (CBN) announced an upward review of the minimum capital for various categories of licensed banks to be implemented over two years.

For commercial banks with international operations, the minimum capital was raised ten times from Naira 50billion to Naira 500billion, while the minimum capital for commercial banks with national operations was increased by eight times to Naira 200billion.

Notably CBN barred capitalisation of retained earnings e.g. through issuing bonus shares, from consideration for the enhanced minimum capital.

The only options availed by CBN were; injection of fresh capital (through private placements, rights issues, and offers for subscription), mergers and acquisitions (M&As), and/or upgrade or downgrade of license authorisation/category.

CBN gave banks a month to submit an implementation plan, indicating their chosen option(s) for meeting the new capital requirements, including the various outlined activities and their timelines.

As at end of 2024, five banks had already met the enhanced minimum capital requirements by raising capital, through a mix of public offers, rights issues, and private placements. Three banks also had rights issues that were underway by end of 2024.

Ghana

In September 2017, the Bank of Ghana (BoG) announced an upward increase in the minimum capital for banks by a little over three times from Ghs 120m to Ghs 400m, to be implemented in about 15 months. The BoG allowed banks to meet the enhanced capital requirements through injection of fresh capital, capitalisation of income surplus, or a combination of both.

Seven months after BoG’s announcement, locally owned banks in Ghana submitted a petition to the Presidency, requesting for an extension of the deadline to meet the additional minimum capital requirements, that was ultimately unsuccessful.

As per an update from BoG in January 2019, 23 banks had met the new capital requirements (from a previous 34 banks), one player had been downgraded and one player had exited the market and sold part of its business to another bank. BoG had also approved three merger applications involving six banks (two-way mergers).

Prior to the recapitalisation deadline, five local banks had their licences revoked and their businesses consolidated into a state-owned bridge bank known as the Consolidated Bank Ghana Ltd, which the government plans to privatise later. The BoG had also earlier appointed an advisor to assist one of the banks to come up with a credible recapitalisation plan.

Notably, the BoG took advantage of the recapitalisation drive to clean-up the banking sector.

The Government of Ghana (GoG) set-up a special purpose vehicle known as the Ghana Amalgamated Trust (GAT), to raise money in partnership with the pensions sector so as to invest in local banks, including state-owned banks, struggling to raise the additional capital.

Ultimately, the GoG became the sole shareholder of GAT and adequately capitalised the first set of investee banks.

Uganda

In November 2022, the Bank of Uganda (BoU) announced an upward increase in the minimum paid-up capital for licensed financial institutions to be implemented in a stepwise manner in about 18 months.

The minimum capital for commercial banks increased six times from Ush25 billion to Ush150 billion, while that of Tier II credit institutions increased 25 times from Ush1 billion to Ushs 25 billion. The major banks increased their paid-up capital through capitalisation of retained earnings while others, especially the foreign-owned ones including subsidiaries of Kenyan banks, injected fresh capital.

In its first update on the bank recapitalisation exercise in July 2023, BoU informed the market that the exercise had been largely successful and remained on course.

In 2024, BoU downgraded three Tier 1 commercial banks to Tier II credit institutions and allowed them a three-month transition period to exit Tier 1 commercial bank products and processes. In addition, BoU placed an existing Tier II credit institution under liquidation..

The experiences in Ghana, Nigeria, and Uganda points to the need for credible implementation plans for the additional capital in Kenya. It also shows that the CBK should be ready to take the necessary steps to enforce compliance to keep banks on track.

Of Kenya’s banks that do not meet the new minimum capital requirements, less than a handful can credibly plan to raise the required additional capital through a mix of retained earnings and injection of fresh capital only.

The majority will have to seriously consider consolidation through mergers and acquisitions if they don’t want to downgrade their licence category from commercial banks.

To avoid the disruption from a possible sequence of successive M&A activities from the relatively smaller banks looking to hit the additional capital target in the 5-year transition period, CBK, in consultations with the Capital Markets Authority (CMA), should encourage the large Tier 1 banks along with Kenya’s pensions sector, private equity sector, and sophisticated investor community, to set-up and fund special purpose acquisition vehicles to ensure smooth consolidation of the smaller players.

The writer is a financial advisory consultant

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.