Kenya’s parliament finance committee has recommended extending the compliance deadline for new capital requirements for commercial banks from three years to eight years. The proposal seeks to give smaller lenders sufficient time to adjust to the tenfold increase in minimum core capital outlined in the Business (Amendment) Bill, 2024.
Background on the Proposed Capital Hike
In June 2024, the Central Bank of Kenya (CBK) proposed increasing the minimum capital requirement for banks from KES 1 billion ($7.7 million) to KES 10 billion ($77.8 million), with a three-year compliance window. The move aimed to enhance the resilience of Kenya’s financial sector against risks like economic shocks and cyber fraud.
However, concerns have emerged that the accelerated timeline could destabilize the financial sector and place undue pressure on small and mid-size banks.
“While an upward adjustment is necessary to align with the current economic and financial environment, the proposed timeline of three years… is considered too short,” the committee stated.
Challenges for Smaller Lenders
Over half of Kenya’s 39 licensed commercial banks are small and mid-sized institutions that may struggle to meet the new requirements within the original three-year window. Options for these banks include:
- Mergers and Acquisitions: Consolidation could help smaller banks pool resources and meet the threshold.
- Raising Capital: Leveraging stock markets or securing investments are potential avenues, though challenging given current economic conditions.
In June, the CBK reported that 12 banks, including state-owned institutions like Consolidated Bank and Development Bank of Kenya, were already in breach of existing capital requirements.
Regional Comparison and Historical Context
Kenya’s current capital requirement of KES 1 billion ($7.7 million) has been in place since 2012. It is significantly lower than requirements in Africa’s top banking markets:
- South Africa: $90 million
- Nigeria: $337.1 million
- Egypt: $104.7 million
This is the second attempt in a decade to raise Kenya’s capital threshold. A 2015 proposal to increase the requirement to KES 5 billion ($38.9 million) was rejected by lawmakers.
The Committee’s Recommendations
The committee’s recommendation to extend the compliance period to eight years aims to strike a balance between strengthening the banking sector’s resilience and allowing smaller banks to strategize sustainably.
“Extending this compliance period… provides a more practical and manageable timeframe for banks to raise the required capital without destabilizing their operations or the wider financial sector,” the committee noted.
Implications for the Banking Sector
- Greater Resilience: The new capital requirement, once implemented, will align Kenya’s banking sector with global and regional benchmarks, bolstering its ability to weather financial shocks.
- Potential Consolidation: Smaller banks may explore mergers, acquisitions, or partnerships to meet the requirements, potentially reducing the number of licensed banks in Kenya.
- Operational Stability: An extended deadline would ease pressure on smaller institutions, allowing them to adapt without significant disruptions.
Outlook
The proposed extension to an eight-year compliance timeline offers a practical approach to implementing higher capital requirements. If approved, the revised framework could provide smaller banks with a lifeline, safeguarding their operations while fostering a more robust financial sector in Kenya. The recommendation reflects the legislature’s recognition of the nuanced challenges facing different tiers of banks in the country