Commercial banks have six months to comply with new rules by the Central Bank of Kenya (CBK) requiring them to raise their share of cash or liquid assets to levels sufficient to respond to panic withdrawals for at least 30 days without collapsing.
The regulator has published final guidelines on the liquidity threshold which will be implemented effective October 1, 2025. The CBK in November last year circulated draft guidelines for input from industry players.
The new guidelines on liquidity coverage ratio (LCR), net stable funding ratio (NSFR), and leverage ratio (LR) will require banks to raise their available cash above the current 20 percent of their deposits to withstand a sudden and severe run on deposits.
LCR is a regulatory requirement designed to ensure banks have enough high-quality liquid assets (HQLA) to meet their short-term obligations, specifically within 30 days of liquidity pressure. LR is a metric that measures a company's debt relative to its assets, equity, or earnings. It helps evaluate a company's financial health, risk, and ability to meet its financial obligations.
The NSFR measures the proportion of a bank's available stable funding to its required stable funding, and it must be at least 100 percent.
Commercial banks will now be required to estimate the level of withdrawal requests possible from customers over 30 days in a shock scenario and keep an equivalent value of high liquid assets such as Treasury bills and bonds to cover the outflows without destabilising operations.
The guidelines are aligned with the continued global adoption of Basel III— an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007/2008 to strengthen supervision, and risk management among banks.
CBK says LCR will ensure banks have an adequate stock of unencumbered HQLA that can be converted easily and immediately into cash to meet their liquidity needs for a 30-calendar day liquidity stress scenario.
Holding enhanced levels of high-quality liquid assets such as government paper will help banks improve their 30-day resilience when hit with panic withdrawals so that corrective actions can be taken by the management and the CBK to ensure an orderly resolution.
“The LCR will improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy,” says CBK in the guidelines.
“Banks are expected to inform the CBK of their LCR and their liquidity profile on an ongoing basis. Banks should also notify the CBK immediately if their LCR has fallen, or is expected to fall, below 100 percent.”
The LCR builds on traditional liquidity coverage ratio methodologies that banks have been using internally by banks to assess their exposure to contingent liquidity events.
The banking industry has on average exceeded its liquidity requirement having ended January this year at a ratio of 56.9 percent, twice over the 20 percent statutory requirement. However, the liquidity is usually concentrated in the hands of a few large banks.
Kenya experienced a banking crisis in the 1990s that triggered the collapse of a string of banks. The calm and resilient banking system was again tested in 2016 when the CBK placed three lenders—Dubai Bank, Imperial Bank, and Chase Bank-in receivership over nine months.
