Commercial banks will be given up to three years to raise their minimum capital tenfold to Sh10 billion, kicking off a period of consolidation or share offers in Kenya’s banking sector.
The Central Bank of Kenya (CBK) is set to shortly start seeking stakeholder input on the proposed higher capital requirement, which is expected to protect lenders against risks and bolster them for regional expansion.
The recapitalisation move will pose challenges to 24 or more than half 39 licensed commercial banks in Kenya, especially the small and mid-sized. "Obviously (the transition) can't be one year, so it will probably be up to three years. Many of the banks already have Sh10 billion in core capital. There will also be quite a number of banks with the ability to generate additional capital either from their shareholders which will be enough to meet the Sh10 billion requirement within the three years,” CBK Governor Kamau Thugge said in an interview last week.
“We have not adjusted the core capital requirements in many years, and during that time, we have had all kinds of new risks emerging such as cybersecurity and climate issues. There is also competition from foreign banks coming here and becoming very aggressive. As we plan to become a financial hub, we need strong banks that can withstand the new risks.”
Kenya currently requires a minimum capital of Sh1 billion for those who wish to start a bank. The higher capital requirement could see some lenders choosing to downgrade their banking licences.
Banks that are already operating are required to maintain 10.5 percent core capital to total risk-weighted assets, and 14.5 percent total capital to risk-weighted assets.
Spire Bank (acquired by Equity Bank in 2023), Consolidated Bank, First Community Bank (now Premier Bank) and Access Bank Kenya had the lowest core capital of the 24 banks at the end of 2022.
In the period, the banking industry closed with a total core capital haul of Sh809 billion against Sh6.5 trillion in the sector’s total assets.
The CBK has welcomed mergers and acquisitions as a solution to the looming capital dash, with the Governor seeing fewer but better-capitalised banks as the ideal scenario.
The banking industry is no stranger to mergers and acquisitions, the latest deal having come in June last year when Shorecap III, LP- a Mauritian based private equity fund acquired Credit Bank Plc.
The industry’s last merger was in September 2019 when NIC Group and Commercial Bank of Africa combined to form NCBA Bank Kenya Plc.
Despite consolidation being on the cards, Dr Thugge says the CBK will not enforce mergers or acquisitions even as he views consolidation in the industry as favourable.
“Mergers and acquisitions will be encouraged but we will allow it to play out within the banks. Unless we are asked to be intermediate, I really don’t see the need for forcing mergers outside of setting the target for core capital,” he added.
Equally, the CBK does not see concentration risks emerging from consolidation, arguing that having bigger banks will enhance competition, which could trigger a lowering of bank charges and costs.
“There still will be quite a number of banks. I think the concentration will not mean just five or 10 large banks. For the purposes of competitiveness, having bigger banks enhances competition. Right now, if you have so few large banks, they kind of set the stage and smaller banks just follow,” said Dr Thugge.
An increased capital base is seen as important for financial sector stability and is normally expected to lead to cost reductions from economies of scale. This marks the second attempt in a decade to revise the minimum capital threshold for lenders.
A similar proposal in 2015, which sought to raise the capital requirement to Sh5 billion, was rejected by Parliament.
The Sh1 billion minimum capital requirement has been in force since 2012 and lags the standards set by other major African banking markets.
South Africa, for instance, requires Sh11.5 billion, Nigeria Sh43 billion, and Egypt Sh13.4 billion. Recently, Uganda raised its minimum capital requirement to Sh5.1 billion, resulting in downgrades for banks like Nigeria’s GTBank, Kenya’s ABC Capital Bank, and Opportunity Bank.
