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Dividend freeze looms as banks race to boost capital
The Governor of the Central Bank of Kenya (CBK) Dr Kamau Thugge when he appeared before the Finance and National Planning Committee chaired by Kuria Kimani at the Bunge Tower in Nairobi on March 25, 2025.
The Central Bank of Kenya (CBK) says banks with a core capital base below Sh10 billion will likely freeze dividends to retain all of their profits in a bid to meet new capital requirements, which seek to promote stability of the financial sector.
This signals a dividend drought for shareholders of the affected institutions including wealthy individuals and private equity firms, with most of the affected lenders being small or medium-sized banks.
Large banks whose subsidiaries are yet to hit the new capital threshold will also need to support the units to reach compliance, reducing their capacity to raise payouts to their shareholders.
Recent legal changes now require commercial banks to have at least Sh10 billion in core capital by December 2029 in a phased implementation of new capital rules beginning this year when they are to have a minimum capital of Sh3 billion.
Out of the 24 lenders that need to raise new capital, 22 of them have submitted plans to the banking sector regulator with most of them leaning to profit retention while others considering rights issues to bolster their balance sheets.
“Some banks are telling us that they are going to retain profits. We are going into the details to see if the banks can generate enough profits to be able to meet the capital requirements,” CBK Governor Kamau Thugge told the Business Daily in an interview on the sidelines of the IMF/World Bank Spring Meetings in Washington DC.
“Others are going to do rights issues. It could be a combination of several approaches. We will have discussions with the banks to be comfortable that they will be able to meet their requirements.”
The new capital requirements arise from changes made to the CBK Act through the Business Laws (Amendment) Act of 2024, which was signed into law last December and requires banks to increase their minimum core capital from Sh1 billion to Sh10 billion over the next five years.
The top-up starts with an increase to Sh3 billion this year, progressing to Sh5 billion in 2026, Sh6 billion by 2027, Sh8 billion by 2028, and Sh10 billion by 2029. The increase in the minimum capital level is aimed at helping banks to withstand a jump in defaults and other economic shocks, further protecting the interest of depositors.
As of December 2024, more than six banks had a core capital level under Sh3 billion including Access Bank Kenya, Consolidated Bank, Middle East Bank, Development Bank of Kenya, M-Oriental Bank, and Commercial International Bank (CIB) Kenya.
Kenya’s large banks, including KCB Group, Equity Group, Co-operative Bank of Kenya, Absa Bank Kenya, Standard Chartered Bank Kenya, NCBA Group, and DTB Group, have all met the Sh10 billion core capital requirement, allowing them to continue with their dividend payout and expansion programmes.
Some will over the next few years, however, need to inject new capital into their subsidiaries or stop receiving dividends from the units that are yet to hit the Sh10 billion minimum capital requirement.
Analysts argue that profit retention may help medium-sized institutions but may not be enough in the case of small lenders that don’t generate substantial profits.
An analysis by Fitch Ratings deemed that mid-tier banks would be able to raise additional capital through retention, but 17 smaller banks would struggle to meet new capital requirements on retained profits alone.
“The remaining 17 banks, which together account for just seven percent of sector assets, are unlikely to be able to comply through earnings retention alone due to their large capital shortfalls and weak profitability,” said Fitch in a research note published on February 18.
“However, many are subsidiaries of regional banking groups that view Kenya as an important market, so we expect them to receive capital injections.”
The subsidiaries of foreign banks with a presence in Kenya have turned to their parent companies for capital support to meet the higher capital levels.
Ecobank TransNational—the Togo-based owner of Ecobank Kenya— injected $27 million (Sh3.5 billion) into its local subsidiary, raising its total capital to $65 million (Sh8.4 billion) which puts the lender on course to meet the Sh10 billion 2029 core capital deadline.
Other banks that might turn to their parents for capital boost include UBA Kenya, Access Bank, and Commercial International Bank (CIB) Kenya.
The law mandating higher capital levels comes after similar proposals were thwarted for years, putting Kenya behind other markets, including Uganda, which in November 2022 raised the minimum paid-up capital for its banks to 150 billion Uganda shillings (Sh5.2 billion at current exchange rates).
