Full, timely and consistent implementation of Basel III requirements on capital is fundamental to establishing a sound and efficiently functioning Kenyan banking system that is able to support sustainable economic growth.
The Basel III accord is a set of financial reforms formulated by the Basel Committee on Banking Supervision with the aim of strengthening regulation, supervision, and risk management within the banking industry.
President William Ruto last week assented into law the Business Laws (Amendment) Bill, 2024, which sought to amend various Acts of parliament to boost financial stability, protect depositors, and promote integrity in the financial services sector. Notably, the Act seeks to raise banks’ minimum capital ten-fold to Sh10 billion staggered in a five-year period.
Despite robust capital buffers of 18.3 percent at the end of 2023, the proposed requirement mirror concerns over loan quality and correspond with higher capital rules in other Sub-Saharan banking sectors.
The minimum capital will move to Sh5 billion by the end of 2026 and Sh7 billion by the close of 2027. The banks will then be required to pump up the figure further to Sh8 billion by end of 2028 before taking it to Sh10 billion by December 2029.
The proposal for higher capital requirement largely reflects multiple risks within the banking industry.
Firstly, the ratio of non-performing loans to aggregate loans disbursed touched a high of 16.3 percent in June, levels not seen since 2006.
This is largely attributable to persistently low loan growth and high lending rates, exacerbated by a challenging economic environment characterised by high inflation, shrinking payslips, diminishing disposable incomes, feeble demand for goods and services, and prolonged delays in settling pending bills.
Higher capital will enable banks to better absorb potential losses, thereby preserving their solvency and stability.
Secondly banks are considerably exposed through investments in government securities and credit extended to the government and parastatals As of April, public sector loans made up 29.7 percent of the total loan portfolio. This investment strategy could engender debilitating solvency challenges if the government’s financial health deteriorates.
Additional risks include elevated operating expenses and Kenya’s grey listing by the Financial Action Task Force in February, which is expected to increase transactional, funding and operational costs for banks, as well as heighten due diligence burdens and dampen investor confidence.
The high capital requirement is beneficial to the economy and to the banks themselves and they must, therefore, endeavour to progressively meet the new threshold as prescribed by the law. The regulations will act as a powerful spring that will propel more Kenyan banks into expanding their footprints across the region and in Africa.
Moreover, this regulatory change will buttress confidence in the banking industry and result in a more stable and robust banking system capable of supporting complex transactions and big-ticket domestic projects, while ably withstanding unanticipated economic shocks.
