CBK’s Higher Capital Limits Put 25 Banks on Edge
The Central Bank of Kenya (CBK) plans to increase the minimum capital requirement for banks from KSh 1 billion to KSh 10 billion. This aims to strengthen the resilience of the banking sector and encourage mergers and acquisitions. Banks will have three years to meet the new requirement. The change is intended to fortify the financial system against emerging risks and may lead to fewer, larger banks dominating the market. Smaller banks might face downgrades or seek partnerships to comply. This shift is expected to significantly reshape Kenya’s banking sector.
The Rationale Behind the Increase
Dr. Kamau Thugge, the CBK Governor, highlighted the need to address emerging risks like cybersecurity threats and climate change. The banking sector must adapt to these challenges, which weren’t as prominent during the last increase in 2012. Foreign banks are also becoming more competitive, prompting the CBK to ensure local banks can match their capabilities. As Kenya aspires to become a financial hub, robust banks are crucial for stability and growth.
The Role of Capital in Banking
Capital acts as a buffer for banks, protecting depositors and the economy from potential failures. It allows banks to absorb unforeseen losses, ensuring liquidity crises are managed by bank owners rather than relying on public funds. This safeguard is vital for maintaining public trust and economic stability.
Implications for Banks
The new capital requirement could lead to significant changes in the banking sector. Some banks might need to seek downgrades to their licenses if they cannot meet the new threshold. This scenario has precedent; after Uganda raised its capital requirements, three banks had their licenses downgraded. In Kenya, banks may need to merge or acquire others to comply. For example, subsidiaries of larger banks like Kingdom Bank, SBM Bank (Kenya) Ltd, and CIB Kenya will require substantial capital injections to meet the new requirements.
Encouraging Mergers and Acquisitions
Dr. Thugge mentioned that while mergers and acquisitions are encouraged, the CBK would not force them unless necessary. This approach allows the sector to naturally adjust to the new requirements. Mergers can create stronger, more resilient banks capable of handling larger projects and competing on an international scale.
Sector Predictions
Stanbic Bank Kenya CEO Joshua Oigara predicted that the increased capital threshold could halve the number of commercial banks in the sector, favoring larger players. Currently, eight listed banks control 80% of the sector. This concentration of power could lead to a few big players dominating the market, while smaller banks might either close or shift to the microfinance sector.
Recent Trends and Future Outlook
In 2023, the banking sector witnessed six consolidations, with four commercial banks and two microfinance banks being partially or wholly acquired. This trend is likely to continue as the new capital requirements take effect. The sector’s current health is robust, with a total capital adequacy ratio of 18.6% as of December 2023, above the required minimum of 14.5%. The liquidity ratio also remains strong at an average of 51%, well above the statutory minimum of 20%.
Conclusion
The proposed increase in capital requirements by the CBK is a strategic move to strengthen Kenya’s banking sector. It aims to build robust banks capable of withstanding new risks and financing larger projects. While this change may lead to fewer but stronger banks, it also opens opportunities for mergers and acquisitions, reshaping the sector. The three-year transition period will be crucial for banks to adjust and comply with the new requirements. This shift is expected to enhance the sector’s stability, making it more competitive and resilient in the face of emerging challenges.
