National Assembly Finance and National Planning Departmental Committee chairperson Kuria Kimani with Central Bank Governor Kamau Thugge at Bunge Tower in Nairobi on August 21, 2024.
Commercial banks have received a major reprieve after a parliamentary committee recommended that lenders attain the proposed minimum core capital of Sh10 billion over the next eight years.
The National Assembly’s Finance and National Planning Committee made changes to the Business Laws (Amendment) Bill, 2024 to increase the period of compliance from three to eight years.
The Central Bank of Kenya (CBK) has proposed higher core capital requirements to protect lenders against risks. Banks are currently required to have a minimum core capital of Sh1 billion.
The Bill, whose debate at the Second Reading commenced last evening, seeks to amend the Second Schedule of the Banking Act Cap 488 to progressively increase the core capital requirements for banks and mortgage institutions.
The proposed schedule includes a phased compliance plan, starting with a core capital of Sh1 billion by December 31 and ending at Sh10 billion by December 31, 2027.
Sh10 billion core capital
“However, the committee noted that the three years, as proposed in the Bill, is too short a time for banks to restructure to achieve the Sh10 billion core capital,” Kuria Kimani, who chairs the committee said in a report to the House. “The committee is proposing a phased-up approach of a maximum of eight years to achieve the set target of core capital.”
The committee’s recommendation follows submissions by the Kenya Bankers Association (KBA) in which it opposed the proposed timeline on the grounds that it was too short.
KBA said that even though the policy aims to ensure stability, the unintended short-term consequences and impacts on small banks, credit accessibility, operational priorities and sector-wide adjustments may be disruptive. It proposed a staggered increase of Sh1 billion every year over the next eight years. The lobby told MPs that the proposed gradual increase of the core capital within three years was too ambitious for small banks.
Acknowledging the risk CBK was seeking to mitigate, the committee noted that the banking sector had grown from 2012 in terms of assets, loan portfolio, non-performing loans, deposits, number of deposit and loan accounts, as well as a number of branches and subsidiaries.
“The committee observed that despite the exponential growth in assets, liabilities, and number of depositors and borrowers, the minimum core capital for banks has remained at Sh1 billion,” Mr Kimani said in the report. “The low capital base, which supports a significant asset base of the banking sector, makes banks more susceptible to failure.”
Minimum core capital
For these reasons, the committee said, the current minimum core capital can no longer support the sector’s growth trajectory.
The higher capital requirement could have seen some lenders choose to downgrade their banking licences.
Banks are required to maintain a 10.5 per cent core capital to total risk-weighted assets, and 14.5 per cent 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 39 banks at the end of 2022. In the period, the industry closed with a total core capital of Sh809 billion against Sh6.5 trillion in total assets.
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 behind 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.
