Fitch Ratings projects that Kenya’s new Ksh10 billion capital requirement for banks will reduce non-performing loans and enhance credit capacity. This measure aims to bolster the banking sector’s stability and promote consolidation among smaller institutions. The phased increase in capital requirements will allow banks to gradually raise their core capital and strengthen their financial resilience. Other countries in the region are also implementing similar capital increases in response to financial challenges.
Fitch Ratings has indicated that Kenya’s new capital requirement of Ksh10 billion ($77.51 million) for banks is expected to significantly mitigate non-performing loans (NPLs) and credit concentration risks. The requirement aims to enhance the resilience of the banking sector against economic shocks and may encourage consolidation among financial institutions to fortify their operations. The agency anticipates this restructuring will provide additional avenues for credit expansion.
Under the Business Laws (Amendment) Act, enacted in December 2024, Kenya will incrementally increase its minimum core capital requirement from Ksh1 billion ($7.75 million) to Ksh10 billion ($77.51 million) by the end of 2029. This phased approach allows Kenyan banks to build their core capital progressively, reaching Ksh3 billion ($23.25 million) by 2025, Ksh5 billion ($38.75 million) in 2026, Ksh6 billion ($46.51 million) in 2027, and Ksh8 billion ($62.01 million) in 2028.
Banks will be permitted to utilize retained earnings to achieve the new capital standards, providing more flexibility compared to Nigeria’s capital requirements, where banks must raise fresh capital. According to the Kenya Bankers Association (KBA), various options are available for banks needing to increase their capital, though KBA’s Chief Executive, Raimond Molenje, believes it is too early to evaluate specific approaches.
Fitch notes that while larger banks have already met the new requirements, significant capital enhancements and potential mergers are anticipated among smaller lenders who currently exhibit lower financial performance. While the 14 largest banks had a cumulative core capital exceeding Ksh10 billion by the third quarter of 2024, most smaller banks will likely require assistance to meet these capital benchmarks.
Fitch forecasts that approximately seven second-tier banks could comply with the capital requirement by 2029 through retained earnings due to their profitability. However, the remaining 17 banks, representing only seven percent of sector assets, face substantial capital challenges and low profitability, making it improbable for them to meet compliance without external capital injections.
Many of the smaller banks, which are currently struggling, are expected to pursue mergers or acquisitions by either seeking partnerships with larger institutions or attracting foreign banks looking to expand their market presence in Kenya. Historically, the consolidation trends within the banking sector may accelerate as smaller banks seek to strengthen their operational stability.
Across the region, banks in Nigeria and Uganda are also adapting to new capital requirements. The Central Bank of Nigeria has mandated significant increases in banks’ paid-in capital, with compliance required by 2026. In Uganda, the Bank of Uganda has escalated the minimum capital requirements for financial entities to ensure robust financial health in the sector.
The introduction of the new Ksh10 billion capital requirement for Kenyan banks is anticipated to strengthen the banking sector’s stability, improve credit growth, and address issues with non-performing loans. The phased implementation allows banks adequate time to adjust their capital structures, and while larger banks are poised to comply, smaller banks may face challenges that lead to potential consolidations. Other regional banks are similarly navigating increased capital demands, reflecting a broader trend in financial regulation across East Africa.
Original Source: www.zawya.com
