Fitch’s report indicates that Kenya’s new Ksh10 billion capital requirement for banks will reduce non-performing loans (NPLs) and credit risks, fostering credit growth. The phased increase in capital requirements calls for banks to gradually elevate their core capital by 2029 using retained earnings. While larger banks are compliant, lower-tier banks may require mergers to meet the new standards, supporting sector consolidation and stability in the banking industry.
Global rating agency Fitch has announced that Kenya’s new core capital requirement of Ksh10 billion ($77.51 million) for banks is expected to mitigate the prevalence of non-performing loans (NPLs) and credit concentration risks. This regulatory adjustment may also foster an environment conducive to increased credit growth within the financial sector. Fitch emphasized that improved capital retention and injections will enhance banks’ stability against market shocks and stimulate consolidation efforts among financial institutions.
The Kenya Business Laws (Amendment) Act, passed by Parliament in December 2024, incrementally raises the minimum core capital threshold from Ksh1 billion to Ksh10 billion by the end of 2029. The increment will proceed as follows: Ksh3 billion ($23.25 million) by the end of 2025, Ksh5 billion ($38.75 million) in 2026, Ksh6 billion ($46.51 million) in 2027, Ksh8 billion ($62.01 million) in 2028, and culminating at Ksh10 billion in 2029. Banks are permitted to utilize retained earnings to meet these increasing capital expectations.
The Kenya Bankers Association (KBA) acknowledged that banks have various strategies available to achieve the new capital requirements but indicated that it is premature to predict individual banks’ choices in their capital-raising initiatives. Chief Executive Raimond Molenje stated, “It’s too early to assess. However, all options are available to banks in need of capital raise.”
Fitch noted that while the majority of Kenya’s larger banks already satisfy the new capital requirements, there is an anticipated need for significant capital enhancement among lower-tier banks. Many of these smaller institutions are experiencing fragmented operations and subpar financial results. The larger banks, which comprise 87 percent of the sector’s assets, are already compliant with the Ksh10 billion core capital threshold.
Fitch has indicated that just seven additional banks, primarily in the second-tier category, are likely to adhere to the new requirements by 2029 solely through earnings retention due to their satisfactory profitability, while 17 smaller banks may struggle due to significant capital deficits and limited profitability. These smaller institutions, which comprise a mere seven percent of the sector assets, are expected to receive financial support from regional banking groups which consider Kenya a key market for investment.
Consolidation trends are anticipated to accelerate among struggling small domestic banks, as they may either merge with more sufficed banks or become acquired by second-tier or international banks seeking to expand their market presence in Kenya. This trend would reinforce the banking sector’s stability and address longstanding issues such as low profitability and vulnerability during challenging economic periods. Additionally, developments in Nigeria and Uganda reveal similar capital requirement adjustments aimed at enhancing the robustness of their banking systems, demonstrating a broader regional trend towards increased financial security in East Africa.
In conclusion, the introduction of Kenya’s Ksh10 billion core capital requirement is a significant step aimed at bolstering the banking sector’s resilience while mitigating risks associated with NPLs. While larger banks display readiness to meet these requirements, smaller banks may face challenges that necessitate consolidation for operational sustainability. This regulatory evolution signals a commitment to enhancing the financial landscape within not only Kenya but also the broader East African region, as evidenced by similar movements in neighboring countries. Ultimately, constructive adjustments in regulation, alongside strategic financial maneuvers by banks, are vital for promoting a stable and growth-oriented banking environment.
Original Source: www.zawya.com
