Kenya's Central Bank to Raise Minimum Capital Requirement for Commercial Banks Tenfold
The Central Bank of Kenya (CBK) is set to significantly increase the minimum capital requirement for commercial banks, raising it tenfold to $77.8 million (KES 10 billion), Finance Minister Njuguna Ndung’u announced on Thursday, 13 June 2024.
This development will:
- increase stability: With more capital, banks should be better able to weather financial crises and avoid collapse. This could protect depositors' money and make the overall financial system more secure.
- be a challenge for small banks: The new requirements could be difficult for some smaller banks to meet. They may need to merge with other banks or raise money from investors in order to stay in business. This could reduce competition in the banking sector.
This substantial hike in capital requirements aims to bolster the resilience of Kenya's banking sector against potential financial risks, such as cyber fraud and economic shocks. However, the move could pose challenges for over half of Kenya's 39 licensed commercial banks. Smaller and mid-sized banks may need to consider mergers or seek additional capital through stock market offerings to meet the new requirements.
“The CBK plans to progressively raise the minimum core capital for banks from the current KES 1.0 billion ($7.7 million) to KES 10.0 billion ($77.8 million),” Ndung’u stated during the annual budget speech in parliament. “The CBK will engage the market to establish an appropriate timetable for achieving this goal. This initiative is designed to enhance the resilience and capacity of banks to finance large-scale projects while ensuring a robust capital buffer.”
This marks the second attempt in a decade to revise the minimum capital threshold for Kenyan lenders. A similar proposal in 2015, which aimed to increase the requirement to $38.9 million (KES 5 billion), was rejected by parliament.
Currently, the CBK mandates banks to maintain a core capital to risk-weighted assets ratio of at least 10.5%, a total capital to risk-weighted assets ratio of 14.5%, and a core capital to deposits ratio of 8%. Consolidated Bank, which is state-owned, is the only lender not meeting the existing requirements.
Kenya’s current minimum capital requirement of KES 1 billion ($7.7 million) has been in place since 2012. This figure lags behind the capital adequacy standards of South Africa ($90 million), Nigeria ($337.1 million), and Egypt ($104.7 million)—Africa’s three largest banking markets.
In the region, Uganda raised its minimum capital threshold to $40 million (UGX 150 billion), leading to the downgrading of several banks, including Nigeria’s GTBank, Kenya’s ABC Capital Bank, and Opportunity Bank. Meanwhile, Tanzania last reviewed its core capital requirements in 2013 and has been contemplating further increases.
The proposed capital increase by CBK underscores a significant step towards strengthening the stability and competitiveness of Kenya's banking industry in the face of growing financial challenges and regional standards.