Mergers and acquisitions are threatened because the state sets the minimum amount for banks at PLN 10 billion

The country’s small banks could face an uncertain future if the state accelerates reforms aimed at raising the minimum capital requirement for banks.

The recent Treasury announcement to review the £10 billion requirement signals impending consolidation in the banking sector, particularly for small lenders.

The move will cause banks that cannot raise their core capital to seek mergers, acquisitions or face closure of their operations.

Core capital refers to the minimum amount of capital that a bank must have to meet the requirements set in a given country.

The minimum core capital requirement for banks in Kenya is currently £1 billion.

This regulation, enforced by the Central Bank of Kenya (CBK), aims to ensure the financial stability and resilience of the banking sector.

Core capital, also called Tier 1 capital, consists of the bank’s equity capital and established reserves, which play a key role in absorbing losses and protecting depositors.

Treasury Cabinet Secretary Njuguna Ndung’u revealed plans to increase the threshold tenfold during the budget reading on Thursday evening.

“The Central Bank of Kenya intends to gradually increase the minimum core capital of banks from the current P1 billion to P10 billion.”

“This is intended to strengthen resilience and enhance the bank’s ability to finance large-scale projects, while creating a sufficient capital buffer to absorb and withstand shocks caused by constantly emerging risks associated with the adoption of technology and innovation,” the CS said.

In 2015, former Treasury Cabinet Secretary Henry Rotich proposed increasing the minimum capital requirement fivefold to £5 billion over three years.

However, the proposal was rejected by parliamentarians who argued that such a move would lead to excessive concentration where a few large banks dominate the market.

The current requirement was established in 2012, and since 2017 there have been discussions and proposals to increase the minimum core capital to further strengthen the banking sector.

Kenya, with 39 banks, nine of which hold 75.1% of the total market share, is considered over-banked compared to its sub-Saharan African counterparts.

Although Kenyan banks have maintained capital adequacy and liquidity ratios well above the CBK minimum requirements of 14.5% and 20%, both ratios have declined.

In the years 2021-2023, the total liquidity ratio decreased by 5.50 points. percent, and the solvency ratio by 1.30 points. percent According to Stears, a pan-African market research firm, these declines indicate reduced liquidity in the banking sector in Kenya

Financial stability has also deteriorated, with non-performing loan rates rising to 16.1% in April 2024.

As of 2022, despite having the smallest minimum capital base of banks compared to other sub-Saharan African banks, Kenya’s domestic credit to the private sector as a percentage of gross domestic product (GDP) was the second highest at 31.5%.

“By increasing capital reserves, banks can have a greater capacity to lend, which could stimulate economic growth. However, larger capital buffers may also enable banks to charge higher interest rates on loans, which could make it more difficult to borrow and invest,” the research firm said in one of its reports.

This action will increase the capital base of Kenyan banks, leading to an increase in the size of their assets.