Relief for banks as MPs propose more time for raising minimum capital to Sh10 billion

Commercial banks have been granted relief after a parliamentary committee recommended extending the timeline for lenders to meet the proposed minimum core capital of Sh10 billion from three years to eight.

The National Assembly's Finance and National Planning Committee revised the Business Laws (Amendment) Bill, 2024, allowing banks more time to comply with the Central Bank of Kenya's (CBK) proposal aimed at fortifying lenders against financial risks.

Currently, banks are required to maintain a minimum core capital of Sh1 billion.

The Bill, which entered its second reading in Parliament Tuesday evening, proposes a phased compliance plan to raise the core capital threshold progressively.

The plan starts with Sh1 billion by December 31, 2024, to Sh10 billion by December 31, 2032.

"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," said Kuria Kimani, the committee chair, in a report presented to Parliament.

"The committee is proposing a phased-up approach of a maximum of eight years to achieve the set target of core capital," the report said.

Opposed three-year timeline

The recommendation followed submissions from the Kenya Bankers Association (KBA), which opposed the initial three-year timeline, citing potential disruptions.

KBA argued that the accelerated schedule could harm smaller banks, limit access to credit, and impose challenges on operational priorities across the sector. Instead, the association proposed an annual Sh1 billion increment over eight years.

Acknowledging the CBK's intent to mitigate systemic risks, the committee noted that the banking sector had grown significantly since 2012, with increases in assets, loan portfolios, deposits, and the number of accounts and branches.

Despite this growth, the minimum core capital requirement has remained at Sh1 billion, which, according to the committee, no longer aligns with the sector's expansion.

"The low capital base, which supports a significant asset base of the banking sector, makes banks more susceptible to failure," Kimani noted.

Failure to meet the higher capital requirements could have prompted some banks to downgrade their licenses.

Currently, banks must maintain a core capital-to-risk-weighted assets ratio of 10.5 per cent and a total capital-to-risk-weighted assets ratio of 14.5 per cent.

The banking sector's total core capital stood at Sh809 billion at the close of 2022, against total assets of Sh6.5 trillion.

Small lenders, including Spire Bank (now under Equity Bank), Consolidated Bank, Premier Bank (formerly First Community Bank), and Access Bank Kenya, had the lowest core capital among 39 banks in the same period.

This is the second attempt in a decade to increase the capital requirement.

A similar proposal in 2015 to raise the minimum threshold to Sh5 billion was rejected by Parliament.

Kenya's Sh1 billion minimum requirement, in place since 2012, trails standards set by other African countries.

South Africa mandates Sh11.5 billion, Nigeria Sh43 billion, and Egypt Sh13.4 billion. Uganda recently increased its requirement to Sh5.1 billion, forcing downgrades for several banks, including Kenya's ABC Capital Bank.