Fitch Ratings expects the new Ksh10 billion capital rule for Kenyan banks to reduce non-performing loans and enhance credit growth. Gradual capital increments will help improve the sector’s stability and encourage consolidation among financial institutions. Major banks are well-positioned, while smaller banks may face challenges requiring mergers or capital injections for compliance.
Fitch Ratings anticipates that Kenya’s implementation of a Ksh10 billion ($77.51 million) core capital requirement for banks will effectively address issues related to non-performing loans (NPLs) and credit concentration risks. This initiative aims to foster an environment conducive to credit growth and enhance the banking sector’s resilience against economic shocks. Additionally, it encourages consolidation among financial institutions, resulting in stronger organizations in the future.
The new capital requirements, established under the Kenya Business Laws (Amendment) Act passed in December 2024, will be implemented gradually. By the end of 2025, core capital must rise to Ksh3 billion ($23.25 million), followed by increasing increments in subsequent years: Ksh5 billion ($38.75 million) in 2026, Ksh6 billion ($46.51 million) in 2027, Ksh8 billion ($62.01 million) in 2028, and Ksh10 billion ($77.51 million) by 2029.
Banks are permitted to utilize retained earnings for capital enhancement, contrasting with Nigeria’s requirement for banks to raise new funds directly. The Kenya Bankers Association (KBA) has indicated that various methods exist for banks to accumulate the necessary capital, although the specific paths remain uncertain at this early stage.
Larger banks appear to meet the new capital requirements, while smaller, less profitable institutions may face challenges. Mergers and acquisitions are anticipated, particularly among the lower-tier lenders struggling to comply due to significant capital deficiencies. Fitch identifies that 14 major banks, including KCB, I&M, NCBA, and Stanbic, already exceed the new requirements.
While seven second-tier banks may fulfill the requirement through earnings retention, 17 smaller banks, representing only 7% of total sector assets, may have to rely on capital injections, likely from regional banking groups interested in Kenya’s market. Smaller domestic banks are more prone to consolidation and potential mergers as their operational viability is questioned due to low profitability and high rates of NPLs.
Additionally, a comparison with Nigerian banks highlights that they are making significant strides toward meeting new capital requirements ahead of their 2026 deadline. Similarly, Uganda’s Bank of Uganda has set new paid-up capital expectations for financial institutions, requiring compliance by mid-2024.
In summary, the new $77 million capital rule for Kenyan banks is a strategic move by Fitch that aims to mitigate non-performing loans and foster credit growth. By increasing core capital requirements incrementally over the next few years, the banking sector is expected to enhance stability and encourage consolidation, positioning stronger banks for better financial health. Smaller banks may face challenges, potentially leading to further mergers and acquisitions to meet these new standards.
Original Source: www.zawya.com
