Fitch Analyzes Kenya’s $77 Million Capital Rule Impact on Banks

Fitch Ratings expects Kenya’s new Ksh10 billion ($77.51 million) capital requirement for banks to reduce non-performing loans and promote credit growth. Introduced via the Kenya Business Laws (Amendment) Act, this initiative mandates incremental increases in core capital until 2029. Larger banks currently comply, while smaller banks might need mergers or capital injections to meet these standards, indicating potential sector consolidation.

Fitch Ratings has observed that Kenya’s new core capital regulations, requiring banks to increase their minimum capital to Ksh10 billion (approximately $77.51 million), aim to diminish non-performing loans (NPLs) and mitigate credit concentration risks. This regulation may also promote higher credit growth. The agency believes that these measures will bolster the banking sector’s resilience to economic shocks and encourage consolidation to foster stronger financial institutions.

The new requirements, established by the Kenya Business Laws (Amendment) Act in December 2024, will implement annual increments in the minimum core capital. Banks must raise their capital to Ksh3 billion ($23.25 million) by the end of 2025, increasing successively to Ksh10 billion by the year-end of 2029 from the existing Ksh1 billion.

Under this phased approach, banks will have the ability to use retained earnings to meet the new capital requirements, distinguishing Kenya’s strategy from Nigeria’s, where new capital must be raised in cash. The Kenya Bankers Association has highlighted that while many banks have options to comply with these new thresholds, it may be premature to determine their specific capital-raising strategies.

Fitch notes that although larger banks already fulfill the new requirements, it anticipates that smaller banks, which face lower financial performance and fragmentation, will need to undergo capital strengthening or mergers and acquisitions. As of the third quarter of 2024, the 14 largest banks accounted for 87% of the total assets and had surpassed the Ksh10 billion capital requirement.

Fitch forecasts that another seven second-tier banks will comply with the new capital requirements primarily through earnings retention due to their satisfactory profitability. However, the 17 remaining smaller banks may struggle to meet these benchmarks independently, likely necessitating capital infusions to remain viable. Many of these smaller entities are subsidiaries of regional banking groups that view the Kenyan market favorably, increasing the likelihood of support from their parent companies.

Furthermore, Fitch suggests that smaller domestic banks may be more inclined towards mergers or being acquired, especially those unable to raise the required capital. This would expedite the ongoing trend of consolidation within the banking sector, which has already seen several acquisitions of smaller institutions by larger banks.

In comparison, Nigerian banks are progressing towards meeting their new capital requirements, which were significantly raised in March 2024. They have until the first quarter of 2026 to comply through various means, including capital injections and mergers. Additionally, the Bank of Uganda has increased minimum paid-up capital requirements for major financial institutions, following extensive consultations.

The implementation of higher capital requirements for Kenyan banks is intended to enhance financial stability by reducing the incidence of non-performing loans and fortifying the banking sector’s structural integrity. Fitch anticipates that compliance efforts will lead to beneficial consolidation within the industry, ultimately resulting in stronger financial institutions capable of sustaining economic challenges. Though larger banks appear positioned to meet these standards, the impact on smaller banks may manifest through mergers or capital support from regional entities.

Original Source: www.zawya.com