Fitch Anticipates Positive Impact of Kenya’s New Capital Requirements on Banking Sector
Fitch Ratings anticipates that Kenya’s new $77 million core capital requirements will reduce non-performing loans and drive credit growth. The phased increase in capital is designed to improve bank resilience and may lead to consolidation among smaller lenders. Larger banks already meet the requirements, while smaller institutions may face challenges in compliance and may engage in mergers or acquisitions to strengthen their operations.
Fitch Ratings has projected that the implementation of a new core capital requirement of Ksh10 billion (approximately $77.51 million) for Kenyan banks will assist in reducing non-performing loans (NPLs) and mitigate credit concentration risks. This policy is likely to foster increased credit growth within the sector, enhancing its stability against potential financial shocks and promoting consolidation among banks to form more robust institutions.
The recent amendment to Kenya’s Business Laws, enacted by parliament in December 2024, incrementally raises the minimum core capital requirement. By the end of 2025, this requirement will increase to Ksh3 billion ($23.25 million) from the present Ksh1 billion, progressing to Ksh10 billion by the end of 2029. Under this phased approach, banks are encouraged to utilize retained earnings to augment their capital.
The Kenya Bankers Association (KBA) acknowledges that while there are various avenues for banks to achieve the new capital levels, it remains premature to determine their specific strategies for capital raising. Chief Executive Raimond Molenje stated, “It’s too early to assess. However, all options are available to banks in need of capital raise.”
Fitch observes that while the country’s larger banks already meet the new capital requirements, significant consolidation and capital strengthening among smaller lenders—currently fragmented and exhibiting poorer performance—are anticipated. The 14 largest banks, which account for 87 percent of sector assets, have already surpassed the new core capital threshold.
According to Fitch, compliance with the new regulations is feasible for seven additional second-tier banks, predominantly through earnings retention due to their adequate profitability. However, 17 banks, representing 7 percent of sector assets, face challenges in adhering to the requirements primarily due to inadequate capital and weak profitability. The potential for capital injections from regional banking groups remains high.
Challenges persist for smaller domestic banks, as capital injections remain uncertain due to their weak franchise strength and high levels of non-performing loans, and these banks may find themselves the target of merger and acquisition activities. Fitch predicts that these smaller institutions may either merge or be acquired to strengthen market positions in Kenya.
In comparison, Nigerian banks are advancing toward meeting their newly established capital requirements, with significant increases in paid-in capital mandated by the Central Bank of Nigeria in 2024. Similarly, the Bank of Uganda has recently proposed raising capital requirements for domestic financial institutions, pushing compliance deadlines to June 30, 2024, demonstrating a broader trend of capital reinforcements in the region.
In summary, Fitch Ratings believes that Kenya’s new capital regulations will bolster the banking sector by reducing non-performing loans and nurturing overall credit growth. As banks transition to the heightened capital requirements through 2029, the expectation of consolidation among smaller banks presents opportunities for increased stability and a more robust financial environment. The actions taken in neighboring countries further illustrate the regional shift towards enhanced banking resilience.
Original Source: www.zawya.com