Fitch Ratings predicts that Kenya’s new Ksh10 billion capital requirement will reduce non-performing loans and credit risks while expanding credit growth. The phased implementation by 2029 requires banks to gradually increase their core capital. Larger banks are already meeting the requirements, while smaller banks may need to consolidate or raise capital to comply. Similar regulatory changes are underway in Nigeria and Uganda.
Fitch Ratings has forecasted that Kenya’s new core capital requirement of Ksh10 billion (approximately $77.51 million) will aid in minimizing non-performing loans (NPLs) and reduce credit concentration risks among its banks. This strategic increase is expected to create greater capacity for credit expansion and bolster the resilience of the banking sector against economic shocks.
The recent Business Laws (Amendment) Act, passed in December 2024, set forth a gradual increase in the minimum core capital requirement for Kenyan banks from the previous Ksh1 billion to Ksh10 billion by 2029. These increments will occur annually, reaching Ksh3 billion by 2025, escalating to Ksh10 billion by 2029.
Banks will have the ability to utilize retained earnings to meet the new capital requirements, unlike their counterparts in Nigeria, who must seek fresh capital. The Kenya Bankers Association (KBA) acknowledges that banks have various methods to raise capital but considers it early to predict specific fundraising strategies.
While larger banks are compliant with the forthcoming capital requirements, Fitch anticipates significant consolidation and capital enhancements among smaller, lower-tier banks, which may struggle financially. Approximately 87% of the sector’s assets are held by 14 large banks, all exceeding the mandated Ksh10 billion core capital by the third quarter of 2024.
Fitch noted that while some second-tier banks may achieve compliance through earnings retention by 2029, many smaller banks with substantial capital deficiencies may require external capital infusions. This situation may lead to increased merger and acquisition activity as weaker banks consider partnerships or acquisitions to remain viable.
Also, as in Kenya, Nigerian banks are actively raising capital to meet new requirements, with a deadline set for the end of Q1 2026. Concurrently, Uganda has also adjusted its minimum capital requirements for major financial institutions, necessitating compliance by June 30, 2024.
In summary, Kenya’s revised core capital requirements will likely enhance the banking sector’s stability while reducing non-performing loans. As banks adapt to these changes through retained earnings or consolidations, smaller banks may face challenges complying with the new standards. Meanwhile, comparable regulatory shifts are occurring in Nigeria and Uganda, reflecting a broader regional focus on increasing bank capital reserves.
Original Source: www.zawya.com
