Kenya Signals Banking Consolidation by Raising Core Capital

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Kenya’s government increased minimum capital requirements for the East African nation’s banks by fivefold to promote competition.

Core capital for lenders will jump to 5 billion shillings ($52 million) by the end of 2018, from 1 billion shillings, Treasury Secretary Henry Rotich said in his annual budget speech Thursday in the capital, Nairobi. The benchmark for insurance companies will increase to 600 million shillings, he said.

“This should help promote consolidation in the banking industry,” particularly among smaller lenders known as Tier 3 and Tier 4 banks, Francis Mwangi, head of research at Standard Investment Bank, said by phone.

Kenya, a nation of 44 million people with a $55 billion economy, has 43 commercial lenders and a mortgage-finance company, according to the Central Bank of Kenya. About 70 percent of banking business is done by eight companies and industry fragmentation is hindering the development of scale lenders need to offer more complex services, Kenya Commercial Bank Ltd. Chief Executive Officer Joshua Oigara said in August.

The bottom 20 lenders in Kenya all have capital below 5 billion shillings, Martin Oduor-Otieno, a partner at Deloitte East Africa, said in an e-mailed note.

Smaller banks also may be forced to consider mergers because the three-year timeframe imposed to increase core capital may be insufficient, Mwangi said. Those lenders already face competition from bigger banks in their traditional markets such as micro-lending and low-income retail customers, he said.

“The Tier 3 and Tier 4 lenders won’t be able to grow their earnings as fast because of increased competition from the bigger banks,” Mwangi said.

The increase in minimum core capital requirements is in line with the government’s development program, known as Vision 2030, Rotich said.

“Kenya needs to have strong, well-capitalized financial institutions, which are not only able to participate in financing the large projects envisaged in the vision, but that are also well capitalized to withstand financial shocks and crises,” Rotich said.