Otiato GuguyuKenya’s Finance Cabinet Secretary Prof Njuguna Ndung’u has laid out a policy meant to force bank consolidation by increasing core capital to 10 billion shillings ($75.2 million), up from Kes1 billion ($7.52 million).
Momentum to consolidate the sector has gained traction with both Central Bank and the National treasury in agreement on the need to reduce the number of banks in Kenya that currently number 37.
During his vetting for Central Bank of Kenya (CBK) Governor position, Dr Kamau Thugge promised to revamp the banking sector through consolidation. This, he said, reduces the risk of weak banks collapsing while strengthening the merged units to be able to compete more effectively.
“The CBK intends to progressively increase the minimum core capital for banks from the current Ksh 1.0 billion to Ksh 10.0 billion. The CBK will engage the market for an appropriate time table to achieve this goal,” Prof Ndungu said.
Kenyan authorities have not always agreed on forcing mergers and acquisitions among lenders with the previous Central Bank administration opposing a similar plan when Dr Thugge, then Principal Secretary under the then Finance Secretary Henry Rotich pushed a policy to raise bank core capital from Kes1 billion to Kes5 billion.
The 2016 push to raise bank capital requirements could have forced mergers and acquisitions as smaller banks sought partners to survive but Members of Parliament rejected the move saying raising barriers to entry will make banking too elitist
Against forced marriages
Although the former Governor Dr Patrick Njoroge was against this increase and what he felt would lead to forced marriages, but following the collapse of three lenders in succession, he softened up and facilitated several acquisitions of weak lenders including Jamii Bora, Mayfair, Transnational and Spire Bank.
The consensus to force bank mergers also comes at a time Kenyan bank, especially small ones are facing vulnerabilities from higher interest rates for longer with a record number of lenders tapping into the regulators emergency liquidity.
Moody's predictions
Commercial banks have tapped Kes32.7 billion from the Central Bank of Kenya (CBK) discount window in the first two months of the year, pointing to liquidity woes facing the lenders.
In its African Banking Sector report, ratings agency Moodys ahd predicted that the weakness in Kenyans small banks would lead to mergers and acquisitions
Moodys said that lessons from the collapse of three lenders in quick succession will inform CBK’s desire to see more consolidation than let depositors suffer insurmountable losses and disruptions as a result of receiverships and liquidation.
“Authorities have allowed smaller troubled banks to enter liquidation, receivership and statutory management (e.g. Imperial Bank, Dubai Bank, Chase Bank and Charterhouse Bank). In these cases, depositors have lost access to their money, with likely losses beyond the deposit insurance guarantee of Kes100,000 ($775),” the ratings agency said.
Moodys however said that the government is unlikely to allow the larger banks, including KCB, Equity Bank, Co-Operative Bank and Diamond Trust Bank to go down since they are too big to fail and their fall can be catastrophic.
“Larger banks, however, including the top six banks will continue to benefit from some level of government support, if needed, given their systemic importance,” the ratings agency said.
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