Kenya has proposed a significant increase in the capital requirement for commercial banks in a bid to make its financial sector competitive, in the hope of taking on banks from South Africa, Nigeria, Angola and Egypt in big ticket business.

For the second time in eight years, the move by the National Treasury to increase the minimum core capital for lenders from $10.1 million to $50.54 million in the next three years is intended to create strong and stable institutions with the capacity to lend more at lower rates.

The proposals are in the 2015/2016 budget, which also recommends the doubling of the paid-up capital for insurance firms conducting general insurance business to $6.06 million, from $3.03 million, and an increase for those in the life insurance business to $4.04 million, up from $1.51 million.

In 2007, Kenya proposed to raise the minimum core capital for banks to $10.1 million, from $2.52 million, setting December 31, 2012 as the deadline for all banks to comply.

Treasury Cabinet Secretary Henry Rotich told The EastAfrican that the presence of many banks is hindering the government’s efforts to tame spiralling interest rates, which are choking private sector investments.

According to Mr Rotich, many banks competing for a share of the deposits market has increased the cost of funds, making it difficult for lenders to reduce the borrowing costs. The current average lending rate in Kenya is estimated at 15.4 per cent, according to data from Central Bank of Kenya.

“We expect mergers to happen and have a reasonable number of banks able to compete effectively and drive down interest rates,” Mr Rotich said.

Under the proposed recapitalisation programme, Kenyan lenders will be required to increase their shareholders’ funds to $20.21 million by December of 2016, then $35.38 million by December 2017 and finally $50.54 million by December 2018.

“We shall streamline the architecture of the financial sector to have strong sub-sectors with stable service providers who can compete regionally,” said Mr Rotich.

The move now means that over 20 lenders currently operating on a core capital of less than $10.1 million have the option of raising additional capital, merging or putting themselves up for grabs by strategic investors.

Martin Oduor-Otieno, a partner at Deloitte&Touche East Africa said: “Overall, this is a good move aimed at creating larger institutions with capacity to invest in innovation, systems, products and support bigger (as well as smaller) businesses.”

According to latest data from Central Bank of Kenya, the country has a total of 43 commercial banks six of which control 50 per cent of the banking business while 21 small banks own a paltry 8.3 per cent of the market. Medium banks — 16 of them — have a market share of 41.7 per cent.

Currently, three banks are yet to comply with the new prudential guidelines on capital adequacy ratios whose deadline expired on January 1, signalling the financial quagmire facing the small banks.

“The banks that were not compliant with the capital adequacy ratios as at January 2015 have undertaken to raise additional capital through either retention of profits, rights issues, introduction of strategic investors and issuance of qualifying debt capital,” said CBK.

The new guidelines introduced a capital conservation buffer of 2.5 per cent above the minimum regulatory core and total capital ratios of 8 per cent and 12 per cent respectively, which became effective on January 1. This brought the core and total capital ratios to 10.5 per cent and 14.5 per cent respectively, which every bank must maintain at all times.

In the region, Tanzania issued a moratorium of three and five years for existing fully fledged commercial banks and community banks to fully comply with the minimum capital requirements in 2013.

Commercial banks in Tanzania are expected to increase their minimum capital requirements to $6.73 million from $2.24 million by the end of this year. In Uganda, commercial banks are expected to have a minimum capital of $7.86 million. The capital requirements in South Africa is $90.9 million, Nigeria is $80.8 million, and Egypt is $60.6 million. Angola’s is at $22.2 million.

Francis Mwangi, head of research at Standard Investment Bank, said that the move should help promote consolidation in the banking industry especially among smaller lenders known as Tier 3 and Tier 4 banks.

“Given that the three-year time line to raise the core capital may be insufficient, these smaller banks may be forced to consider mergers in order to take on the stiff competition from the top tier banks,” said Mr Mwangi.

Apart from an expected reduction in interest rates, the other implication that the move will create will be acquisitions of the smaller banks with a bias towards micro-lending, low-income retail customers, regional network growth and Islamic banking.

Clive Akora, the Director of Tax at KPMG said that the measure apart from reducing the cost of credit to the public will also help the country avoid markets shocks.

“Increasing capital cushions against potential losses. Because most of the banks are smaller, we are going to see the number of banks reducing. This is likely to result in a reduction in the cost of borrowing in the long term,” Mr Akora said.

Mid last year, Joshua Oigara, the chief executive of KCB, suggested that increasing the minimum core capital requirement for each bank would enable to enable the banking sector to finance mega projects.

“We are a country of many small banks, ... the fragmentation of the industry is hindering the scale needed by banks to offer more complex services,” Mr Oigara said.