Kenya has issued guidelines to allow commercial banks to determine their capital base in a return to the niche banking that was abandoned two decades ago.
Last week, the Central Bank of Kenya introduced rules on the Internal Capital Adequacy Assessment Process (ICAAP) allowing institutions to determine the level of capital needed to support the nature and scope of the risks they are undertaking.
“With a comprehensive ICAAP, institutions are better placed to set internal capital targets that are consistent with their business plans, risk profile and operating environment,” CBK said.
The move to risk-based prudence requirements is a marked departure from the Universal Banking policy introduced by former governor Micah Cheserem, now chairman of the Commission on Revenue Allocation, in 1996, in a bid to stem bank collapses that were partly attributed to money laundering between commercial banks and the financial institutions they owned.
It also underscores the influence Central Banker Governor Patrick Njoroge, who came into office in July last year, is having on Kenya’s financial policies; on appointment, he said that he did not favour a uniform minimum capital for all commercial banks.
Before then, the National Treasury had been pushing for an increase in the core capital for commercial banks from the current Ksh1 billion ($10 million) to Ksh5 billion ($50 million) in order to allow for consolidation and create fewer, stronger banks. The proposal was rejected by lawmakers last year, on the grounds that it would kill competition and block new players from entering the market.
In the 2016/2017 budget, Treasury Cabinet Secretary Henry Rotich reintroduced the proposal, asking the politicians to reconsider their position.
CBK’s proposed policy gives reprieve to small-sized lenders who have struggled to strengthen their core capital reserves. However, a cross-section of bankers said the move is unlikely to lead to specialty banking because the Kenyan market is small and risky, creating the need for diversification of product offerings.
“What is going to happen is that banks are going to group their products based on the risks in that sector,” said Sammy Langat, the chief executive of Transnational Bank Ltd.
Habil Olaka, chief executive of the Kenya Bankers Association, said a shift to niche banking is an individual bank’s decision.
“A number of banks are targeting specific niches,” Mr Olaka said.
A specialty bank is an institution that handles products aimed at a particular group of people or specific demographic.
For example, a specialty bank that is more focused on developing a relationship with a customer could target students, farmers or businesspeople.
Specialty banking is popular in the US where lenders like Rabobank support farmers, ranchers and agribusiness, while One United Bank, the largest African-American-owned bank in the US, serves developing urban communities across the country.
The Reserve Bank of India is exploring the possibility of licensing differentiated banks such as custodian banks and lenders focusing on wholesale and long-term financing.
In South Africa, ABSA bank is the “go-to” bank for home loans, First National Bank is well known for its innovative products, Nedbank is the business bank of choice, and Standard Bank is known for its stock trading platform.