Small banks in Kenya are looking at various options to raise new finances as the government seeks to hold the lenders to a new capital standard, which quadruples the amount they must set aside to cover against losses.

In order to meet the new minimum core capital requirements, small and some mid-sized banks will each need to raise at least Ksh5 billion ($50.5 million) by the time the rules take full effect on December 31, 2018.

This represents a 400 per cent increase from the current minimum core capital requirement of Ksh1 billion ($10.1 million).

According to Cabinet Secretary for the National Treasury Henry Rotich, all commercial banks are required to increase their capital to Ksh2 billion ($20.2 million) by December 2016, then to Ksh3.5 billion ($35.35  million) by December 2017 and finally Ksh5 billion ($50.5 million) by December 2018.

READ: Kenya raises core bank capital, eyeing Africa’s big ticket business

Resilience

These measures are meant to boost the banking sector’s resilience to potential financial and economic shocks.

Directors of small banks are faced with a number of choices to survive.

Some lenders are wooing selected groups of investors to buy shares through private placements.

Analysts say some small banks could downgrade their status to deposit taking microfinance institutions in the event none of these options works.

A number of small banks polled by The EastAfrican last week said that compliance with the new capital requirements could prove difficult and demand major policy decisions to be undertaken by the boards of affected banks. They said mergers may not be a possibility except for lenders that operate in the same niche markets.

“At Credit Bank, we had already made a decision to capitalise to Ksh3 billion ($30.3 million) by 2016 through a strategic investor and private placement. The balance will be raised through a rights issue and retained earnings,” said Chege Thumbi, chief executive officer of Credit Bank.

TransNational Bank Ltd is in talks with a consortium of local and international investors to take up an equity stake in the bank.

“We are having discussions with our shareholders while at the same time waiting to see what can arise from mergers,” said Sammy Langat, chief executive officer of the bank.

According to Rajab Karume, head of recovery department at Dubai Bank, the time given for implementation of the new capital requirement is not adequate.

The new rules, which are yet to be approved by parliament, are expected to provoke consolidation among Kenya’s 43 commercial banks; enhance their capability to lend more; stiffen competition and ultimately bring down interest rates.

Kenya is keen on reducing the number of banks in the country. “We expect mergers to happen and have a reasonable number of banks able to compete effectively and drive down interest rates,” said Mr Rotich.