Kenya's National Treasury plans to lobby Members of Parliament to pass a proposal to increase core capital requirements for commercial banks, which are charging high interest rates but are unable to finance large infrastructure projects on their own.

The MPs had rejected the new measures meant to create strong banking institutions on the grounds that the policy would kill nascent banks and stifle competition.

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National Treasury Cabinet Secretary Henry Rotich said a strong and stable financial sector is critical for the growth of the economy and attainment of the country’s long-term development plan.

“We shall lobby parliament so that they understand the significance of creating strong banks,” said Mr Rotich.

Kenya’s average lending rate currently stands at 15.26 per cent, according to data from the Central Bank of Kenya, compared with Uganda’s 22.34 per cent, Tanzania’s 16.1 per cent and Rwanda’s 17.26 per cent.

The high cost of credit is brought about by lack of effective competition and high overhead such as wages, infrastructure costs and cash-in-transit, according to CBK. Other factors are high risk premiums, lack of alternative sources of non-bank funding and shareholders expectations of high profit margins.

The country’s parliamentary Budget and Appropriation Committee overruled the provision in the Finance Bill, 2015 seeking to increase the capital base for the lenders, arguing the move would choke the banking industry by blocking new investors.

Budget statement

In his budget statement for the 2015/2016 fiscal year, Mr Rotich proposed to increase the minimum core capital requirement for commercial banks progressively over three years from the current Ksh1 billion ($9.45 million) to Ksh5 billion ($47.26 million).

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Under the proposed plan banks are required to top up their core capital from Ksh1 billion ($9.45 million) to Ksh2 billion ($18.9 million) by December next year (2016), then Ksh3.5 billion ($33.08 million) by December 2017 and finally Ksh5 billion ($47.26 million) by December 2018.

More than half of Kenya’s 43 commercial banks — 23 banks — stand to be affected by the proposed law.