"Kenya has introduced new banking policies. An economist weighs them\u00a0up"

" \r\n \r\n Kenya has introduced new banking policies. An economist weighs them\u00a0up \r\n The Central Bank of Kenya has made two significant changes in the country\u2019s banking sector. The first is to lift a decade-long\u00a0 moratorium \u00a0on licensing new banks. Second is to raise capital requirements, the amount of money banks are required to keep readily available compared with the value of other assets they have. Bank capital is what shareholders have invested in the banking business. It\u2019s a buffer against insolvency. Higher capital\u00a0 makes \u00a0a bank stronger by reassuring depositors that their money is \u201csafe\u201d in case of a financial crisis. Economics professor XN Iraki answers some questions about Kenya\u2019s banking sector and the importance of the two latest policy changes. \r\n\r\n What is the state of Kenya\u2019s banking sector? \r\n\r\nKenya has\u00a0 39 \u00a0licensed banks. Of these, 17 are classified as foreign-owned with 50% or more shareholding held by foreign interests. All the top commercial banks are\u00a0 listed \u00a0on the Nairobi Stock Exchange. Three are majority government-owned while the rest are privately owned.\r\n\r\nKenya\u2019s banking sector is known for its\u00a0 dynamism . This is reflected in the adoption of innovations, new product offerings and technology. It is also seen in the growth in assets, deposits and profitability. Finally, it is also evidenced in the mergers, buyouts and\u00a0 growth across borders \u00a0into the neighbouring countries.\r\n\r\n KCB Group \u00a0\u2013 a publicly owned bank that is also the country\u2019s largest \u2013 as well as privately owned\u00a0 Equity Bank \u00a0have established foreign subsidiaries or acquisitions in Uganda, Tanzania, South Sudan, Rwanda, Burundi and the\u00a0 Democratic Republic of Congo .\r\n\r\nThe use of technology, for instance linking bank accounts with the popular M-pesa mobile payment platform, has made banking easier and more accessible. This has made banking\u00a0 popular with the younger generation , including Generation Z, who are astute at using technology.\r\n\r\nThe Kenyan banking sector is dominated by nine large banks that\u00a0 accounted for about 90% \u00a0of the profit in 2024.\r\n\r\nNonetheless, the sector has been stable in recent years. It\u2019s a far cry from the 1980s, when\u00a0 bank failures \u00a0were constantly in the headlines. Up until 1998, 37 bank failures had been recorded. More followed in 2003 and in 2015.\r\n\r\n Why did the government ban new banks 10 years ago? What was the impact? \r\n\r\nThe\u00a0 moratorium \u00a0on licensing new banks was instituted in 2015. This followed the failure of\u00a0 Dubai Bank \u00a0on 14 August 2015 and\u00a0 Imperial Bank \u00a0on 13 October 2015.\r\n\r\nAt about the same time, another institution \u2013 Chase Bank \u2013 was in trouble. It was\u00a0 placed \u00a0under management on 7 April 2016.\r\n\r\nThe banks were closed to protect depositors and ensure stability of the sector. But banning new banks was not the best solution. It stifled competition and could have led to the current situation where a few banks\u00a0 dominate \u00a0the market.\r\n\r\nThough the failures were not the first, they were a big blot on Kenya\u2019s financial sector. They could have slowed the growth of the sector in at least two ways. First is the restriction on new players. Second, the perceptions of higher risk would have led to more cautious investment and lending decisions.\r\n\r\n What are the limits placed on banks wanting to set up in Kenya? \r\n\r\nBanks are subject to regulation and rules set out in the\u00a0 Banking Act . These rules relate to\u00a0 licensing , capital requirements, who may be a shareholder or director, and protection of customer deposits, among other aspects. For this reason, shareholders and key employees are subject to vetting by regulators.\r\n\r\nThese regulations can be enhanced from time to time. It\u2019s the basis on which the Central Bank of Kenya has\u00a0 increased \u00a0bank core capital requirements to 5 billion shillings (US$38 million) by 2026. This will double to 10 billion shillings (US$76 million) by 2029. Core capital as\u00a0 defined \u00a0by Central Bank of Kenya is \u201cshareholders equity in the form of issued and fully paid-up shares of common stock, plus all disclosed reserves, less goodwill or any other intangible assets.\u201d\r\n\r\nHigher core capital is expected to strengthen banks and possibly reduce the number of players as some banks merge or are absorbed by stronger players.\r\n\r\nThis can only be counterbalanced if more banks enter the market after the moratorium was lifted. That would be the ideal case. More competition would lead to lower interest rates, which act as an economic stimulus. It would be easier to borrow money for more consumption or investment.\r\n\r\nHigher core capital is a double edged sword. Lifting the moratorium will lead to greater competition if more banks enter the market. But higher core capital might deter new entrants. One speculation is that lifting the moratorium could usher in global brands with more capital and a competitive edge.\r\n\r\nInvestors who can overcome the higher core capital and join this sector are likely to reap big. Kenyan banks are a popular choice for investors in the security markets and are generally\u00a0 profitable .\r\n\r\n What opportunities or pitfalls will the Central Bank be watching out for? \r\n\r\nThe lifting of the moratorium on new banks and raising capital requirements could be the start of more changes in the Kenyan banking sector.\r\n\r\nIt\u2019s expected that with new capital requirements Kenyan banks will become bigger and more resilient and serve as the lubricant of economic growth. Bigger and fewer banks are likely to be more stable and easier to supervise.\r\n\r\nWill bigger banks adequately respond to the needs of small and microenterprises (SMEs) and individuals? Will they keep the focus on local communities? Could new licences be granted to the politically connected as\u00a0 happened in the past ? Here could lie a pitfall. The true test of such policy decisions is achieving faster economic growth and higher standards of living for all.\r\n\r\n \r\n "

"Kenya has introduced new banking policies. An economist weighs them\u00a0up"

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