On 11 December, Kenya President William Ruto signed into law the Business Laws (Amendment) Bill, which among other measures significantly increases the minimum capital requirement for Kenyan banks. Banks will be required to abide by a gradually higher minimum core capital requirement of KES10 billion ($77 million) by 2029, a tenfold rise from the current level of KES1 billion, with the minimum requirement increasing to KES3 billion by the end of 2025, KES5 billion by 2026, KES7 billion by 2027, KES8 billion by 2028 and KES10 billion by 2029. The higher capital requirements are credit positive for Kenya's banking sector and financial stability more broadly.

Higher capital requirements, in addition to the weaker profitability, efficiency and capital of smaller banks, will encourage further banking sector consolidation in the coming years, which is likely to result in a smaller number of larger and better capitalized banks. Potentially stronger balance sheets and financial positions will support banks' ability to grow their loan books, as well as their resilience to potential unexpected financial risks such as higher credit losses, climate change shocks or cybersecurity incidences. The creation of larger banks will also give rise to greater competition. Larger banks typically have competitive advantages and better digital offerings, can scale up their business and revenue, and are more efficient.

Around 38 commercial banks currently operate in Kenya1 and the sector is heavily overbanked as a result, despite some consolidation in recent years. The 21 smallest banks contributed 8% of assets but just 2% of systemwide profitability in 2023. Smaller banks face challenges including higher funding costs, weaker profitability, less efficient operations, more basic digital services and higher loan quality risks during downturns.

Most banks will need additional capital as a result of the new requirement. As of December 2023, 12 banks were below the imminent KES3 billion capital threshold set for 2025, while an additional 12 were below the KES10 billion set for 2029. State-owned Consolidated Bank of Kenya faces the biggest deficit and will require at least KES3.5 billion to comply with the capital requirement by the end of next year. Access Bank (Kenya) Plc, a subsidiary of Nigeria’s Access Bank Plc (Caa1 stable, caa1)2, will require at least KES 1.5 billion based on 2023 results. Access Bank Plc is also in the process of acquiring National Bank of Kenya, which has stronger core capital, though it also needs capital to meet minimum Basel III capital requirements. 

While some banks may be able to raise capital from the market or with the assistance of foreign parents, we also expect further consolidation in the form of mergers and acquisitions, either by larger domestic banks or regional players.3 Banks could also seek a more limited license with fewer capital requirements.