Excess liquidity draws financial institutions to capital market

Commercial banks and insurance firms have been making a beeline for the corporate bond market to raise cash to recapitalise their operations.

This follows a move by the Central Bank of Kenya (CBK) and Insurance Regulatory Authority (IRA) to prescribe new capital adequacy levels for the institutions they oversee.

Given that both these sectors are some of the most profitable in the financial services industry, and also the most risky, the regulators are pushing up capital ratios to safeguard against any shocks that could affect depositors or policy holders.

Smaller commercial banks need to build a buffer of 2.5 per cent above the required capital ratio of 12 per cent, effective January 2015, which is pushing them to rush to shareholders for more cash.

Unlisted Family Bank, which recently floated a Sh3 billion rights issue and whose sale closes on November 28, is one of the latest banks to make a cash call.

“The need to have a buffer above the statutory capital ratio has constrained our capital, and this is why we are seeking for funds from shareholders,” Family Bank Board Chairman Wilfred Kiboro told shareholders.

In addition to complying with CBK guidelines, Family Bank will use the cash it raises to finance its expansion. The bank is aiming to become a tier-one bank by 2017.

It will also scale up its IT infrastructure to enable it cope with growing customer numbers.

Capital structure

Insurance firms are also looking to change their capital structure. CIC Insurance recently floated a Sh3 billion medium-term note and plans to use the cash to recapitalise its subsidiaries, fund expansion into South Sudan, Uganda and Malawi, as well as explore new lines of business, including in real estate.

“Many insurers are taking advantage of the cheap cash in the bond market, which they are going for, rather than use retained earnings to recapitalise,” said Kariithi Murimi, a risk consultant.

He added that although insurance firms are paying more for the bonds, those seeking to go into new lines of business, such as real estate, will likely recoup the costs as property prices are expected to retain their upward trajectory over the next decade.