Spare banks from rushed marriages, urges Central Bank of Kenya boss

Central Bank of Kenya (CBK) Governor Patrick Ngugi has warned that a proposal in the Finance Bill to have commercial banks increase their core capital to Sh5 billion by the end of 2018, could lead to the collapse of small banks.

Ngugi urged a parliamentary committee to drop the proposal to avoid pushing small banks out of business. He warned that if this rule is upheld, it would leave established banks dominating the market, while forcing small banks to either consolidate or seek investors to meet the stiff capital requirements.

Appearing before the National Assembly Committee on Finance, the CBK boss pleaded with the committee to drop the proposal.

"If we are not careful and we retain this proposal, small banks will be gobbled up by the big ones or you could say the small ones will be desperate in those three years to get strategic investors. They could go for rushed marriages," he said.

The proposal in the bill was put forward by Treasury Cabinet Secretary Henry Rotich, a move that led MPs to question why this was done without seeking concurrence from Central Bank.

"This is an old proposal. It has its genesis in 2013. At the end of the day, CBK is uncomfortable with that proposal and we request the committee to drop it," he added.

The proposal seeks to amend the second schedule of the Banking Act that put December 31, 2016 as the deadline for all commercial banks and mortgage lenders to have minimum core capital of Sh2 billion. By December 31, 2014, 15 banks were below that threshold.

The governor warned that the rule was in favour of already established banks, cautioning that the move would only make them more dominant, which is risky for the economy.

"The large banks are not exactly the ones that are playing the best," he said. The governor said the encouragement of the growth of big banks would make them 'too big to fail' as has happened in other parts of the world such as the US.