Why MPs rejected Treasury’s bid to raise banks core capital to Sh5 billion

Nairobi: National Treasury’s bid to have banks raise their core capital to Sh5 billion within three years ran into a legislative whirlwind, after MPs sided with the Central Bank Governor Patrick Njoroge and vowed to sink the proposal.

In a three-hour debate in the National Assembly, the lawmakers said the push to have banks raise their core capital as proposed in the Finance Bill, 2015, will expose the banking sector to wealthy money-hungry cartels and smother entrepreneurship by blocking access to cheap loans. This, they said will lock a majority of Kenyans out of banking.

Finance, Planning and Trade Committee Chairman Benjamin Langat (Ainamoi) and his deputy Nelson Gaichuhie (Subukia) explained the proposal and urged their colleagues to reject it.

The proposal seeks to change the Banking Act 2007 to make sure that all commercial and mortgage banks raise their minimum core capital to Sh2 billion by December next year, Sh3.5 billion by December 2017 and Sh5 billion by end of 2018.

“The requirement for increase in the capital base of the banks is something we have left open for anybody to come up with amendments, because we do not think the economy is developing in double digits. If there are amendments which can be supported, the Departmental Committee on Finance is ready to take them up,” said Gaichuhie.

The MPs took the cue and vowed to defeat the proposal when the Bill comes up for adoption before  November. Save for Balambala MP Abdikadir Aden who backed the Treasury’s move, arguing that the banking industry had to be left to firms and people with money to guarantee safety of deposits, other MPs were united in condemnation.

Dubai Bank

Abdikadir had cited the closure of Dubai Bank a week ago as the reason why only serious players should be left in the  industry that tends to dictate the health of the economy.

With an eye on history of banking in Kenya, the MPs said they will not allow “a few large banks” to return and dominate the industry, because that will send the country back to the era of expensive credit and a huge unbanked population.

“My experience though I am not a financial expert is that large banks are faceless, heartless and deal with people off-the-cuff. What is important to them is their rate,” said James Nyikal (Seme). “Before Equity Bank came into being, the big banks had started saying they do not take deposits of less than Sh20,000. In fact they were locking out people from the banking industry.”

The MPs argument is that if few banks are allowed to operate and end up in fiscal straits, then they will inevitably seek a bail-out from the Government. “The Government says: “This bank is too big to fail.” Therefore, because of their size, they get help from public resources. This is not necessary,” said the Seme MP who sits in the Budget and Appropriations Committee.

Majority Leader and Garissa Township MP Aden Duale, who usually supports government policy in the House,  rejected National Treasury’s proposal, saying it was likely to “create a monopoly of big multinational banks” to run the country’s economy.

Public Accounts Committee Chairman Nicholas Gumbo (Rarieda) joined Duale in calling on his colleagues to defeat the amendment to thwart monopolistic tendencies in the banking industry, and their knack to charge exorbitant rates.

“The fact that the (banking) charges have been going down comes from the fact that Kenyans now have many more choices,” said Gumbo.

Kikuyu MP Kimani Ichungwa said; “In the interest of ensuring that our unbanked population is banked, we must encourage the growth of small banks. If we were to double the minimum capital for all commercial banks, we would be driving further away the unbanked population from banking services.”

High interest

Patrick Musimba (Kibwezi West), Makali Mulu (Kitui Central), Gladys Wanga (Homa Bay), John Mbadi (Suba), Dr Chris Wamalwa (Kiminini) and Isaac Mwaura (nominated) all vowed to “resist” and “defeat” Treasury’s proposal. They said the minimum core capital had to be retained at the current rate of Sh1 billion.

“We know banks in this country are exploiting the business community. They are killing the spirit of entrepreneurship, because their interest is high. If we are going to increase that threshold and maybe block others from entering this sector, we are going to minimise competition. Interest rate is not going to be minimised.”

“It will kill entrepreneurship, especially of the youths, because as they leave universities and colleges, they must have money to start businesses. For them to have money, they must borrow from the financial institutions,” said  Dr Wamalwa. When the debate ended, the die was cast.