MPs reject proposal raising core capital for banks to Sh5bn

The MPs took the decision after CBK governor Patrick Njoroge (pictured) opposed raising of banks capital to Sh5 billion. PHOTO | FILE 

By EDWIN MUTAI, emutai@ke.nationmedia.com

In Summary

• The MPs voted by acclamation to overturn recommendations made by the Treasury to raise minimum core capital from the current Sh1 billion to Sh5 billion by 2019 to enhance system stability.

MPs have handed small banks and mortgage firms a lifeline by rejecting a proposal to raise core capital to Sh5 billion, but passed the one requiring the Central Bank of Kenya (CBK) to consult the Treasury before putting lenders under receivership.

The CBK and the Kenya Deposit Insurance Corporation (KDIC) must now consult the Treasury before seizing any bank in a move seen as politicising the processes and encroaching on the CBK’s mandate.

The legislation follows quick-fire closure of three distressed banks — Chase Bank, Dubai Bank and Imperial Bank — in eight months. Chase Bank is said to be on the path to recovery.

The MPs voted by acclamation to overturn recommendations made by the Treasury, earlier approved by the Finance, Planning and Trade Committee, to raise minimum core capital from the current Sh1 billion to Sh5 billion by 2019 to enhance system stability.

The CBK has in the past opposed the measure, preferring capitalisation based on asset risk. The legislators for the second year in a row opposed a clause in the Finance Bill, 2016.

They deleted clause 48 of the Bill that sought to amend the second schedule of the Banking Act.

“The Second Schedule of the Banking Act is amended by deleting paragraph (d) and substituting therefore… a core capital of at least Sh5 billion by December 31, 2019 in the case of a bank and mortgage finance company,” the amendment read.

READ: CBK, Treasury differ on drive to create big banks

The deleted section of the proposed law would have required a bank or mortgage finance company to have a minimum core capital of Sh2 billion by December 31, 2017, Sh3.5 billion by December 2018 and Sh5 billion by end of 2019.

 “The committee agrees we need to encourage more Kenyans to invest in the banking sector also. We don’t want to make it an exclusive business for the few who have the high capital they were proposing,” committee chairman Benjamin Lang’at told MPs on Wednesday.

“In Kenya, we have not reached that stage where we can say we have enough banks and so we can bar others from entering the market.”

The Lang’at team agreed with the House that the move to increase core capital could have forced mergers and acquisitions as smaller banks sought partners to survive.

“Such a move might lead to mergers, giving rise to bigger conglomerates that are highly capitalised and perhaps capable of withstanding financial shocks and crisis,” Mr Lang’at said while initiating debate on the Finance Bill, 2016.

The MPs took the decision after CBK governor Patrick Njoroge opposed raising of banks capital to Sh5 billion.

Dr Njoroge argued small banks are necessary in the economy as they serve a niche while the Treasury secretary Henry Rotich had insisted that the economy needs fewer and better capitalised banks that can finance big projects to accelerate growth.