The National Assembly’s approval of the Business Laws (Amendment) Bill 2024, mandating banks to meet a minimum core capital threshold of KES 10 billion by December 2027, is a marked shift in the country’s banking landscape. 

Implemented gradually over eight years, this measure is designed to strengthen financial stability, improve resilience, and align Kenya’s banking sector with global best practices. However, the policy’s true effectiveness lies not only in the numbers but also in addressing the systemic governance issues that have historically been at the root of banking failures, as illustrated by high-profile cases like the collapse of Lehman Brothers in the United States.

While low capitalisation is often cited as a risk factor, a deeper analysis reveals that governance failures have been the principal driver of bank collapses, both globally and locally. Kenya has had its share of collapsed institutions, such as Imperial Bank and Chase Bank, where governance lapses, fraud, and mismanagement were the culprits rather than inadequate core capital. Similarly, the 2008 collapse of Lehman Brothers—a global financial behemoth—underscored the dangers of poor risk management, opaque financial practices, and regulatory blind spots.

This underscores a critical question: Will raising the minimum core capital effectively address these deeper, more complex governance issues? Without complementary reforms targeting corporate governance, internal controls, and risk management, the higher capital requirement may provide a false sense of security while leaving the sector vulnerable to the same systemic risks.

A robust capital base is undoubtedly a cornerstone of financial stability. By requiring banks to hold KES 10 billion in core capital, the policy seeks to create a buffer against economic shocks, reduce the likelihood of insolvencies, and enhance confidence among depositors and investors. Larger capital reserves enable banks to absorb losses, fund large-scale projects, and compete more effectively in a regional and global context.

The phased implementation offers breathing space, particularly for smaller banks. This graduated approach reduces the immediate pressure to comply with and provides room for strategic adjustments. However, for some banks, meeting the new threshold will necessitate significant operational changes, such as raising equity, restructuring balance sheets, or merging with larger institutions.

One of the most immediate and visible consequences of the higher capital requirement will be an acceleration of mergers and acquisitions (M&As). Smaller banks that struggle to meet the new threshold will likely seek partnerships or acquisitions to survive. The consolidation trend could mirror experiences in other markets, such as Nigeria, which introduced similar measures in 2004. Nigeria’s banking sector shrank from 89 banks to 25 within two years, creating a more stable but less diverse financial ecosystem.

The consolidation of banks could lead to several outcomes:

• Improved Efficiency: Merged entities can achieve economies of scale, reduce redundancies, and enhance operational efficiency.
• Enhanced Competitiveness: Larger banks with higher capital reserves will be better positioned to compete on a regional and global scale.
• Reduced Diversity: The market may lose smaller, niche players that cater to underserved segments, potentially affecting financial inclusion.

While the policy is well-intentioned, it risks creating an uneven playing field that favours larger institutions. Smaller banks, particularly those serving micro, small, and medium enterprises (MSMEs) operating in underserved regions, may find it challenging to raise additional capital. This could force them to scale back their operations, merge with larger entities, or exit the market entirely.

The potential loss of smaller banks could have far-reaching implications for financial inclusion. Many of these institutions specialise in serving low-income clients, rural communities, and informal businesses—segments that larger banks often overlook. Policymakers must ensure that the quest for stability does not come at the expense of accessibility and diversity in financial services.

The experience of collapsed banks such as Chase Bank underscores the need for governance reforms alongside higher capital requirements. Poor governance not only precipitates collapse but also undermines public confidence in the financial system.

The collapse of Lehman Brothers in 2008 serves as a stark reminder of the dangers of prioritising short-term profits over long-term stability. Despite being well-capitalized, Lehman Brothers failed due to risky lending practices, inadequate risk management, and a lack of regulatory oversight. This case underscores that capital adequacy, while important, cannot compensate for governance failures.

The country’s banking sector must learn from this precedent by prioritising governance reforms. The Central Bank of Kenya (CBK) should strengthen its enforcement mechanisms to ensure compliance with prudential guidelines, including those related to loan provisioning, insider lending, and asset quality.

The challenge for policymakers lies in striking a balance between enhancing stability and fostering growth. This proposal presents a significant step towards creating a more stable and resilient banking sector in Kenya. However, the success of the policy will depend on its implementation and the accompanying reforms to address systemic governance issues.

By learning from past failures, such as the collapse of Lehman Brothers, and focusing on transparency, ethical leadership, and robust oversight, policymakers can create a banking sector that is not only well-capitalised but also well-governed. Striking the right balance between stability, growth, and inclusion will be critical in ensuring that the sector contributes to the broader goal of sustainable economic development.