The Kenya Bankers Association (KBA) has issued a stark warning that 24 banks could face closure if Parliament enacts a proposed law requiring banks to increase their core capital from Sh1 billion to Sh10 billion within three years. Speaking before the Finance and Planning Committee of the National Assembly, KBA Acting CEO Raymond Molenje highlighted the potential fallout from the legislation, cautioning that 7,000 jobs could be lost, alongside significant disruptions to the banking and real estate sectors.
Impact on Banking Sector and Economy
According to Molenje, the 24 banks at risk currently provide loans totaling Sh539 billion to the private sector, which constitutes approximately 13% of the total private sector lending by all banks. Should these banks collapse, the ripple effects could severely impact the availability of credit, particularly for Micro, Small, and Medium Enterprises (MSMEs), and Small and Medium Enterprises (SMEs), which rely heavily on these financial institutions.
“Such a move would counterproductively weaken the financial sector, making it harder for Kenyans and businesses to access essential banking services,” Molenje told the committee chaired by Kimani Kuria. He also emphasized that these closures could force 627 rental premises to shut down, amplifying the negative economic impact.
Appeal for Gradual Implementation
KBA proposed a more gradual implementation of the core capital increase, suggesting an eight-year timeline that would see the requirement reached by 2032. The association believes this extension would mitigate the adverse effects on the banking sector while giving financial institutions time to adjust.
Criticism of Lending Practices
Despite the concerns raised, Kenyan banks have faced criticism for reducing credit to private sector players, especially MSMEs and SMEs, while channeling their capital into high-yielding government bonds. Critics argue that banks are prioritizing profits over their role in supporting economic growth by sidelining small businesses that drive employment and innovation.
Public Participation on Financial Legislation
The National Assembly’s Finance and Planning Committee is currently conducting public participation sessions on six critical Bills, including the Public Finance Management (Amendment) (No. 3) Bill, 2024, and the Tax Laws (Amendment) Bill, 2024. These deliberations will shape Kenya’s economic policies and the formulation of the 2025/2026 budget. However, concerns have been raised about regional inclusivity in the consultation process, as some regions have reportedly been excluded from hearings.
The proposed increase in core capital for banks is just one of the many amendments under consideration. These Bills aim to reform financial management, taxation, and procurement laws to strengthen economic governance. However, stakeholders are divided on whether these changes will achieve the intended outcomes without destabilizing critical sectors.
Balancing Stability and Growth
Supporters of the core capital increase argue that it would bolster the banking sector’s stability, ensuring institutions have sufficient reserves to weather economic shocks. However, KBA and other stakeholders warn that a rushed implementation could undermine the sector’s resilience and harm the broader economy.
The ongoing consultations will determine the final direction of these reforms. For now, the debate underscores the delicate balance policymakers must strike between strengthening financial institutions and ensuring they continue to serve the needs of Kenya’s growing economy.
As the National Assembly prepares to finalize its recommendations, all eyes remain on how these legislative changes will affect the banking sector, employment, and access to credit for ordinary Kenyans and businesses. Whether the proposed timeline will be revised to accommodate a more gradual transition remains to be seen.
