The Central Bank of Kenya (CBK) had given banks a five-year window to add credit loss provisions back to their capital for performing loans as of December 31, 2017, and those issued in 2018.
This was to help them comply with the new accounting standard – International Financial Reporting Standards 9 (IFRS 9) that required banks to provide for expected loan losses instead of those already incurred.
The window closed at the end of last year, and banks are now expected to disclose their full compliance with the higher capital requirements.
Banks that had a healthy buffer over the statutory minimum can take on more deposits or loans without falling foul of the regulations compared to those whose ratios are lower.
However, several smaller lenders in the market have flouted some or all of the capital adequacy ratios over the last few years, leaving them in need of capital injections.
The recent consolidation efforts in the industry have seen troubled lenders taken over by larger or foreign peers who have recapitalized them.
Last week, the CBK noted that the banking sector remained stable in terms of capital adequacy, with a floor of 10.5 percent for the core capital to total risk-weighted assets ratio, 14.5 percent for total capital to total risk-weighted assets, and eight percent for the core capital to total deposits ratio.
However, some lenders face a reduced ability to take on more deposits and lend more if the difference between the adjusted and actual ratios is significant.
Two lenders that were flouting the ratios – Spire Bank and First Community Bank (FCB) – have been acquired this year.
Equity Group took over Spire Bank, while FCB brought on board a new majority shareholder in the form of Somali lender Premier Bank Limited.
FCB had a shortfall of more than Sh1 billion in core capital at the time of the sale, dropping well below the minimum adequacy ratios.
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