A more conservative accounting standard implemented in 2018 resulted in greater capital requirements, and banks no longer have the five-year reprieve that permitted them to avoid making provisions for certain loans. Lenders are now required to disclose complete compliance with these standards. Following the implementation of International Financial Reporting Standards 9 (IFRS 9) on January 1, 2018, banks were compelled to account for projected loan losses rather than actual loan losses, reducing profitability and depleting capital.

However, for performing loans as of December 31, 2017, and those issued in 2018, the Central Bank of Kenya (CBK) enabled banks to put credit loss provisions back to the capital for five years, thus ignoring capital shortages caused by the new accounting method for the period.

This was done in order to give lenders time to strengthen their balance sheets and prevent less capable lenders from having to raise additional capital right away in order to comply. The time for submission of this information closed at the end of last year, so banks must now demonstrate their rigorous adherence to the capital requirements.

With the disparity between the adjusted and actual ratios being so large, certain lenders now have a limited capacity to accept more deposits and increase lending.

“The banking sector is stable and resilient. There is liquidity and capital and there has also been consolidation and strengthening of the sector,” said CBK governor Patrick Njoroge.

To comply with the laws, banks must maintain core capital to total risk-weighted assets, total capital to total risk-weighted assets, and core capital to total deposits ratios of at least 10.5 percent, 14.5 percent, and 8 percent, respectively.

A number of the market’s smaller lenders have recently violated some or all of the capital adequacy rules, necessitating capital infusions. Spire Bank and First Community Bank (FCB), two of these rule-breaking firms, were acquired this year.

Equity Group purchased Spire Bank from Mwalimu Sacco in a deal that put an end to the teachers’ protracted attempts to get the bank off their hands.

Premier Bank Ltd, a Somali lender, purchased a 62.5 percent share in the Shariah-compliant Kenyan bank for Sh2.8 billion, joining the owners of FCB as a new majority stakeholder.

FCB had a core capital shortage of more than Sh1 billion at the time of the sale, falling considerably short of the statutory adequacy ratios.