GTBank, UBA to raise more funds for Kenya subsidiaries

• GTBank CEO, Segun Agbaje

• GTBank CEO, Segun Agbaje

Guaranty Trust Bank Plc (GTBank) and United Bank for Africa Plc (UBA) are to raise more funds for their Kenya subsidiaries following the increase in banks’ minimum capital base.

The government last weekend raised minimum capital requirements for banks by fivefold  to promote competition.

Core capital for lenders will jump to 5 billion shillings ($52 million) by the end of 2018, from 1 billion shillings, Treasury Secretary Henry Rotich said in his yearly budget speech in the capital, Nairobi. He said the benchmark for insurance companies was also increased to 600 million shillings.

But, GTBank and UBA will have to source for the funds in Kenya because of the Central Bank of Nigeria’s (CBN’s) policy that banks with foreign subsidiaries should utilise resources in their host-countries to boost their operations rather than use funds from home to do so.

The CBN’s stand is that banks raise funds from the offshore capital market through private placements or public offerings. CBN’s advice followed its earlier directive stopping banks from using local resources to fund their offshore subsidiaries. It also stopped quarantee of deposits for foreign subsidiaries.

CBN Director, Banking Supervi-sions, Agnes Martins advised that the banks could also pursue a merger or acquisition; or if external capital raisings fail, submit a strategy for exiting the relevant foreign jurisdictions to the regulator.

The directive also bars Nigerian banks from guaranteeing the deposits of their foreign subsidiaries and mandates banks with foreign subsidiaries to submit plans showing that their subsidiaries are fully capitalised in line with Basel II and III accords.

Capital increase in Kenya has been reoccurring. The Central Bank of Kenya (CBK) increased the minimum capital requirement in 2008 to Sh1 billion from Sh250 million, with banks given a four-year period to comply. The process was expected to see small lenders merge but most of them convinced their shareholders to inject additional capital while others invited strategic partners. A 12-fold increase in capital requirement in 2004 saw Nigerian banks shrink from 89 to 25. Banks are currently aggressively raising additional funds from shareholders and the debt market to comply with new capital adequacy ratios coming into effect at the end of the year.

The CBK had last year, hinted at increasing the minimum capital requirement for banks in a move that could lock out small lenders and new entrants from the market.

The banking regulator is concerned that low levels of capitalisation will lock Kenyan lenders out of financing large infrastructure projects being undertaken in the country.

“The Sh1 billion minimum capital requirements may actually constrain financing potential of some large banks. The CBK may consider raising this minimum capital requirement to make the industry move to the level of Egypt, Angola, Nigeria and South Africa,” it said. Kenya banks are not allowed to lend more than 25 per cent of their core capital to a single borrower.

”This should help promote consolidation in the banking industry,” particularly among smaller lenders known as Tier 3 and Tier 4 banks, Francis Mwangi, head of research at Standard Investment Bank, said told Bloomberg.

Kenya, a nation of 44 million people with a $55 billion economy, has 43 commercial lenders and a mortgage-finance company, according to the Central Bank of Kenya. About 70 per cent of banking business is done by eight companies and industry fragmentation is hindering the development of scale lenders need to offer more complex services, Kenya Commercial Bank Ltd. Chief Executive Officer Joshua Oigara said in August.

The bottom 20 lenders in Kenya all have capital below 5 billion shillings, Martin Oduor-Otieno, a partner at Deloitte East Africa, said in an e-mailed note.

Smaller banks also may be forced to consider mergers because the three-year timeframe imposed to increase core capital may be insufficient, Mwangi said. Those lenders already face competition from bigger banks in their traditional markets such as micro-lending and low-income retail customers, he said.

“The Tier 3 and Tier 4 lenders won’t be able to grow their earnings as fast because of increased competition from the bigger banks,” Mwangi said.

The increase in minimum core capital requirements is in line with the government’s development programme, known as Vision 2030, Rotich said.

“Kenya needs to have strong, well-capitalised financial institutions, which are not only able to participate in financing the large projects envisaged in the vision, but that are also well capitalised to withstand financial shocks and crises,” Rotich said

KCB, Kenya’s largest bank in asset base, has a core capital of Sh52 billion, capping its lending to a single entity at Sh13 billion. Most of the infrastructural projects being put up in Nairobi require huge funding. For instance, the Lamu coal plant is expected to use an estimated Sh177 billion of which Sh130 billion will be debt.

CBK disclosed that two banks violated the minimum capital requirement last year underlining the challenges facing banks funding large projects. The capital requirements in South Africa is Sh9 billion, Nigeria (Sh8 billion), Egypt (Sh6.2 billion) and Angola at Sh2.2 billion. Eighteen banks in Kenya have a core capital of less than Sh2 billion. Analysts pointed out those large banks were in a strong position to comply with whichever extra amount that may be required but small lenders are likely to struggle.

“The effect is dependent on the amount but I expect the key players will comply with it,” said Standard Investment Bank’s Francis Mwangi. Mr Mwangi said a regulation meant to push banks to finance infrastructure projects by raising capital may see the lenders used to micro-lending holding idle cash.

The post GTBank, UBA to raise more funds for Kenya subsidiaries appeared first on The Nation.

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