Kenyan banks under testing ahead of new global rules

NairobiThe Central Bank of Kenya (CBK) has started regular tests on Kenyan banks to ensure that they will be in compliance when new minimum capital requirements come into force by mid next year.The new rules require all lenders in the country to maintain a minimum core capital to risk-weighted assets ratio – a measure of a bank’s financial strength based on what shareholders have put in – of 10.50 per cent, up from the current eight per cent.The banks are also required to maintain a total capital to risk-weighted assets ratio – a gauge of a bank’s financial strength based on total capital including items such as goodwill and revaluation – of 14.50 per cent, up from the current 12 per cent.Banks are required to increase their buffer capital over a period of 18 months with effect from January 2013, meaning that the new capital ratios are expected to be in effect by June 2014.“The capital requirements relate to banks setting aside capital to cater for operational and market risks. Previously, capital was only set aside for credit risk. The rationale for this requirement is to ensure that we have strong, resilient banks,” said central bank governor Njuguna Ndung’u in an interview with The EastAfrican.“The policy environment is to strengthen banks through enhanced capital requirements,” said Prof. Ndung’u.The push to have banks increase their capital buffer has preoccupied central bankers globally over the past few years following the 2007-2009 financial crisis.Under the Basel III rules being implemented globally, banks are expected to raise their capital thresholds.The Basel accords are a set of guidelines meant to strengthen banks’ capital adequacy ratios, quality of assets and risk management.Kenyan banks are currently implementing some elements of Basel II, which addresses the quality of assets on a bank’s books in addition to capital adequacy. Basel II, for example, looks at whether a loan is secured by cash or land.“All banks are in compliance with the existing law with regard to minimum capital requirement. Banks are building their buffer capital in line with the CBK’s prudential requirements and CBK is undertaking stress-testing to ensure that this progresses well within the 18-month build up window,” said Habil Olaka, the chief executive officer of the Kenya Bankers Association.KBA said the minimum capital ratios will be phased in between January 2013 and January 2015 and the conservation buffer will be phased in from January 2016 to December 2018.An analysis of the two ratios for banks shows that the top six and other tier two banks such asDiamond Trust and NIC Bank are already in compliance with the new requirements.Equity, Barclays and Co-operative Banks adjusted their ratios in advance, their adoption of new accounting methods resulting in a drop in both ratios as at June 2013 when compared with December 2012.