The Central Bank of Kenya (the CBK) will with effect from 1 July 2025 lift the moratorium on licencing of new commercial banks. This moratorium has been in effect for almost 10 years. The moratorium however did not apply to cases relating to resolution, amalgamation and acquisition of banks.
Reason for the Moratorium in 2015
The moratorium was put in place due to concerns over governance, risk management and operational challenges in the banking sector particularly after the collapse of two banks in 2015. It was intended to provide space for the strengthening of the banking sector.
Effect of the Moratorium
The moratorium left investors, including foreign banks, with acquisitions and the use of representative offices as the only entryway into the Kenyan market. Acquisitions by foreign investors during the moratorium period include the acquisition of Fidelity Commercial Bank Ltd by Mauritius’ SBM Bank, Mayfair Bank Ltd by the Commercial International Bank Egypt S.A.E., First Community Bank Limited by Premier Bank Somalia, Transnational Bank PLC by Access Bank PLC, and Credit Bank PLC by Shorecap III, LP.
Reasons for the Lifting of the Moratorium
The decision to lift the moratorium has been informed by the strides made towards strengthening the banking system during the moratorium period. These include: (i) mergers and acquisitions involving existing licensees; (ii) entry of foreign and domestic strategic investors in the banking sector; and (iii) changes to the legal and regulatory framework.
During the moratorium period, the number of commercial banks reduced from 42 in 2016 to 38. This was primarily due to mergers involving existing licensees. Some of the notable mergers and acquisitions that Bowmans was involved in include the consolidation of NIC Group PLC and the Commercial Bank of Africa Ltd to NCBA Bank Kenya PLC, the acquisition of National Bank of Kenya Limited by KCB Group PLC, Mayfair Bank by the Commercial Internation Bank Egypt S.A.E, and National Bank of Kenya Limited by Access Bank PLC. These mergers ensured that the consolidated banks were stronger, more resilient, and better capitalised.
A notable change in the legal framework was the increase of the minimum core capital requirement for banks from KES 1 million to KES 10 million (approximately USD 77.04 million) pursuant to the Business Laws (Amendment) Act, 2024. This increase is, for existing banks, supposed to be made incrementally until 31 December 2029. This change also seeks to ensure that banks are well-capitalised. According to the CBK, new entrants to the Kenyan banking system will be required to demonstrate that they can meet the enhanced minimum capital requirements to obtain a licence.
Implications for the Banking Sector
The lifting of the moratorium opens up the Kenyan banking space to new entrants that meet the enhanced capital requirements. These new entrants are likely to bring with them competition and innovation.
It is also noteworthy that pursuant to the Business Laws (Amendment) Act, 2024 all credit providers are required to be licenced under the Central Bank of Kenya Act (Chapter 491, Laws of Kenya) consequently, it is possible that large credit providers may seek to be licenced as commercial banks, which would grant them power to undertake more licensable activities, following the lifting of the moratorium under the new regime.
On the other hand, following the increase of the minimum core capital many licenced banks will be required to raise billions in fresh capital or opt for mergers and acquisitions. This is likely to reduce the number of existing banks. The remaining banks are likely to be more resilient and able to compete with the new entrants, further strengthening the Kenyan banking sector.
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