Njoroge says although having more capital would strengthen the banking institutions and enable them to take up more projects, other crucial factors needed to be taken seriously so as to minimise the risk to the general public.
He called for a stay to implementation of the proposal by National Treasury CS Henry Rotich to allow further consultations with stakeholders.
“If you look at the 42 banks, there those that have a lot of capital but the way we want to deal with it is through a risk weighted approach meaning they must have capital that is commensurate with the risk they have,” he said.
Appearing before Parliament’s Finance, Planning and Trade committee chaired by Ainamoi MP Benjamin Lang’at, Njoroge said raising the core capital was not the only way banks could be strengthened as there were other aspects like liquidity and how much leverage a bank can get among others that needed consideration.
He proposed that instead of issuing a blanket amount on all banks, each institution should be regulated to ensure its core capital matches the risk.
“If we imposed a minimum it will force consolidation of banks and the small ones will be gobbled up by the bigger banks – the large banks are not necessarily playing the best, their business models would be dominant and we may end up reversing the financial inclusion we have been talking about,” he added.
The CBK Governor further pointed out that smaller banks would desperately seek to merge with a ‘strategic’ investor without considering what the investor provided, equating the issue to a marriage where if one does not select the partner carefully, the marriage would fail.
He added that in November 2012 the CBK had asked banks to increase their capital (capital conservation buffer) by two percent saying this had already been achieved.
He said if Kenya wanted to become the centre of business in Africa, entrepreneurship needed to be nurtured and small banks needed to be allowed to grow as they were less risky compared to the bigger ones which handled more complex projects.
“Once you have very large banks, you will have this too big to fail banks and which may begin misbehaving,” he added.
Njoroge further stated added that allowing smaller banks to thrive would also tame the bigger banks as they would offer competition comparing Kenya’s case to Nigeria whose GDP was 10 times that of the country and only had 22 money deposit banks.
“You can imagine the size of those banks, this is frightening even for us as regulators. But you have the assurance as the regulator of the banking sector that we will apply the rules in an even handed fashion and improve the regulation framework so that we have smart regulation,” he went on to state.
The core capital was initially Sh250 million in 2008 before it was increased to Sh1 billion in 2012.
During the meeting, the CBK Governor was also urged to develop a ‘serious’ agenda to address the issue of interest rates which have highly impacted on the cost of business and lowered the value of the shilling.
“I want to work with the commercial banks until they deliver on these issues; we are more focused on these issues today more than five years ago,” assured Njoroge.