Big banks face a reduced headroom for paying hefty dividends to investors as the Central Bank of Kenya (CBK) pushes for enhanced core capital, which is used to absorb unexpected financial losses.
New proposals by the CBK require large lenders such as Equity, KCB and Co-op Bank to hold larger buffers to prevent them from falling into trouble and disrupting the economy or requiring a taxpayer-funded bailout.
This is in addition to the minimum core capital requirement of Sh10 billion by 2032.
Also known as Common Equity Tier I capital, core capital is the highest quality capital a bank holds, primarily made up of ordinary shares and retained earnings, and serves as a cushion against financial stability.
The new framework for supervision of domestic systemically important banks by the CBK, if adopted in its present form, will potentially compel big banks to cut back on dividends as they build up their retained earnings to ensure they adhere to the strict requirements of the regulator.
“In order to enhance the resilience of domestic systemically important financial institutions, the framework requires these banks to hold higher levels of capital through additional loss absorbency requirements. These requirements aim to reduce the probability of domestic systemically important financial institutions failure, provide a buffer to absorb losses during periods of stress and limit the need for public sector support,” the CBK says.
“The additional capital is to be implemented through the Common Equity Tier I capital requirement. Additionally, the enhanced supervision and robust recovery and resolution planning to reduce systemic risks and ensure resilience strengthens financial stability and minimise the impact of domestic systemically important banks’ failures,” the framework states.
Kenya’s big banks have been paying substantial dividends over the years, backed by core capital topping the Sh100 billion mark for some institutions.
The 12 listed banks paid total dividends of Sh117.2 billion for the year ended December 2025, amounting to nearly half of the Sh245.9 billion that all Nairobi Securities Exchange-listed firms paid in their latest financial years.
For the full year ended December 2025, Co-operative Bank raised its dividend per share by 66.6 percent to Sh2.50 from the prior year’s Sh1.50 while Equity Group lifted its distribution by 35.2 percent to Sh5.75 from Sh4.25 over the same period.
In the half year ended June 2026, several banks bumped up their dividend on the back of strong earnings.
KCB Group, for instance, increased its interim dividend by 50 percent to Sh3.0 per share and NCBA Group hiked its interim dividend by 50 percent to Sh3.75 per share.
The CBK now wants the country’s big banks to be supervised more closely, keeping up with the trend of regulation of global systemically important banks, which started in November 2011 in reaction to the fallout from the 2008 global financial crisis.
According to the CBK framework, domestic systemically important financial institutions are financial institutions operating in one or more countries and whose disorderly failure would cause significant dislocations in the domestic or regional financial system and adverse economic consequences in the country or region.
The regulator says four indicators –size, interconnectedness with other institutions, complexity and substitutability (difficulty in being replaced in a specific service)— can determine a domestic systemically important bank.
“The size of a bank can be regarded as the key measure of systemic risk. The larger a bank is, the higher the potential damage that arises from its failure,” the regulator said.
“When a large bank collapses, other banks are unlikely to fully replace its activities. Failure of a large and well known bank negatively impacts confidence in the banking system as a whole. In determining the size of a bank, this framework shall consider the leverage ratio [indebtedness] exposure measure of a bank relative to the aggregate value of the Leverage Ratio exposure measure for all banks in Kenya’s banking sector.”
At a global level, the collapse of America’s investment bank Lehman Brothers in September 2008 set off a contagion that was felt around the world, featuring bankruptcies and severe financial crises in countries such as Iceland and Dubai.
The focus on keeping Kenya’s large banks on a tighter leash comes at a time when smaller institutions are undergoing recapitalisation with the ultimate target of hitting a Sh10 billion core capital requirement by the close of 2032, signalling increased efforts to put the entire country’s banking sector on more solid ground.
The Business Laws (Amendment) Act 2024 amended the Banking Act to provide for a staggered approach with annual hurdles towards the Sh10 billion core capital target. But the Finance Act 2026 repealed the annual hurdles and provided only for the 2032 Sh10 billion target.
“To allow flexibility in achieving this objective and following widespread consultations, we have adopted an amendment to the timeline specified in the law to allow banks to realise the Sh10 billion core capital by December 31, 2032 without any annual milestones,” Treasury Cabinet Secretary John Mbadi told the National Assembly on June 11.
