Kenya’s banking sector has been in a fascinating tug-of-war lately. New accounting rules, while intended to strengthen the financial system, forced banks to confront the reality of potential loan defaults. To avoid taking a financial tumble, Kenya’s biggest banks have been busy pumping billions into their reserves.

The culprit behind this capital scramble? IFRS 9, a stricter accounting standard that requires banks to consider not just current loan problems, but also anticipate future ones. This means setting aside more money as a buffer against potential defaults. While this bolsters the financial system’s resilience, it also eats into a bank’s profits.

Here’s where things get interesting. Kenyan banks responded to this double-edged sword with a strategic capital injection of Ksh619.22 billion ($4.72 billion). This financial shot in the arm came from a combination of core capital (like additional shares) and supplementary capital (think debt).

The good news? This strategy seems to have paid off, at least in the short term. Despite the need for increased provisioning, the net profit of these banks actually doubled! It appears the fresh funding helped them weather the storm.

But hold on a minute, it’s not all sunshine and rainbows. While the industry’s capital ratios are healthy overall, some banks are still struggling to meet regulatory requirements. The number of banks failing capital adequacy tests has risen, indicating a need for continued vigilance.

Why the struggle? A perfect storm of factors battered Kenyan banks in recent years. The global pandemic, high-interest rates, and inflation all took their toll, contributing to a rise in bad loans. This highlights the ongoing challenge Kenyan banks face in effectively managing risk.

Looking ahead, Kenyan banks seem to be on the right track. They’ve adapted to the new accounting rules, but the journey isn’t over. Keeping a close eye on loan defaults and implementing robust risk management strategies will be crucial for ensuring the long-term health of the Kenyan banking sector.

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