This is the thinking behind the Central Bank of Kenya’s (CBK) proposed Framework for Identification, Regulation and Supervision of Domestic Systemically Important Banks (D-SIBs), issued in August 2026 and subsequently released for public comment.
The framework targets banks whose distress or disorderly failure could cause significant disruption to Kenya’s financial system and wider economy. The important question, therefore, is not simply which Kenyan banks will qualify as D-SIBs, but what it takes to regulate an institution whose failure could become a national economic event.
The 200-8 collapse of the $639 billion in assets Lehman Brothers remains the clearest reminder of how the failure of a large and interconnected institution can transmit losses and uncertainty throughout financial markets. Several major institutions deemed systemically important also received substantial state support to prevent wider consequences.
The Basel Committee subsequently introduced the D-SIB framework in 2012, recognising that a bank does not have to be globally important to be systemically important. A bank can be relatively small by global standards but critically important to its domestic economy. Kenya is now adapting this logic to its own financial system, which is a very progressive step toward ensuring bank stability in the economy.
Kenya enters this new regulatory phase from a position of relative strength. The latest CBK data show total capital adequacy at 20 percent in June 2026, comfortably above the statutory minimum of 14.5 percent. The average liquidity ratio stood at 61.2 percent against a 20 percent minimum, while the gross non-performing loans-to-gross loans ratio declined to 14.6 percent in July 2026 from 17.6 percent a year earlier.
It is also impressive to note that four Kenyan banks: KCB Bank Group, Equity Bank, Co-operative Bank of Kenya and Stanbic Bank Kenya, made Forbes’ first-ever list of the World’s Top Performing Banks, ranking 500 institutions across 89 countries.
These are encouraging indicators, but financial strength should never become complacency. Banking history teaches us that apparently healthy institutions can deteriorate rapidly when weaknesses in governance, liquidity, credit management or internal controls collide with a loss of confidence and trust from the public: bank runs can happen in seconds.
Kenya has seen the consequences. Between 1984 and 2016, Kenya experienced 27 banking failures with the more recent (as of 2016) cases being the collapse or resolution of banking institutions including Dubai Bank, Imperial Bank, Chase Bank and Charterhouse Bank.
Dubai Bank was placed under receivership in 2015, followed by Imperial Bank later that year amid revelations concerning suspected fraudulent activities.
Chase Bank was placed under receivership in 2016 after a severe liquidity and confidence crisis, while Charterhouse Bank was eventually placed into liquidation.
The consequences were felt beyond the failed institutions themselves. Such failures affect depositor confidence, interbank liquidity, credit availability, investors and other financial institutions. In the case of Chase Bank and Imperial Bank, for example, they had substantial outstanding bonds, illustrating that bank failures can also transmit losses into capital markets beyond their depositors and clients.
Kenya’s historical experience points to three recurring vulnerabilities: poor corporate governance and management; insider lending and weak credit management; and fraud and weak internal controls.
Weak boards, poor decision-making, conflicts of interest and inadequate accountability can allow problems to grow unnoticed. Excessive lending to directors, shareholders and related parties, coupled with weak loan appraisal and monitoring, can produce large non-performing loans. Fraudulent transactions, misappropriation of funds, financial manipulation and ineffective controls can then transform institutional weaknesses into crises. These lessons should sit at the centre of D-SIB supervision.
Who might be systemically important?
It would be premature to name the eventual D-SIBs before CBK completes its assessment. However, given their scale, interconnectedness and economic reach, banks such as KCB Bank Kenya, Equity Bank Kenya, Co-operative Bank of Kenya and NCBA Bank would naturally attract attention. There could be others once the methodology is applied to actual supervisory data.
More importantly is that the D-SIB designation does not mean a bank is weak. It means that the consequences of its failure would be sufficiently serious to warrant greater resilience and supervisory attention.
CBK proposes to assess systemic importance using five indicators: size, interconnectedness, substitutability, complexity and importance to the domestic economy. Size carries 40 percent, interconnectedness 30 per cent, substitutability 15 percent, domestic economic importance 10 percent and complexity 5 percent.
The proposed Kenyan framework adapts the Basel methodology by replacing cross-jurisdictional activity with importance to the domestic economy. This is appropriate: a bank may be globally insignificant but economically indispensable to Kenya.
Size considers the bank’s exposure measure; interconnectedness examines transactions with other local banks; substitutability considers lending to households and the trade sector, including SMEs, as well as RTGS payments; complexity considers securities and derivatives; and domestic economic importance incorporates deposits and bank size relative to GDP. The underlying question is therefore not simply, ‘How big is the bank?’ but ‘What would Kenya lose if this bank suddenly disappeared?’
Capital is necessary, but not sufficient
Under the proposed framework, a systemic-importance score above 0.25 and/or a category score above 0.05 would indicate systemic importance. Designated banks would then be placed into three buckets, with additional Common Equity Tier 1 requirements ranging from 0.5 percent to 2.5 percent of risk-weighted assets.
Additional capital is important because it reduces the probability of failure and provides greater loss-absorption capacity. But capital is only one line of defence. A bank can meet capital requirements and still fail because of poor governance, excessive risk-taking, fraud, weak internal controls, poor liquidity management or ineffective leadership. The regulator must therefore identify weaknesses before they become capital problems.
Governance and succession are systemic-risk issues
This is particularly important for Kenya’s D-SIBs. A systemically important bank requires a board capable of challenging management, understanding its risk profile and ensuring that growth does not outpace risk-management capacity. It also needs credible succession plans for the chief executive and other critical executives.
Recent CEO movements within Kenya’s banking industry demonstrate why this matters. Executive mobility is not itself a problem; indeed, it can strengthen the industry by spreading leadership experience. The regulatory question is whether a bank can manage leadership transitions without uncertainty or disruption and whether incoming executives satisfy CBK’s fit-and-proper requirements.
For D-SIBs, succession planning should therefore extend beyond naming a replacement. Boards should have tested plans covering CEO succession, emergency leadership, key risk-management positions and business continuity.
The critical question is simple: If the CEO left tomorrow Friday evening, would the institution remain stable on Monday morning? If the answer is uncertain, succession is no longer merely a human-resources issue. It is a financial-stability issue.
Regulation must look beyond today’s ratios
The proposed framework goes beyond higher capital requirements. D-SIBs will face more intensive supervision, including closer examination of governance, risk management and internal controls. They will undertake quarterly stress testing and conduct Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) exercises at least annually.
They will also be required to maintain recovery and resolution plans, updated annually and submitted to CBK by April 30. CBK may impose higher liquidity requirements, enhanced disclosure obligations and restrictions on activities that increase systemic risk. This represents an important shift from backward-looking compliance towards forward-looking supervision.
CBK must ask not only whether a bank complies today, but whether its business model, governance, capital, liquidity, technology, cyber resilience and leadership would withstand tomorrow’s shock.
The US lesson: stability does not mean absence of risk
A preview of US banking failures of 2023, particularly the Silicon Valley Bank, Signature Bank and First Republic, showed that even sophisticated financial systems remain vulnerable to interest-rate risk, liquidity pressures, concentrated funding and rapid loss of confidence.
Yet the lesson is not that the US financial system is inherently unstable. Despite reporting about 2,439 FDIC institutions shut down and put under receivership between 1984 and 2026, the US financial services sector remains stable, albeit with elevated pockets of vulnerability rather than systemic distress. The lesson for Kenya is more nuanced: regulation cannot eliminate banking failures. Its purpose is to ensure that the failure of one institution does not become the failure of the system.
What does this mean for Kenya?
The D-SIB framework should strengthen Kenya’s already resilient banking sector. Large banks will face greater capital requirements and supervisory scrutiny, but they will also be expected to demonstrate stronger governance, risk management, succession planning and recovery capabilities.
Smaller banks should not assume that systemic risk is exclusively a large-bank problem. A smaller institution can still undermine confidence, particularly where its failure exposes weaknesses elsewhere in the financial system. The framework could also accelerate differentiation and consolidation as banks with stronger capital, governance, technology and risk-management capabilities gain an advantage.
But Kenya must guard against one unintended consequence: the creation of a ‘too-big-to-fail’ phenomenon. D-SIB designation must never be interpreted as a government guarantee. Otherwise, the framework could create moral hazard by encouraging depositors and investors to assume that the State will ultimately rescue designated banks. Systemic importance should mean greater responsibility, greater scrutiny and greater loss-absorption capacity, not guaranteed protection.
Kenya’s banking sector, with an asset base of Sh8.413 trillion (approximately US$65 billion), is currently well capitalised, highly liquid and profitable, with total assets equivalent to about 52 per cent of the country’s GDP. But financial stability is not secured by today’s ratios alone. It depends on governance, risk management, internal controls, technology, cyber resilience, board independence, succession planning and the regulator’s ability to identify problems before they become crises.
The ultimate test of Kenya’s D-SIB framework will therefore not be how well CBK manages the collapse of a systemically important bank. It will be whether the framework makes such a collapse less likely, less contagious and less consequential for the Kenyan economy.