Kenya’s commercial banks with core capital of less than 8.625 percent of their loan book will be barred from paying any dividend to their shareholders in new regulatory proposals to control risk in the banking sector.
The Central Bank of Kenya (CBK) wants banks to maintain significant levels of common equity tier 1 capital (CET 1) -made up primarily of retained earnings- in relation to risk taken through lending before they can pay dividends.
CET1 consists of the highest quality capital a bank holds, primarily made up of ordinary shares and retained earnings, serving as a cushion to support financial stability.
A bank with a core capital less than 8.625 percent of its loan book will be required to rebuild its buffer by retaining all its earnings, while an institution whose CET exceeds 10.5 percent of the loan portfolio can pay out all its profit as dividends.
The 10.5 percent level is among the current standard minimum capital requirements, indicating that the regulator intends to force non-compliant lenders to catch up through the tiered system of stricter and dynamic curbing of dividend payouts the greater the shortfall.
Banks whose capital ratio exceeds 8.625 percent and up to 9.25 percent will have to retain a minimum of 80 percent of their earnings, while those in excess of 9.25 percent and up to 9.875 percent will retain at least 60 percent.
An institution whose capital ratio is more than 9.875 percent and up to 10.5 percent will retain a minimum of 40 percent of its profit.
‘The applicable conservation standards must be recalculated at each distribution date. For example, a bank with a CET1 capital ratio in the range of 8.625 percent to 9.25 percent is required to conserve 80 percent of its earnings in the subsequent payment period (i.e. pay out no more than 20 percent in terms of dividends, share buybacks and discretionary bonus payments),’ say the draft guidelines.
The CBK says banks keen on paying larger dividends than those allowed by the proposed rules can overcome the constraint by raising additional funds from other parties for purposes of enhancing their cash distributions.
‘If the bank wants to make payments in excess of the constraints imposed by this regime, it would have the option of raising capital in the private sector equal to the amount above the constraint which it wishes to distribute,’ the regulator said.
The CBK said the capital ratios will be placed at the consolidated level for banks that operate as a group under a holding company.
The restrictions on profit distribution form part of new capital requirements the regulator intends to impose on the banking industry.
The regulations include the introduction of the common equity tier 1 capital, which exclusively relates to shareholders’ capital tied up in the business and excludes some lines such as share premium, which will now be categorised as additional tier 1 capital.
The regulator has also introduced a new capital buffer to be held when banks are experiencing rapid credit growth. The buffer of between 0.5 percent and 2.5 percent of a bank’s loan book (total risk-weighted assets), dubbed the ‘countercyclical capital buffer,’ will be determined by the regulator every 12 months.
‘Institutions will be required to maintain a countercyclical capital buffer where the Central Bank of Kenya determines that there is a build-up of credit risk which could lead to system-wide stress,’ says the regulator.
The introduction of higher capital requirements in the US financial system saw investors shy away from banking counters, with analysts reckoning the same is expected in Kenya in the short term before being reversed.
‘Income-focused investors may have reservations in the short term concerning dividend payments due to tighter earnings retention policies (likely to affect lenders without significant excess capital buffers and may need to build them up) and potential payout uncertainty during stress cycles,’ said Melodie Ndanu, a research analyst at Standard Investment Bank.
‘In the long run, however, investors are likely to view the changes positively, with the introduction of Basel III-aligned features making banks far more resilient against systemic shocks,’ she added.
Nairobi Securities Exchange-listed 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 publicly traded firms paid in their latest financial years.
For the full year ended December 2025, Co-operative Bank of Kenya 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, including KCB Group, which increased its interim dividend by 50 percent to Sh3.0 per share, and NCBA Group which also hiked its interim dividend by 50 percent to Sh3.75 per share.
The CBK is also seeking to have big banks hold additional capital in what could weigh on their dividend decisions.
Large banks classified as domestic systemically important banks (D-SIBs), given the disruption their collapse or distress would create in the local economy and regional market, will be required to hold an additional buffer of between 0.5 percent and 2.5 percent of their loan book.
The regulator will look at the size of a bank, its interconnectedness with other institutions, complexity and substitutability (difficulty in being replaced in a specific service) to determine if it will be classified as a D-SIB.
‘CBK may impose a surcharge on designated D-SIBs, implemented as an extension of the capital conservation buffer (CCB) known as higher loss absorbency (HLA). HLA is implemented as a capital “add-on” or an extension to the existing CCB,’ states the draft.
‘This supplementary buffer must be met exclusively using common equity tier 1 capital,’ it adds.
This means that the core capital to total risk-weighted assets ratio required of a bank could rise to 19.5 percent from the current 10.5 percent.