By Jerameel Kevins Owuor Odhiambo
The Central Bank of Kenya’s March 2025 proposal to overhaul commercial bank license fees represents the most significant regulatory fee restructuring in Kenya’s financial sector in over three decades. Since the last update in 1990, Kenya’s banking sector has undergone remarkable transformation, with total assets expanding 38-fold from Ksh.202 billion in 1994 to Ksh.7.6 trillion in 2024, and profits before tax growing 21-fold from Ksh.11 billion to Ksh.262 billion. This exponential growth, coupled with increasingly complex regulatory demands including consolidated and cross-border supervision of Kenyan banks’ regional operations (which have expanded from zero cross-border branches in 1994 to 550 by December 2024), underpins CBK’s rationale for modernizing its fee structure. While the need for reform is justified, the proposed implementation warrants critical examination.
The CBK’s consultative paper proposes replacing the outdated branch-based methodology where fees are determined by branch count and location with a Gross Annual Revenue (GAR) approach that would charge banks a percentage of their overall revenue. After evaluating four methodologies (branch-based, deposit-based, asset-based, and revenue-based), the CBK recommends the GAR model at a rate of 1% to be implemented gradually: 0.6% in 2025, 0.8% in 2026, and 1% from 2027 onward. The CBK’s own analysis shows this approach would have the least drastic impact on bank profitability compared to the other methodologies, reducing overall sector profitability by approximately 3.1% at the full 1% rate, versus 19.4% under the deposit-based approach or 27% under the asset-based model. However, this sector-wide figure masks significant variability in impacts across different bank tiers.
The proposed 1% GAR rate exceeds comparable regional standards, potentially creating competitive disadvantages for Kenyan banks. While the CBK cites Uganda’s rate of 0.05% and Rwanda’s 0.5% as regional benchmarks, its proposal doubles Rwanda’s rate and is twenty times Uganda’s. This significant divergence raises questions about proportionality and regional competitive equity, particularly as Kenyan banks increasingly compete across East African markets. The CBK justifies this higher rate based on the “size, complexity, risk profile, and interconnectedness of the Kenyan banking ecosystem,” but fails to provide quantitative evidence showing why Kenya’s regulatory burden requires such substantially higher fees compared to neighboring jurisdictions with similar banking structures and regional expansion patterns.
The most concerning aspect of the proposal is its asymmetric impact across banking tiers. While the CBK’s sensitivity analysis indicates that only one Tier III bank would be pushed into a loss-making position under the GAR methodology (compared to five or six banks under alternative approaches), this still represents a significant destabilization risk for smaller institutions servicing niche markets or underbanked populations. These smaller banks typically operate on thinner margins and have less ability to absorb additional regulatory costs compared to larger, more diversified Tier I institutions. The proposal thus risks accelerating banking sector consolidation and potentially reducing competition in specialized market segments like agricultural finance, SME lending, and rural banking—precisely the areas where Kenya needs more banking innovation and investment, not less.
For consumers and businesses, the reform’s downstream effects could prove particularly challenging in Kenya’s current economic environment. Banks facing higher regulatory costs typically respond through a combination of strategies: raising lending rates, increasing fees on accounts and transactions, implementing stricter lending criteria, and reducing higher-cost service channels like physical branches. Given that the GAR approach directly taxes bank revenue, institutions would be incentivized to maximize revenue-generating activities with minimal cost potentially shifting resources away from lower-income segments that often require more personalized service while generating less revenue. This contradicts Kenya’s admirable progress in financial inclusion and risks creating new accessibility barriers, particularly for rural customers, elderly Kenyans, and those with limited digital literacy who rely on branch networks.
The SME sector, which accounts for approximately 30% of Kenya’s GDP and 80% of employment, faces particular vulnerability under the proposed reform. Banks already perceive SME lending as higher risk, and the additional license fee burden may encourage further risk aversion in lending policies. The CBK’s own draft regulations define gross annual revenue to include “income from interest on loans, advances, government securities and placements,” creating a direct tax on lending activity that could push banks toward lower-risk investments like government securities rather than productive business loans. This shift would constrain the very credit expansion needed to drive economic growth, job creation, and tax revenue generation—ultimately working against broader national development goals while temporarily boosting regulatory funding.
The CBK’s phased implementation approach (0.6% to 1% over three years) provides some adjustment time but fails to address the fundamental rate calibration issue. A more balanced reform would adopt the GAR methodology which correctly aligns fees with bank activity levels rather than branch counts but set the target rate between 0.3% and 0.5%, bringing Kenya into alignment with regional standards while still increasing regulatory resources substantially compared to the current system. This calibration would generate sufficient additional regulatory funding (approximately Ksh.2.25-3.75 billion annually at the 0.5% rate, based on the CBK’s own projections) without triggering significant lending contractions or branch closures that would harm economic growth and financial inclusion.
Additionally, the CBK should consider implementing a tiered GAR approach that acknowledges the structural diversity of Kenya’s banking sector. For example, Tier III banks serving specialized market segments could be subject to a lower rate (perhaps 0.3%), while larger Tier I institutions with greater systemic importance and supervisory complexity could pay the full rate. This differentiation would help maintain competitive dynamics across the sector while ensuring appropriate regulatory funding from the largest institutions that require more intensive supervision. Such an approach finds precedent in regulatory systems worldwide that recognize the principle of proportionality in supervision costs and capabilities across different institution sizes.
The reform should also be accompanied by complementary regulatory measures preventing banks from disproportionately passing costs to consumers through predatory fee increases. The CBK could establish guardrails for basic banking services fee adjustments following the implementation of new license fees, ensuring vulnerable customers maintain reasonable access to essential financial services. Given Kenya’s global leadership in digital financial services, the CBK could further incentivize innovation by offering GAR calculation discounts for banks demonstrating expanding service to underbanked populations through technology—creating a reward system for institutions advancing national financial inclusion objectives rather than treating the fee reform as solely a revenue-raising measure.
Ultimately, while the CBK’s objective to modernize its licensing fee framework is appropriate given the sector’s remarkable three-decade evolution, the proposed implementation requires recalibration to better balance regulatory funding needs with economic growth imperatives. By adopting a more moderate fee rate, implementing tiered pricing based on bank size, and adding consumer protections against cost pass-through, the CBK can achieve its regulatory objectives while safeguarding Kenya’s inclusive growth trajectory. This balanced approach would ensure the banking sector continues serving as a catalyst for economic development rather than becoming constrained by disproportionate regulatory costs. As stakeholders engage with the CBK during the consultation period ending March 31, 2025, focusing on these practical adjustments to the otherwise sound GAR methodology would yield a more sustainable, equitable regulatory funding model that supports both financial stability and economic prosperity.
The Writer is a Legal Scrivener
Mt Kenya Times