Basel III, African edition: supervisors tighten capital rules without strangling credit

A wave of African bank recapitalisation is under way. Nigeria's programme — announced in 2024, requiring banks with international licences to raise minimum capital several-fold by 2026 — is the largest, and Kenya has legislated a phased increase in minimum core capital. The common trigger: currency depreciation mechanically shrank bank capital measured in hard-currency terms, even at banks that never made a bad loan.

Supervisors are converging on Basel III with African characteristics. Core equity requirements and capital buffers arrive on international schedules, but risk-weighting reflects local reality: sovereign exposure — a dominant asset on many African bank balance sheets — receives closer scrutiny after Ghana's domestic debt exchange and Zambia's restructuring demonstrated that local-currency government paper is not risk-free.

The sovereign-bank nexus remains the region's defining prudential challenge. Banks hold government securities because they are liquid, yield-rich and satisfy regulatory ratios; governments lean on captive domestic demand when external markets close. Loosening the loop requires deeper capital markets — pension funds, insurers, collective investment schemes — that can absorb government paper without concentrating it in the deposit-taking system.

Consolidation is the predictable consequence. Higher capital floors tend to drive mergers among mid-tier banks, an outcome supervisors generally regard as strengthening: fewer, better-capitalised banks are easier to supervise and better able to fund large-ticket infrastructure and trade finance.

The risk to watch is credit supply. Recapitalisation that front-loads capital demands while policy rates are still restrictive can push banks to shrink risk-weighted assets — that is, lend less — precisely when disinflation should be unlocking credit growth. Sequencing is everything.