The Central Bank of Kenya (CBK) will now be required to apply stricter rules before offering emergency financial support to struggling banks, following the enactment of a new law aimed at strengthening the country’s financial system and protecting public funds.
The changes are contained in the Central Bank of Kenya (Amendment) Act, 2026, which was signed into law by President William Ruto on Monday. The law introduces a formal legal framework for Emergency Liquidity Assistance (ELA), clearly defining when and how the CBK can step in to assist banks facing temporary cash shortages.
Under the new framework, emergency funding will be available only to banks that are financially sound, commercially viable, and deemed important enough that their failure could threaten the stability of Kenya’s financial system. Banks that are insolvent or have no realistic chance of recovering will no longer qualify for rescue funding from the regulator.
The move marks one of the biggest reforms to Kenya’s banking safety net in years and brings the country’s financial regulations closer to internationally accepted banking standards. It is also expected to reduce the likelihood that taxpayer-backed resources will be used to keep poorly managed financial institutions afloat.
According to the law, the amendments are intended to create a clear distinction between the Central Bank’s routine liquidity operations used for monetary policy and emergency assistance offered only in exceptional situations.
“The Bill seeks to amend the Central Bank of Kenya Act to provide clear statutory separation between liquidity operations undertaken by the CBK for routine monetary policy implementation and Emergency Liquidity Assistance provided in exceptional circumstances to preserve financial stability,” the legislation states.
Previously, the Central Bank Act did not clearly separate these two functions. As a result, there was no detailed legal framework explaining when emergency liquidity support could be offered or the conditions institutions had to meet before receiving it.
The new law changes that by setting strict eligibility requirements. A bank experiencing temporary liquidity problems, such as short-term cash flow pressures, may qualify for assistance if it remains solvent and has a sustainable business model. However, the CBK will not be allowed to use emergency funding to rescue banks whose financial position has already become unsustainable.
The distinction is important because liquidity problems and insolvency are not the same. A bank may temporarily lack enough cash to meet immediate obligations even though its assets remain healthy. In such cases, central banks around the world often provide short-term liquidity to prevent panic and protect the wider financial system.
The reforms also seek to reduce what financial experts describe as “moral hazard,” where financial institutions take excessive risks with the expectation that regulators will eventually rescue them if things go wrong. By limiting support to fundamentally healthy institutions, the CBK hopes to encourage stronger risk management across the banking sector.
The amendments reflect principles found in the Basel Core Principles for Effective Banking Supervision, which guide banking regulators across many countries. These principles recommend that central banks act as lenders of last resort only for solvent institutions facing temporary liquidity shocks, helping maintain confidence in the financial system without rewarding poor management.
The law comes only weeks after the government extended the deadline for commercial banks to meet the new minimum core capital requirement of Ksh10 billion from 2029 to 2032. The extension was intended to give smaller lenders more time to strengthen their balance sheets while allowing the sector to adjust gradually to tougher capital requirements.
Beyond emergency liquidity support, the amendments also expand the Central Bank’s legal responsibilities. Financial system stability has now been formally recognised as the bank’s secondary objective after maintaining price stability. This gives the CBK a stronger legal basis to monitor and respond to risks that could threaten Kenya’s banking sector and the broader economy.
The law further introduces parliamentary approval for the appointment of Deputy Governors, gives legal recognition to the Central Bank of Kenya Institute of Monetary Studies, updates outdated provisions in the existing law, and clarifies the CBK’s authority to buy, sell, and hold gold and other precious metals as part of managing the country’s foreign exchange reserves.
“The changes are intended to ensure emergency liquidity serves its original purpose of preventing temporary funding pressures from developing into wider financial crises, rather than rescuing institutions that are no longer commercially viable,” the legislation explains.
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