Central Bank Retains KSh 65.8 Billion Surplus as Capital Strengthening Takes Priority Over Treasury Dividends

In a significant departure from established practice, the Central Bank of Kenya (CBK) has announced it will not remit dividends to the National Treasury for the 2025 cycle, marking the first time in seven years that Kenya’s monetary authority has withheld its operational surplus from government coffers. This strategic decision, which retains a substantial KSh 65.8 billion surplus within the central bank’s balance sheet, reflects an ambitious capital strengthening initiative aimed at fortifying the institution’s financial resilience against potential economic shocks and currency volatility.

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The Financial Performance Behind the Decision

According to the CBK’s audited financial statements for the fiscal year ending June 30, 2025, the central bank generated a total surplus of KSh 65.8 billion, comprising two distinct components that reveal important aspects of the institution’s financial operations and market exposure.

The first component consists of a KSh 52 billion operating surplus, representing profits generated through the central bank’s core monetary policy operations, foreign exchange management activities, and returns on its substantial foreign reserve holdings. This operating surplus reflects actual cash earnings from interest income on government securities held in the bank’s portfolio, investment returns on foreign exchange reserves, fees from banking services provided to commercial banks, and other operational revenues.

The second component comprises KSh 13.8 billion in unrealised gains, which represent paper profits arising from the revaluation of the central bank’s assets—particularly its foreign currency holdings—as exchange rates fluctuate. These unrealised gains do not represent actual cash flows but rather accounting adjustments that reflect changes in the Kenya Shilling value of dollar-denominated and other foreign currency assets held on the CBK’s balance sheet.

The distinction between operating surplus and unrealised gains carries significant implications for dividend policy decisions. While operating surpluses represent genuine earnings that could theoretically be distributed, unrealised gains remain subject to reversal if exchange rates move unfavorably. Prudent financial management therefore suggests caution in distributing unrealised gains, as subsequent currency movements could transform paper profits into actual losses.

In its official statement accompanying the financial results, the CBK emphasized its decision to retain the entire surplus: “The surplus for the year was KSh 65.8 billion, consisting of Ksh 52 billion operating surplus and Ksh 13.8 billion unrealised gain. This entire surplus has been added to the General Reserve Fund.”

Strategic Capital Strengthening Initiative

The decision to withhold dividends stems directly from the CBK’s ambitious program to substantially increase its capital base over the coming years. The central bank is working systematically to raise its paid-up capital to KSh 100 billion by 2027, representing a significant increase from the current level of KSh 60 billion.

This capital strengthening initiative reflects growing international recognition among central banking authorities and financial regulators that monetary institutions require robust capital buffers to effectively discharge their responsibilities and maintain credibility during periods of economic stress. The Bank for International Settlements, often described as the central bank for central banks, has emphasized the importance of adequate central bank capitalization in its research and policy recommendations.

Several factors drive the imperative for stronger central bank capital positions. First, central banks with weak capital positions may face constraints on their ability to conduct monetary policy operations, particularly interventions in foreign exchange markets that can generate losses if exchange rates move unfavorably. Second, inadequate capitalization can undermine confidence in the central bank’s independence and its commitment to price stability, potentially affecting inflation expectations and currency stability. Third, well-capitalized central banks possess greater capacity to absorb losses from financial sector interventions or economic crises without requiring recapitalization from taxpayers.

Historical Context of Capital Expansion

The groundwork for the current capital strengthening program was established in April 2024 when the CBK raised its authorized capital from KSh 50 billion to KSh 100 billion. This statutory increase, which required legislative approval, provided the legal framework enabling the central bank to convert retained earnings into paid-up capital progressively over subsequent years.

During the 2024-2025 financial year, the CBK successfully increased its paid-up capital to KSh 60 billion while simultaneously growing its general reserves from KSh 300.7 billion to KSh 357.3 billion. This substantial reserve accumulation provides the central bank with enhanced financial strength to weather potential future challenges including currency depreciation, financial market disruptions, or losses from emergency lending to distressed financial institutions.

These reserves serve as crucial buffers protecting against various risks inherent in central banking operations. Currency revaluation risks arise when the Kenya Shilling depreciates against major international currencies like the US Dollar, Euro, or British Pound, reducing the local currency value of foreign exchange reserves. Credit risks emerge from the central bank’s role as lender of last resort to commercial banks facing temporary liquidity challenges. Market risks stem from fluctuations in the value of securities and other financial instruments held in the CBK’s investment portfolio.

Implications for National Treasury Finances

The CBK’s decision to retain its entire surplus creates significant complications for National Treasury budget planning and deficit financing strategies. The Treasury has historically relied on dividend payments from profitable state corporations, including the central bank, to partially offset budget deficits and reduce borrowing requirements.

Historical Dividend Payments and Their Fiscal Importance

In previous years, CBK dividend transfers to the Consolidated Fund ranged from relatively modest amounts of KSh 2.5 billion during periods of lower profitability to substantial payments of KSh 30 billion when the central bank generated strong earnings. Most recently, in 2024, the CBK remitted KSh 30 billion to the Treasury, providing meaningful budgetary support during a period of fiscal constraint.

These dividend flows, while variable from year to year depending on the central bank’s profitability and capital requirements, have represented an important supplementary revenue source that helps reduce the government’s reliance on debt financing. When state corporations including the CBK transfer dividends to Treasury, they effectively provide cost-free financing that does not increase the national debt burden or create future debt service obligations.

The complete absence of CBK dividends in 2025 therefore creates an immediate financing gap that Treasury Cabinet Secretary John Mbadi and his team must address through alternative means. The options available include increasing tax revenues, reducing expenditures, or expanding domestic and external borrowing—none of which represent politically or economically painless alternatives.

Compounding Fiscal Pressures

The timing of the CBK’s dividend retention decision is particularly challenging for the National Treasury, which already faces significant fiscal pressures stemming from political constraints on revenue mobilization. Following widespread protests in mid-2024 over the high cost of living and proposed tax increases contained in the controversial Finance Bill, the government was forced to withdraw numerous planned tax measures that would have generated billions in additional revenue.

These abandoned tax proposals included increases in value-added tax rates, expanded taxation of basic commodities, higher fuel levies, and various other revenue measures that Treasury officials had counted on to narrow budget deficits and reduce borrowing requirements. The political backlash and ultimate withdrawal of these measures left the government facing a substantial revenue shortfall with limited obvious alternatives for closing the gap.

In this context, the loss of what would likely have been a significant CBK dividend payment—potentially in the range of KSh 30-50 billion based on the bank’s strong profitability—represents a meaningful additional fiscal challenge. Treasury must now identify alternative financing sources or expenditure cuts totaling billions of shillings to compensate for the absent central bank dividend.

The compound effect of withdrawn tax measures and withheld central bank dividends creates what economists describe as a fiscal squeeze, where the government’s capacity to fund its planned expenditures becomes increasingly constrained. This can lead to difficult choices between cutting spending on essential services, delaying infrastructure projects, or increasing borrowing with attendant implications for debt sustainability and interest costs.

Legal Framework Governing CBK Dividend Distributions

Understanding why the CBK can legally withhold dividends despite the fiscal pressures facing Treasury requires examining the statutory framework established in the Central Bank of Kenya Act (Cap. 491), which governs the institution’s operations, powers, and financial management.

Mandatory Profit Distribution Requirement

The Act establishes a general requirement that the CBK must distribute its net annual profits to the National Treasury through transfer to the Consolidated Fund, subject to mandatory allocations to statutory reserves. This provision reflects the principle that the central bank, as a state institution, should ultimately return its earnings to the public purse rather than accumulating indefinite surpluses.

However, this distribution requirement is not absolute and includes several important qualifications and exceptions that provide the central bank with flexibility to retain earnings when justified by financial prudence and institutional requirements.

Capital Strengthening Provisions

One of the most important exceptions permitting dividend retention relates to capital strengthening initiatives. When the CBK determines that its capital base requires fortification to ensure financial stability and operational effectiveness, it may retain some or all of its profits rather than transferring them to Treasury.

This capital strengthening exception reflects recognition that an adequately capitalized central bank serves the broader public interest by ensuring monetary and financial stability, even if it means temporarily foregoing dividend transfers. The current retention of KSh 65.8 billion clearly falls within this exception, as the bank pursues its stated objective of reaching KSh 100 billion in paid-up capital by 2027.

Treatment of Unrealised Gains

Another crucial provision in the legal framework addresses the treatment of unrealised revaluation gains—paper profits arising from currency fluctuations or asset revaluations that do not represent actual cash earnings. The Act implicitly recognizes that distributing such unrealised gains would be imprudent, as subsequent market movements could transform these paper profits into real losses that would undermine the central bank’s financial position.

The KSh 13.8 billion unrealised gain component of the CBK’s 2025 surplus clearly falls into this category. By retaining these unrealised gains within reserves rather than distributing them as dividends, the central bank protects itself against potential future losses if currency movements reverse or asset values decline.

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General Reserve Requirements and Maintenance

The Act also permits the CBK to withhold earnings to build up or maintain its general reserves at levels considered appropriate for operational and financial risk management purposes. These reserves function as financial cushions that enable the central bank to absorb losses from various sources without requiring recapitalization from taxpayers or experiencing capital impairment that could constrain monetary policy operations.

The CBK’s general reserves, which increased from KSh 300.7 billion to KSh 357.3 billion during the 2024-2025 fiscal year, provide substantial protective buffers. However, the central bank’s assessment evidently concludes that even larger reserves are warranted given the scale of its operations, the size of Kenya’s economy, and the various risks facing the institution.

Preparatory Provisions for Financial Risks

Finally, the statutory framework acknowledges that the CBK may retain earnings to prepare for potential financial risks including currency instability, possible losses on asset holdings, or expenses related to financial sector interventions. This forward-looking provision recognizes that central banking inherently involves risk-taking in pursuit of monetary and financial stability objectives.

Currency instability represents a particularly significant risk for the CBK given its large holdings of foreign exchange reserves, which currently exceed $9 billion according to recent CBK statistics. If the Kenya Shilling were to depreciate substantially against major currencies, the local currency value of these reserves would increase—generating unrealised gains. Conversely, if the shilling appreciates, the CBK would experience unrealised losses that could erode its capital if not adequately buffered by reserves.

Comparative International Practice

The CBK’s decision to strengthen capital rather than distribute dividends aligns with international best practices and emerging trends among central banks globally. Many monetary authorities worldwide have undertaken similar capital strengthening initiatives in recent years, reflecting evolving understanding of the importance of central bank financial strength.

The European Central Bank, for example, maintains substantial capital and reserves relative to its balance sheet size and has periodically retained profits to strengthen its financial position. Similarly, the Federal Reserve in the United States maintains significant capital buffers, though its remittances to the US Treasury vary substantially depending on interest rate environments and the profitability of its operations.

Central banks in emerging market economies often face particular challenges related to capital adequacy, as their foreign exchange reserves may represent a large multiple of their capital base, creating substantial currency risk exposure. Many have therefore adopted policies of gradually building capital through profit retention even when this creates fiscal challenges for their governments.

Stakeholder Perspectives and Debate

The CBK’s dividend retention decision has generated varied reactions from different stakeholder groups with divergent perspectives on the appropriate balance between central bank financial strength and fiscal support for government operations.

Central Bank’s Position

From CBK Governor Kamau Thugge’s perspective, the decision represents prudent financial management that prioritizes the institution’s long-term stability and operational effectiveness over short-term fiscal convenience. The Governor and the central bank’s board of directors evidently concluded that reaching the KSh 100 billion capital target by 2027 requires aggressive profit retention in the current period, even at the cost of temporarily foregoing dividend transfers.

The central bank’s public communications emphasize that adequate capitalization serves the broader public interest by ensuring the CBK can effectively discharge its monetary policy mandate, maintain currency stability, and intervene in financial markets when necessary without financial constraints limiting its actions.

Treasury’s Dilemma

From Treasury CS John Mbadi’s perspective, the absent dividend represents a significant budgetary challenge that complicates already difficult fiscal management decisions. Treasury officials must now identify alternative revenue sources or expenditure reductions totaling billions of shillings—a challenging proposition given political constraints on taxation and competing demands for government spending on essential services and development programs.

While Treasury may accept the economic rationale for CBK capital strengthening, the fiscal implications create immediate practical challenges that must be addressed through budget reallocation or increased borrowing. The compounding effect of withdrawn tax measures and absent central bank dividends leaves limited comfortable options for closing the resulting financing gap.

Economic Analysts’ Views

Independent economic analysts generally support the CBK’s capital strengthening initiative while acknowledging the fiscal complications it creates for Treasury. Most economists recognize that a well-capitalized central bank serves long-term economic stability objectives that ultimately benefit government finances through reduced currency volatility, lower inflation, and more stable financial conditions.

However, some analysts question whether the aggressive capital accumulation timeline—reaching KSh 100 billion by 2027—necessarily requires complete dividend retention rather than a more gradual approach that would allow partial distributions to Treasury. These observers suggest that a phased capital building strategy might better balance the competing objectives of central bank financial strength and fiscal support.

Looking Ahead: Implications and Timeline

The CBK’s decision to withhold dividends in 2025 represents the beginning of what will likely be a multi-year period of profit retention as the central bank pursues its KSh 100 billion capital target. Unless the bank’s profitability increases dramatically beyond current projections, achieving this objective by 2027 will require continued retention of most or all surplus earnings over the next 2-3 years.

For the National Treasury, this means adjusting fiscal planning to reflect the extended absence of CBK dividend flows that previously provided supplementary revenue. Budget frameworks extending through 2027 will need to reflect this reality through some combination of enhanced tax collection efficiency, expenditure restraint, or increased reliance on debt financing.

For Kenya’s economy more broadly, a strongly capitalized central bank should provide enhanced monetary and financial stability that creates favorable conditions for private sector investment, economic growth, and ultimately improved government revenues. If the capital strengthening initiative succeeds in enhancing the CBK’s credibility and operational effectiveness, the medium-term economic benefits may outweigh the near-term fiscal costs.

Conclusion: A Strategic Trade-off with Long-term Implications

The Central Bank of Kenya’s decision to retain its entire KSh 65.8 billion surplus rather than remitting dividends to the National Treasury represents a significant strategic choice that prioritizes institutional financial strength over short-term fiscal convenience. This policy reflects sophisticated understanding of central bank capital adequacy requirements and international best practices, even as it creates meaningful challenges for government budget management.

The legal framework established in the Central Bank of Kenya Act provides clear authority for dividend retention when justified by capital strengthening objectives, unrealised gain characteristics, reserve requirements, or risk management considerations. The current retention decision clearly satisfies multiple statutory criteria for withholding distributions.

As Kenya navigates the complex fiscal and monetary policy challenges of the coming years, the wisdom of prioritizing CBK capitalization over dividend distributions will ultimately be judged by whether the stronger central bank delivers enhanced currency stability, more effective monetary policy, and greater financial system resilience that benefit the broader economy. For now, the decision represents a calculated bet that institutional financial strength serves the public interest even at the cost of temporary fiscal discomfort.

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By: Montel Kamau

Serrari Financial Analyst

16th October, 2025