High returns attract banks to corporate bonds

Banks simply use deposits which cost them less than five per cent and pump it into bonds and reap a more than twice handsome return.

The KenGen bond and Safaricom bond were priced at 12.5 per cent giving the banks a seven per cent mark up margin.

However, banking executives say that much of their business charges are driven by the corporate entities hence their margins are not huge.

“Corporate depositors tend to bargain for better returns on their deposits while at the same time they seek preferential lending rates when borrowing,” said Mr Isaac Awuondo , the managing director of Commercial Bank of Africa.

Another factor making bonds preferable to bank loans is the application of benefits such as tax waiver granted by the government.

In an effort to encourage corporates to issue bonds the government waived the taxes that are applicable for infrastructural bond.

Major challenge

“The long-term financing especially for the development of our infrastructure remains a major challenge and to encourage investment, the government will reduce withholding tax from 15 per cent to 10 per cent on interest arising from long term bonds of ten years maturity and above”, said Finance minister Uhuru Kenyatta in his budget speech last June.

The growing preference for bonds is also being fuelled by companies reluctance to be shackled with the demands and stringent conditions that come with loan funding.

Through dis-intermediation which involves taking funds directly from investors, corporates have the leeway to deal with different “capital lenders” and not one entity.

Commercial banks tend to require the execution of collateral before releasing the funds whereas bond issuance is based on future ability to repay.

But companies issuing corporate bonds must meet the minimum regulatory requirements with all key ratios being healthy.

The issuance of corporate bonds allows companies not to exhaust their borrowing avenues hence can turn to banks for short-term financing.

The Governor of the Central Bank, Prof Njuguna Ndung’u, has advocated the active growth of the bond market as a signal to the deepening of the country’s financial market which will not only provide borrowers with a wide choice but also investors with various investment instruments.