Banks now shift to private borrowers as rates decline
The Central Bank of Kenya in Nairobi. Data by the regulator shows that saccos, self-help groups and individuals have increased their Treasury bill holdings. Photo/File
What you need to know:
CBK data shows banks held 49.8 per cent of Treasury securities as at July 12, down from 51.1 per cent a month ago.
Falling interest rates on government securities has nudged banks to lend more to the private sector.
Bank lending to the private sector increased by Sh20 billion to Sh1.44 trillion between March and May, having stagnated towards end of last year.
Commercial banks’ holding of government securities has declined to less than half of all Treasury papers, indicating a shift in lending to private sector borrowers following the drop in interest rates in recent months.
Data released by the Central Bank of Kenya (CBK) shows banks held 49.8 per cent of Treasury securities as at July 12, down from 51.1 per cent a month ago.
The current level of Treasury securities held by banks translates to about Sh505.62 billion of the total outstanding government papers of Sh1.034 trillion, and is about four percentage points lower than the 53.8 per cent holding as at mid April.
“The share of government securities held by banking institutions, insurance companies and parastatals declined from 51.1 per cent, 10.5 per cent and 4.4 per cent, respectively, in June 2013 to 49.8 per cent, 10.3 per cent and 4.3 per cent at July 12,” said CBK in a statement.
Falling interest rates on government securities has nudged banks to lend more to the private sector. Bank lending to the private sector increased by Sh20 billion to Sh1.44 trillion between March and May, having stagnated towards end of last year.
The lenders have gradually reduced their lending rates in tandem with the government’s move to cut the base rate to 8.5 per cent, which sent a signal to banks to lower the cost of loans.
“The government’s focus on growth means banks are encouraged to extend more credit to the private sector,” said Commercial Bank of Africa treasury dealer Joshua Anene.
The uptake of Treasury bills has fallen in tandem with the interest rates trend. Of the Sh9 billion Treasury bills offered for sale during the week ending July 19, Sh1.9 billion in bids was received and accepted.
The interest rates for the 91-day Treasury bills has dropped from the 12.92 per cent offered 12 months ago to 6.29 per cent as at July 19, while the rate for the 182-day bills fell from 12.8 per cent in July 2012 to 6.48 per cent.
The 364-day Treasury bill interest rate has reduced from 13 per cent a year ago to the current 9.05 per cent.
The fall in banks’ lending to government has been balanced out by an increase in take-up of the government securities by other investors who are classified by CBK to include saccos, listed and private companies, self-help groups, educational institutions, religious institutions and individuals.
These investors have raised their holdings of government securities to account for 10.1 per cent of the total, up by 1.4 per cent since the end of June.
“Those held by pension funds and other investors, increased from 25.3 per cent and 8.7 per cent, respectively, to 25.5 per cent and 10.1 per cent,” said CBK in its bulletin.
The holdings by the group classified as other investors have gone up from Sh87.95 billion in June to Sh104.43 billion in July, meaning that they have gained the most in the loosening of banks’ hold on the risk free lending avenue.
The holdings by banks are now at the same levels as July 2012 in percentage terms. Within the past one year, the holdings have gone up to as high as 53.8 per cent, which was recorded in mid-April this year.
The share of government securities held by banks stood at Sh520.6 billion in the week ending April 19, of Sh967.6 billion government domestic debt in form of Treasury bonds and bills, having gone up by Sh110 billion in the one year from April 2012.
Other analysts, however, contend that the interest rates could yet be reverse upwards by the need of the Treasury to bridge the budget deficit.
Research and risk analysis firm Stratlink Africa assesses that the big government deficit could lead to an elevation in borrowing costs both for the government and private sector, potentially reversing the reduction in the cost of loans witnessed lately.
“Given that the government is likely to turn to the local debt market to fund this deficit we expect short term fixed income yields to turn upwards, potentially reversing the trend that has prevailed in the last month,” said Stratlink Africa in their July outlook on the fixed income market.
