Markets & Finance

Insurers transfer deposits from banks to treasuries


A Nairobi Securities Exchange employee monitors online trading. The attractiveness of treasuries is helped by their lack of a risk. PHOTO | FILE

Insurance firms are moving short-term deposits from banks to government securities after the rate cap law, exposing banks to loss of short-term liquidity.

Analysis by UK-based investment bank Exotix Partners and Equity Investment Bank done on the seven listed insurers shows they are set to lose up to five percentage points in interest on deposits normally held for between one and four months.

The recent banking amendments limit bank average lending rates to 400 basis points above the Central Bank Rate (CBR) and set the minimum deposit rates at 70 per cent of the base rate.

This rate cap on loans has forced lenders to also lower the interest they are willing to pay on deposits in order to protect margins.

“Kenyan insurers are now in favour of the 182-day government paper over three-month bank deposits. Our conversations with insurers indicate that short-term bank deposits are being re-priced downwards from their historical pre rate-cap average yield of 12.1 per cent (2011-15 average) to seven per cent currently,” says EIB analyst Muamar Ismaily in the report.

“Our most recent update assumes the average financial year 2016 yield will be 11.7 per cent, and then decline to seven per cent between 2017 and 2020.”

Bank deposits held by non-life insurers are mainly of the one to four month tenor. These bank deposits provide short-term liquidity used to pay for claims and benefits or put to arising investment opportunities.

The listed insurers hold on average 15 per cent of total assets in short-term bank deposits, according to the research.

Using this average, the industry’s total would be equivalent to Sh71.8 billion, based on total assets of Sh478.8 billion at the end of 2015. The banking sector has endured skewed liquidity in recent months, with large lenders holding the bulk of available funds for the industry at the expense of smaller lenders.

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The shift of deposits from banks to treasuries will most likely exacerbate the lenders’ liquidity problem, especially when coupled with the flight of depositors to larger banks.

Treasury bills and bonds accounted for 31 per cent of the insurance industry’s total assets by the end of last year. There is no investment limit on the asset class based on the current regulations.

According to Mr Ismaily, the attractiveness of the treasuries is also helped by their lack of a risk charge under the new risk-based regulatory framework.

“We assume that this allocation will increase to 35 per cent by 2020 due to the premium on yield over bank deposits… government securities also carry no capital risk charge so any insurer looking to improve their capital adequacy levels under the risk framework will be inclined to increase their allocation,” said Mr Ismaily.

The treasuries also carry a variety of maturity profiles that range from the shortest term of three months to the long-term bonds of 25 years, thus allowing insurance firms to match long-term liabilities with less volatile assets.