The Capital Markets Authority recently released its First Quarter statistical bulletin showing what I believe is one of the biggest risks facing our financial sector.
According to the data released, 52.8 percent of total Sh76.1 billion in Assets Under Management (AUM) by licensed fund managers in Kenya is invested in Kenya Government securities.
This is higher than 49.8 percent and 45.8 percent in 2019 and 2018 respectively.
If we dig deeper and look into AUM invested with banks through cash and time or fixed deposits we see a total of 29 percent of the total AUM invested with banks in 2019, 31.4 percent in 2019 and 29.7 percent in 2018.
On the other hand, 12.1 percent of total AUM was invested on the Nairobi Securities Exchange (NSE) in 2019, higher than 9.4 percent in 2018 but lower than 13.6 percent in 2017.
This data it can be argued is a reflection of the volatility of the equities’ market and the general predictability of the fixed income and bank deposits.
Deteriorating asset quality in the banking sector is clearly evident with data as at the end of March 2020 indicating a Non-Performing Loan (NPL) Ratio of 12.5 percent. Data available shows private sector credit growth at 8.9 percent over the same period in 2019.
This could mislead most that banks are in full gear lending to the private sector but this is certainly not the case.
A significant portion of banks capital in the form of customers’ deposits is invested in Government securities. Data from the CBK shows that banks hold 54.6 percent of total domestic debt.
This is equivalent to Sh1.7 trillion of the Sh3.1 trillion domestic debt as at the end of March 2020 and over a quarter of the country’s Sh6.3 trillion public debt.
The truth is banks have also adopted a cautious approach to lending and would prefer to lend to customers who they believe present the lowest risk of default or possesss a security that is easily sold or transferrable in the event of default.
The marketability of fixed securities like land or property has come into question in the recent past as banks struggle to auction the same.
This, however, is not an area I wish to draw attention to. My focus is on the vulnerability of the financial ssytem taking into consideration the distribution of AUM. Combined, 81.1 percent of total AUM was invested in both Government securities and bank deposits equivalent to Sh61.5 billion of the total Sh76.1 billion under management.
If we assume that a sizeable portion of the Sh22 billion is invested by banks in Government securities, the total AUM exposure stands at close to Sh70 billion and near 90 percent of total AUM.
Putting this into perspective, almost 90 percent of personal and investment savings entrusted with local fund managers is invested in one type of security, Kenya domestic debt.
It is about time that fund managers thought beyond predictable returns and perceived risk aversion because this itself is becoming a risk investment strategy.
The writer is head of research of a local investment bank.