Cash-flush firms and individuals have beaten commercial banks, pension schemes and insurers to become the biggest source of new lending to the government so far in this financial year at Sh294.3 billion on the back of rising returns and rollout of an online central bank trading platform.
The retail investors, referred to as “others”, account for slightly more than three-quarters of fresh cash the Treasury has borrowed locally since the start of the current fiscal year through February to bridge the deficit in the budget.
Analysis of the latest government’s domestic debt data shows retail investors have injected Sh294.35 billion into Treasury bonds and bills.
This is after investors —largely composed of individuals, saccos, listed and private companies, self-help groups as well as educational and religious institutions— grew their holding in government debt to about Sh638.88 billion on February 23 this year from Sh344.53 billion on June 30 last year.
The CBK data shows banks raised their holding in government securities by Sh183 billion to Sh2.41 trillion in February from Sh2.23 trillion at the end of last financial year.
Pension schemes, on the other hand, cut their allocation by Sh98.07 billion to Sh1.52 trillion from Sh1.61 trillion in the review period, while insurers raised theirs by Sh20.50 billion to Sh373.72 billion.
Research analysts say the retail or non-professional investors are increasingly seeing government securities as a higher-yielding alternative to bank accounts and money market funds, supported by increased awareness and easier access via Kenya’s new Central Securities Depository (CSD).
The Central Bank of Kenya’s DhowCSD, officially launched last September after three years of development and trial, granted retail investors in Kenya and abroad access to government securities via mobile phones.
Investment in Treasury bonds and bills was hitherto largely a preserve of sophisticated and deep-pocketed investors, with previous effort to open up lending to State via M-Akiba flopping.
The cash pumped into government debt by the retail investor is equivalent to 76.06 percent of the Sh387.02 billion the Treasury has raised through bonds and bills between July 2023 and February 2024.
“Over the past year, yields on government securities have experienced notable growth, with a predominant focus on short-term paper issuances,” Stellar Swakei, a senior research associate at Standard Investment Bank, said via email. “In comparison to alternative passive income streams [such as equities and bank deposits], Treasury bills and bonds have emerged as superior sources of revenue, thus attracting heightened interest from retail investors.”
Returns on Treasury bonds issued this financial year have averaged 16.86 percent, after the CBK paid coupon rates ranging from 15.04 percent to 18.39 percent in the review period.
That is higher than interest on bank deposits which averaged 10.1 percent last December, the first double-digit returns in more than two decades since January 2000. Returns on bank savings accounts are even smaller at an average of 4.24 percent at the end of last year.
The strong appetite in government papers was reflected in raising of Sh240.9 billion from the tax-free infrastructure bond in February, more than three times Sh70 billion the CBK, the government’s fiscal agent, had sought.
The shorter-dated papers, analysts say, have also favoured retail investors unlike pension schemes and insurance firms which usually prefer longer-dated securities.
The CBK has tended to float shorter-dated securities this fiscal year amidst elevated yields being demanded by investors in a high inflationary environment. The tenure for the bonds issued since the beginning of the fiscal year through February averages at 5.25 years, half the 11.93 years maturity period for the same period a year earlier.
“The government has shown a preference of borrowing short-term due to the high rates environment, and for bankers, lending to the private sector gives them room to have longer duration assets,” Churchill Ogutu, a Nairobi-based economist for IC Group.
“Furthermore, banks may have an agnostic view of the real estate sector, cemented by the relationships they may have with their customers. As such, there will still be a likelihood of credit mediation amidst shifts in domestic borrowing targets.”
The increased participation by retail investors will help the government access cheaper funds in future, while lowering the risk of crowding out the private sector by over-relying on banks.
This has come in a fiscal year the Treasury has revised domestic borrowing targets two times.
The borrowing goal was late last year revised upwards to Sh471.4 billion from Sh415.3 billion that the Treasury had projected in September through the Budget Review and Outlook Paper (BROP) and Sh313.7 billion earlier on.
