Banks more than halved lending to the government last year as they sought higher returns that the Central Bank of Kenya was unwilling to offer, official domestic public debt data show.
The commercial lenders cut fresh investment in largely risk-free government securities to Sh64.87 billion in the year ended December 30 from Sh169.74 billion the year before, signalling a reallocation of cash to businesses and households.
The 61.78 percent, or Sh104.86 billion, fall came at a time banks asked for higher interest rates during bond sales to compensate for rising inflation that threatened to eat into their real returns.
The slowdown in the allocation of cash to government securities pushed their share to 46.78 percent of nearly Sh4.47 trillion domestic state debt on December 30 from a 50.2 percent stake a year earlier.
That translated to Sh2.09 trillion of domestic public debt, a flagging 3.20 percent growth over Sh2.03 trillion the year before when their value grew 8.38 percent.
Wesley Manambo, a research analyst at Nairobi-based Genghis Capital, said “banks are disincentivised from holding government securities by the mounting mark-to-market paper losses against the backdrop of surging yields”.
“Furthermore, IFRS 9 provisions require banks to raise their expected credit loss provisions to account for loss impairments — an additional obligation to the banks,” Mr Manambo told the Business Daily via email.
“There is also a notable rise in demand for credit by the private sector despite the rising benchmark rate. This affords banks an opportune moment to raise their loans and advances to customers in place of held-for-trading government securities.”
The CBK, primarily tasked with stabilising prices, raised the benchmark interest rate by 175 basis points to 8.75 percent last year countering the expectations of further growth in prices.
Analysts had expected a more aggressive tightening to significantly reduce capital flight to developed markets such as the US.
Record inflation in a considerable number of developed economies as a result of wracking disruptions in global supply chains last year prompted central banks to aggressively raise policy rates to tame price rises.
Increasing the key policy lending rate makes borrowing more expensive, and this is expected to reduce spending by businesses and families with the ultimate goal of lowering the prices of goods and services that have plagued the economy since last year.
Banks largely use the central bank rate as a base which is normally the cost of funds, plus a margin and a risk premium, to determine the price of a loan.
“We are going back to the [credit] market. We want to stimulate the market. We shall see ourselves significantly removing the value that was packed in government stock to the market,” Equity Group chief executive James Mwangi told investors last November.
“That is an opportunity for investors to see that the asset reallocation will move with returns from maybe an average of nine in government stocks to an average of 13 percent [paid by businesses and households] in revenue portfolio.”
Private sector credit grew 13.3 percent in October from 12.5 percent in August, according to the CBK, a trend analysts expect to persist this year at the expense of lending to the government.
The CBK, the government’s fiscal agent, faces the challenge of keeping borrowing costs manageable for President William Ruto’s administration which is reluctant to borrow at more than 10 percent.
“I have also given instruction to the Ministry of Finance that, yes, we will go to the market and if we find that in the market, we cannot find money at 10 percent, we will go back and relook at other sources,” Dr Ruto told members of the Association of Pension Trustees and Administrators of Kenya on November 11.
“It is not possible for us to borrow beyond 10 percent… the last borrowing that we did was at 14 percent. That is unacceptable.”
Overall, pension funds were the largest investors in government securities last year when they pumped Sh225.27 billion in State debt, racing ahead of commercial banks for the second year running.
