Homes and businesses face costly loans as the government steps up borrowing from the domestic market, pushing returns on bond and Treasury bills to record levels.
The government has in recent weeks increased borrowing amid below-target revenue collections and reduced reliance on debt for the better half ending in December.
This has pushed returns on the 364-day Treasury bill to 10.747 percent in this week’s auction—the highest rate since mid-2018.
The benchmark 91-day Treasury bill yields rose to 9.74 percent from 7.86 percent in June last year, forcing bankers to match it in an attempt to encourage larger depositors to leave their money with banks instead of lending to the State.
The State accepted bids of Sh16.6 billion for the 91-day Treasury bill despite setting the target to collect Sh4 billion, underlining its increased appetite for borrowing.
While the higher rates are welcomed by the cash-rich investors, banks are being forced to raise the rates for wholesale deposits and ultimately pass on the additional costs to consumers in the form of expensive loans.
“The interest rate on deposits for our high-net-worth depositors is rising due to T-bills because we are in competition for funds with the government,” a CEO of a top bank told the Business Daily while seeking anonymity for fear of Central Bank of Kenya (CBK) reprisals.
“The T-bills are rising and the industry is facing pressure to increase lending on the high cost of deposits.”
Banks use a base rate, which is normally the cost of funds plus a margin and a risk premium, to determine how much they charge a particular customer.
A sustained rise in yields on government paper will trigger a review of the bankers’ base rates in what could end the era of cheap credit.
The cost of bank loans hit a 52-month high in December in the wake of the CBK rate hikes and the rising yields on government paper.
Data from the CBK show the average lending rate rose to 12.67 percent in December from 12.22 percent in May last year when the banking regulator first raised rates in nearly seven years.
On Wednesday, the March infrastructure bond became the most lucrative government paper in the market after the CBK was forced to accept higher yields from investors at 14.39 percent for the issue.
This signalled that the government was willing to pay more for budget cash through domestic borrowing.
“The upward shift has resulted from increased budgetary financing pressure from modest growth in revenues with the CBK borrowing aggressively in the domestic debt market,” noted analysts at Sterling Capital.
The Kenya Revenue Authority (KRA) missed its revenue collection target by Sh27 billion in the three months to December amid President William Ruto’s aggressive push to weed out tax evaders and boost receipts.
Tax collections from five major streams—payroll, corporation, VAT, excise and import duty — in the period amounted to Sh466.46 billion against a target of Sh493.11 billion.
Official data show gross domestic borrowing fell by 42.8 percent in the seven months to January to Sh304.2 billion compared to Sh532.9 billion tapped in a similar period a year earlier despite the full-year targets for the two periods being near similar at Sh1 trillion.
“The government was really playing catchup with this month’s infrastructure bond sale, looking at the sub-par performance that was salient hitherto this fiscal year. On the demand side, the sale met a market that is craving for higher rates, against the current macro backdrop,” noted Churchill Ogutu, an economist at IC Asset Managers.
The costly credit emerges in a period when the economy is witnessing increased demand for loans amid the recovery from Covid-19 economic hardships, further putting pressure on lending rates.
Fixed deposit rates increased to 7.17 percent in December from 6.62 percent in June 2022 while returns on current and savings accounts rose marginally.
The higher cost of loans risks locking out businesses from accessing the credit they need for expansion and in turn limiting their ability to create more jobs.
Already, the rate of private sector credit growth has plateaued and begun declining against the backdrop of rising interest rates.
“Private sector credit growth has been on a gradual decline to December 2022 after peaking in July. This shows that the recent tightening by the CBK has tapered private sector credit demand,” said Mr Ogutu.
