Banks’ share of government domestic debt drops to 45pc

The Central bank of Kenya, Nairobi. FILE PHOTO | DENNIS ONSONGO | NMG

Banks’ share of domestic debt has fallen to 45.4 percent from highs of more than 50 percent last year as they seek higher returns from lending to the private sector besides reducing their exposure to paper losses in a rising interest rate environment.

Data from the Central Bank of Kenya (CBK) shows banks' hold of government domestic debt stood at 45.39 percent on March 26 in contrast with 50.15 percent in January last year.

Their investment in bonds and T-bills has been on a downward trend since February last year driven largely by fears of escalating paper losses from holding marketable securities, rebounding private sector credit and a dip in the country’s credit rating.

The reduced holdings of government paper by banks have been against a nominal growth in government domestic debt by nearly Sh500 billion over the same period.

The rising interest rate environment has exposed banks to market losses as yields on Treasury instruments edge higher which has served as a disincentive for banks to increase their holdings of government securities.

An analysis of top banks' results for the three-month period to March for instance shows the nine banks booked paper losses of Sh16 billion from holding tradable government paper with Equity Group accounting for the bulk of the losses at Sh7.8 billion.

Meanwhile, recent credit downgrades on the sovereign have triggered concerns over a potential credit default or a domestic debt restructure event which would impact holders of the securities including banks.

“High sovereign debt levels, along with reduced debt and interest servicing capacity, caused the increased possibility of sovereign restructures or downgrades and defaults in Nigeria, Ghana and Kenya,” South Africa’s Absa Group stated in its latest annual report.

In its last credit worthiness, Moody’s investor service downgraded the country’s foreign currency issuer status from B2 to B3 on deteriorating domestic funding conditions.

Additionally, banks have been incentivized to lend more to the private sector in place of government lending as the demand for credit by the real economy cushions commercial lending against evolving challenges such as high credit costs.

Private sector credit growth for instance stood at a six-month high of 13.2 percent in April while the rate has remained within double-digits since March last year.

Banks have more opportunity to leverage lending for further growth this year with risk-based credit pricing approvals from the CBK clearing the way for banks to offer credit to riskier borrowers at higher margins.

As the banking sector's dominance on Treasuries retreats, insurance companies and pension funds have been adding to their share of government securities.

Insurance firms for instance held 7.61 percent of government domestic debt in March from 6.87 percent at the same time last year.

Meanwhile, pension funds have increased their holding of government securities to 33.82 percent from 31.75 percent over the same period.

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