The Central Bank of Kenya (CBK) has embarked on reforms aimed at cutting dominance of large commercial banks in government securities, lower cost of borrowing and boost cash flow for investors who exit.
This is part of the conditions in a deal between Kenya and the World Bank Group for disbursement of $750 million (Sh81 billion) under the Development Policy Operations (DPO) expected by end of the month.
The CBK in January published updated auction rules for Treasury bonds and bills as part of the reforms to reduce domestic debt costs and risks by promoting transparency and market confidence, thus “preserving the integrity of the auction process”.
The bank backs the refreshed rules, which give more clarity on operation of government debt auctions, to “potentially helping to enlarge participation and improve auction bidding behaviour, which is currently dominated by large commercial banks”.
The share of banks in domestic debt has reduced slightly this year in what analysts have partly attributed to issuance of long-dated bonds by the CBK, and accounted for 51.4 percent of the Sh3.67 trillion portfolio as at June 4 compared with 53.29 percent at the end of December.
“In the secondary market, the CBK is seeking to implement a benchmark bond programme to strengthen secondary market liquidity and reduce domestic debt costs, whilst also supporting broader domestic bond market development,” World Bank analysts said.
The programme will see the CBK —Treasury’s agent in debt markets — restructure Kenya’s debt maturity profile by prioritising benchmark bonds which will set standards for the performance of other bonds.
The World Bank said the CBK has committed to develop a bond reopening calendar, identify candidate bonds and provide justification for the choice and adopt a benchmark bond size limit.
It also pledged to reduce refinancing risk and increase concentration in the benchmark issues by coming up with a refinancing programme through strategies such as buying back the bonds when interest rates are lower and also asking investors to invest in other bonds rather than redeem their cash.