Capital Markets

Extended drought for private loan seekers

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • The Central Bank of Kenya (CBK) said 43 percent of lenders covered in a June credit survey indicated that they would direct their money to Treasury bills and bonds.
  • In the survey, 23 percent of lenders said they were going to invest in treasury bonds, 20 percent in treasury bills while 19 percent indicated they would lend among themselves.
  • Some 28 percent said they would deploy the additional liquidity towards lending to the private sector.

Households and the private sector face a prolonged credit drought after a majority of banks indicated that they would direct their cash to lower-risk government securities.

The Central Bank of Kenya (CBK) said 43 percent of lenders covered in a June credit survey indicated that they would direct their money to Treasury bills and bonds in the current quarter ending September, squeezing out the private sector and households, which are still reeling from the economic fallout of Covid-19.

In the survey, 23 percent of lenders said they were going to invest in treasury bonds, 20 percent in treasury bills while 19 percent indicated they would lend among themselves.

Some 28 percent said they would deploy the additional liquidity towards lending to the private sector while eight percent and three percent are targeting CBK liquidity management through repos and investing in other instruments, including offshore, respectively.

The government's domestic debt stood at Sh3.794 trillion mid-June, with 55.4 percent or Sh1.952 trillion having come from banks.

The preference for risk-free lending to the government points to a blow to private firms and households — many who are seeking loans for recovery following revenue declines, business collapse, and loss of jobs in the Covid-19 environment.

"Perceived demand for credit increased in personal and household, and trade sectors as a result of economic challenges brought about by the pandemic," said CBK in the survey.

Private sector credit growth peaked at 9.6 percent in February but has since dipped, oscillating between 6.7 percent and 7.7 percent.

Part of the bank's challenge has been the pending shift to risk-based pricing models that are supposed to accommodate borrowers deemed riskier.

Many banks are yet to get a CBK nod on their pricing models, forcing them to stick to the lending rates they had in the rate cap regime that had cut out borrowers whose risk profile was above the maximum price of the loan that the law had allowed.

The low appetite for the private sector is despite 67 percent of banks reporting increased liquidity driven by increased deposits, maturity of government securities, loan recoveries, and capital injection.

The liquidity ratio in the banking sector hit an all-time high of 56.8 percent in June, well above the minimum statutory ratio of 20 percent.

Equity Bank Kenya, for instance, closed the period with a liquidity ratio of 88.4 percent, coming on the back of the lender's investment in securities rising 39 percent in six months to close at Sh271.33 billion.

Equity Group CEO James Mwangi said last week private sector credit growth below 10 percent, may not support this year's targeted economic growth of seven percent.

The lenders have accumulated additional Sh227.5 billion deposits between January and June, sending the value of deposits to Sh4.249 trillion as banks stepped up their deposit mobilisation campaigns.

Borrowers have also stepped up on loan repayments but banks are yet to warm up to them given that Covid-19 pandemic uncertainties still exist.

Gross non-performing loans have dropped for four consecutive months to close June at Sh435.3 billion, representing a Sh8.9 billion fall in the four months.

Banks' first-half results have sent the clearest indication that the sector has come out of the Covid-19 downturn.

CBK data showed that commercial banks' six-month profits before tax jumped 61 percent to Sh96.4 billion — the all-time high— in a period majority of them increased government paper holdings.

Relaxed Covid-19 control measures such as reduced curfew hours, allowed movement across counties, and expanded operating hours for bars and hotels have helped many sectors to recover.

The softened measures have offered a boost to sectors such as aviation, tourism, manufacturing, and hospitality, allowing them to repay loans and tap into fresh credit to fund recovery and growth.

The half-year earnings for 2021 have now surpassed the pre-Covid high of Sh85.8 billion recorded in the first six months of 2019.