Capital Markets

Pressure on banks to loan private sector as cash piles

cbk (1)

Central Bank of Kenya. FILE PHOTO | NMG

charlesmwaniki_img

Summary

  • The amount of liquidity in the banking sector has gone up as the government continues to release payments to contractors and its agencies, with eyes now on the lenders to see if they will increase their lending to the private sector.
  • The interbank rate — at which banks lend to each other on an emergency basis — has fallen to a two-month low of 3.33 percent, indicating banks are under less pressure to meet their daily cash requirements.

The amount of liquidity in the banking sector has gone up as the government continues to release payments to contractors and its agencies, with eyes now on the lenders to see if they will increase their lending to the private sector.

The interbank rate — at which banks lend to each other on an emergency basis — has fallen to a two-month low of 3.33 percent, indicating banks are under less pressure to meet their daily cash requirements.

The liquid market is also a result of reduced government appetite for local borrowing in the early weeks of the new fiscal year, largely due to the receipt of more than Sh230 billion in foreign loans from the International Monetary Fund, World Bank, and a Eurobond issue in the past one month.

“The decline in local borrowing towards the tail end of the fiscal cycle continues to reverberate through markets. Moreover, government spending, especially towards the settlement of pending bills has enhanced overall liquidity in the market,” analysts at NCBA said in a weekly fixed income report.

July is also characterised by Treasury bills and bond maturities worth Sh123.8 billion, which have also fed into the money market.

Central Bank of Kenya (CBK) has in the last four T-bill auctions barely accepted enough offers to match maturities, leaving investors in the short-term securities market holding onto the excess funds that would have otherwise gone into new borrowing.

The CBK data shows that the last four auctions have yielded an uptake of Sh88.5 billion against maturities of Sh93.7 billion, meaning that there has been a net repayment of Sh5.2 billion in the period. Investors had offered the government a total of Sh111.1 billion in the four auctions.

The July bond also left investors holding onto Sh37 billion in rejected bids, after the government took up Sh79.9 billion from the offered Sh116.9 billion.

With banks holding onto the excess liquidity, private sector borrowers are now waiting to see if some of these funds will be directed to their credit needs, which are going up as the economy continues to recover from the Covid-19 led downturn.

Annualised private sector credit growth had fallen to 6.7 percent in April from 9.3 percent in January, hampering economic recovery efforts.