Expected growth in private sector lending will put pressure on the government to raise interest rates on Treasury bills and bonds this year amid increasing adoption of risk-based lending by commercial banks.
Analysts at ICEA Lion Asset Management said in their latest quarterly briefing that private sector credit growth is expected to continue its trend towards higher double digits as banks resume lending to the real economy after a slowdown due to the August 2022 General Election.
This is set to see the State compete with the private sector for funding, likely pushing it to raise interest rates on treasuries, which have hit highs of 14 percent on long-term bonds.
This comes at a time when banks are implementing risk-based lending models to price their loans, replacing the rate caps that were removed in November 2019 and raising interest rates to above 20 percent on the riskiest borrowers.
“Private sector credit growth could trend towards 20 percent this year as banks resume lending to the real economy. As a result, investors in Treasury Bills and bonds will demand higher interest rates from the government,” ICEA Lion said.
Bond investors have been bidding aggressively in domestic debt auctions to maintain positive real returns and compensate for the high inflation that has surpassed CBK's upper-range target of 7.5 percent.
As a result, the government has been accepting bids as high as 14 percent in recent sales of medium to long-term bonds.
Interest rates on the 91, 182 and 364-day T-bills have also increased in recent months to the current levels of 9.4, 9.8 and 10.4 percent respectively.
While returns on treasuries have increased, they are still significantly below the interest rates at which most households and businesses are being charged on bank loans.
Equity Bank was the latest to announce the implementation of risk-based pricing of its credit facilities, introducing a base rate of 12.5 percent plus a maximum margin of 8.5 percent.
This means that borrowers will be charged starting from 12.5 percent up to 21.02 percent, depending on their creditworthiness.
As of last November, the Central Bank of Kenya (CBK) had approved formulas for pricing of risks from more than half of the industry’s 39 lenders, setting in motion the return of a model where interest rates vary based on the likelihood of a borrower defaulting on repayment.
Higher lending rates charged by banks on loans and increasing demand for loans in the private sector is seen inducing the State, which remains below its borrowing target, to raise rates on treasuries.
The government is behind in its domestic borrowing target by 30 percent, having collected Sh239 billion against a target of Sh324 billion as of the week ended January 13.
Growth in private sector credit increased to 13.3 percent in October from 12.5 percent in August 2022 as CBK reported that the number of loan applications and approvals was reflected in sectors such as manufacturing, trade, business services, and consumer durables.
