Commercial banks continued pumping more cash into government securities in the half year ended June, even as they tightened credit to private enterprises and individuals.
Financial statements for the half year ended June 2018 show that 28 banks raised holdings of government securities by nearly 11.8 per cent or Sh117.9 billion in the six months as they fought effects of the rate cap.
Government security holdings stood at Sh1.11 trillion in the period from Sh999.5 billion in the comparable period a year earlier. Barclays Bank of Kenya (BBK) #ticker:BBK topped the list of lenders that pumped more money into government debt having bought securities worth Sh93.3 billion, a 62.4 per cent increase or the equivalent of Sh35.8 billion from the previous year’s Sh57.4 billion.
Stanbic Bank #ticker:CFC raised its holdings by 26.6 per cent or the equivalent of Sh19 billion to Sh90.7 billion in the period, while Diamond Trust Bank #ticker:DTK upped its investments by Sh16.6 billion or 19.89 per cent to Sh100.3 billion. NIC Bank #ticker:NIC raised its holdings 28.3 per cent to Sh53.2 billion from Sh41.4 billion a year earlier.
Equity Bank’s #ticker:EQTY investment in government securities stood at Sh124 billion, up from Sh105.1 billion, representing an 18.7 per cent rise equivalent of Sh19 billion. Co-operative Bank’s #ticker:COOP stock went up 13.71 per cent to Sh80.1 billion while Standard Chartered #ticker:SCBK saw its investments rise four per cent to Sh120.9 billion.
Analysts said banks, the largest investors in State securities, have increasingly turned to the debt instruments for sure returns since the restrictions on interest rates in late 2016.
“This is deliberate. It was the way for them to go after the rate caps and so they have become quite big in this way,” said Alexander Muiruri, fixed income expert with Kestrel Capital earlier. Johnson Nderi, a corporate finance manager with ABC Capital, earlier said the increase in volumes of government securities held by banks was also in line with their expanded balance sheets even as they dealt with constraints introduced by compliance with IFRS-9.
IFRS-9 requires lenders to recognise chances of default on loans at the outset rather than when it actually happens. Default on lending to the government is the lowest, thus they are considered risk free.
The Treasury’s appetite for debt appeared to have grown in the past couple of years — a development that has seen the government borrow heavily from local markets, crowding out productive sectors of the economy.
Kenya introduced interest rate controls in September 2016 with the enactment of a law that limits lending rates to not more than four percentage points above the Central Bank Rate in response to the high cost of credit that saw banks lend money at more than 20 per cent interest.
The Banking (Amendment) Act, 2016, also required lenders to pay interest on term deposits at the rate of 70 per cent of the CBR.