Commercial banks have raised holdings of government securities by nearly 11 per cent or Sh125 billion in the past year as they fought off effects of rate cap.
Most of the investment in the gilt-edged instruments was done in the past five months, indicating the extent to which the institutions have stepped up their search for guaranteed returns.
While the proportion in terms of these investments declined slightly in the six months to the end of last year relative to others, it rose afterwards to hit 55.2 per cent as at May 25.
Analysts pointed out that banks, being the largest investors in State securities, have increasingly turned to the debt instruments for sure returns since the enactment of the restrictions on interest rates in late 2016.
“The more important thing about the industry is to look at the volumes of the investments in the period. It is quite substantial. 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.
As per the latest update by Kestrel Capital, total domestic borrowing stood at Sh2.341 trillion compared to Sh2.146 trillion at the end of last year and Sh2.076 trillion at the end of June last year.
Johnson Nderi, a corporate finance manager with ABC Capital, said the increase in volumes of domestic debt held by commercial banks was in line with their expanded balance sheets even as they dealt with constraints introduced by compliance with IFRS-9.
IFRS-9 requires commercial banks to recognise chances of default on a loan at the outset rather than when it actually happens. Default on lending to the government is the lowest, thus they are considered gilt-edged.