The Treasury’s plan to expand the amount of domestic borrowing to finance the budget and high level of non-performing loans are likely to constrain growth of credit to the private sector even with a lower base rate, Standard Investment Bank (SIB) says.
In nominal terms, the fiscal deficit for the year that ends in June is projected at Sh748 billion or 7.2 percent of the gross domestic product (GDP) — which is an increase from the initial projection of Sh635 billion.
Central Bank of Kenya has been trying to encourage banks to lend more to the private sector by lowering the base rate — by 25 basis points to 8.25 percent in January — but the Treasury’s appetite for local debt may yet scupper that plan given that banks are the largest lender to the government locally.
SIB analyst Martin Kirimi said in a fixed income report that that the current monetary policy being pursued by the CBK has therefore been thrown into a spin, because the fiscal stance by Treasury can only result in more cash being thrown into government securities.
“Given that banks are the main sources of liquidity, the divergent actions of the two most important policy formulators leaves the lenders’ with an easy pick in our view: pump the money into treasuries,” said the SIB analyst in the report.
He added that the expected boost in private sector lending due to the removal of the rate cap is also likely to be slower due to limited ability by banks to raise rates, partly due to CBK’s strong in enforcement of ethical behaviour as enshrined in the Banking Sector Charter.
“Our interaction with some of Tier 1 lenders confirm that the regulator is very strict with regards to loan pricing thus there hasn’t been any material adjustments on the same.”
Mr Kirimi added that banks are also likely to keep a wary eye on asset quality while committing further credit to the private sector.
They are likely to have a lower risk appetite because of the sector’s non-performing loans of an average of 12 percent in 2019, presenting a risk to their bottom-line.