Commercial banks pumped more money into government securities in the year to December 2017, even as they tightened credit to private enterprises and individual customers, fresh industry data shows.
Financial statements for the year ended December 31, 2017 show that the top eight Kenyan banks invested Sh83.9 billion or 15 per cent more in government debt for a total of Sh625.1 billion in the period under review.
Lending to the private sector grew a paltry 2.1 per cent in the same period, having been the biggest loser in the credit market following the coming into force of a law capping interest rates.
The Treasury’s appetite for debt appeared to have grown in the past couple of years – a development that has seen 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 to private businesses and individuals 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.
The Central Bank of Kenya (CBK) on March 19 cut the benchmark lending rate by 0.5 percentage points -- the first since the legal caps were introduced.
Commercial banks have, however, shied away from lending to individuals and blame the legal caps for the slow rate at which credit is growing.
The banks have argued that they are unable to properly price in risk for customers, especially SMEs that tend to carry a higher default rate.
Standard Chartered Bank Kenya topped the list of lenders that pumped big money into government debt having bought government bonds worth Sh110.5 billion, a Sh24.1 billion or 27 per cent increase from the previous year’s Sh86.4 billion.
Equity Bank was the second with Sh106.4 billion, up from Sh90.8 billion, representing a 17.1 per cent rise equivalent of Sh15.5 billion.
KCB came in third with Sh92.3 billion, up 1.5 per cent from the previous year’s Sh90.9 billion.
The list also included Diamond Trust Bank (up 14 per cent to Sh84.9 billion), Co-operative Bank (up 19.7 per cent to Sh69.2 billion) and Barclays Bank (up 21.5 per cent to Sh68 billion).
This outcome followed the banks’ warning in March last year that they would divert more funds to treasury bills and other opportunities in the forex market rather than lend to private borrowers.
The banks, through their lobby the Kenya Bankers Association (KBA), argued that it would be more lucrative to lend to the government, which carries minimum risk in the wake of the rate capping law.
The government has promised the International Monetary Fund (IMF) a repeal of the interest rate capping law, leaving consumers under a cloud of uncertainty over the future cost of loans.
Treasury secretary Henry Rotich said recently that the government would review the caps in response to a sharp decline in credit growth.
Borrowers, who paid exorbitant credit costs before rate cap came into force, will now be watching keenly to see how the Treasury navigates the sensitive and emotive issue either with a partial review or repeal.