Desperate for loans, Kenya offers highest returns in 7 years

The Kenyan government is increasingly borrowing more expensive loans from the domestic market in a trend that has set up households and businesses for a new season of costly loans.

The interest rate on one-year Treasury bills, which sets a benchmark for determining interest rates charged to other borrowers, peaked at 12.452 percent in this week’s auction whose results were announced Thursday, marking the highest price since February 2016.

is reading: The Treasury must tread slowly on domestic borrowing

The trend of borrowing indicates that the government is getting desperate for money to plug its budget deficit.

Investors have been asking for higher margins to hold government securities because they factor in the effects of rising inflation on returns at a time when the government is looking to attract money from the domestic market after being shut out of external financing at exorbitant interest rates.

Earlier this week, the Central Bank of Kenya (CBK) had to accept yields of 16.844 per cent on new five-year bonds only.

With commercial banks basing the interest rates charged on customer loans on the government securities yield (reference rate), which is widely seen as the risk-free rate, borrowers can expect to pay a higher premium to access funds from their banks.

The cost of borrowing from commercial banks actually hit a new 60-month high in May as borrowers felt the weight of the rising interest rate environment, while the average interest rate for a one-to-five-year home loan held steady at 13.37 percent in March. .

However, the latest interest rates on consumer loans did not take into account the effects of the recent hike in the government borrowing rate and the hike in the central bank rate (CBR) to 10.5 percent from 9.5 percent last month.

Data released by the Central Bank of Kuwait set the average lending rate at 13.21% at the end of May, the highest rate for commercial bank loans since June 2018.

While the standard lending rate on paper is the standard lending rate, banks prefer to set the cost of loans to customers based on 364 days of paper returns.

One bank insider told The daily business That the Treasury bill rate makes it “a good measure of where the cost of money is”.

With yields on both government securities and commercial bank loans hitting multi-year highs, analysts are worried about the possibility of a slump in private sector credit growth as businesses and households crowd out.

The pace of private sector credit growth has already softened despite sticking to a double-digit rate of 13.2 percent in May, but from a peak of 13.6 percent in July last year.

We may see banks take a conservative view which means less money for the private sector than banks. Rising lending yields will only accelerate this possibility, said Rufus Mwanase, managing director of Canaan Capital.

“I expect to see bank lending to the government pick up again to bring the sector’s share of domestic debt to the historical mark of at least 50 percent.”

Banks have reduced their portfolio allocations to government securities. For example, domestic government debt holdings by banking institutions fell to 46.17 percent at the end of June from 48.74 percent at the same point last year.

The reallocation of assets by banks in this period coincided with the recovery of private sector credit, which had previously been held back by interest rate caps.

With the government offering a premium to its securities holders to keep money flowing into its coffers, banks are expected to find it easier to pool their money in the treasury than to lend to households and businesses.

“It has to do with opportunity cost. Why should I (as a bank) lend to a customer when you can lend to the government at a premium? Lending to the government is cheaper because the alternative has higher costs including hiring debt collectors, higher administrative costs and even opening branches in some cases.

The World Bank warned that the private sector would continue to be crowded out by heavy domestic borrowing by the Treasury.

is reading: How heavy government borrowing pressures the private sector

The multilateral lender noted that commercial banks failed to peak in their support for investments as the government provided the easy way out by borrowing heavily from the domestic credit market.

The World Bank stated that “credit is growing more slowly than GDP, highlighting that the role of banks in facilitating investments and economic activity remains challenging.”

At present, credit demand in the private sector is holding up in the face of creeping financial dominance, with the manufacturing, transportation, telecom, trade and consumer goods sectors recording a sustained appetite for credit.

In a mini-survey conducted by the Monetary Policy Committee of the Central Bank of Kuwait last month, banks noted continued loan requests and approvals.

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