Kenyan banks retreat on lending government over debt

Monday May 01 2023
Central Bank of Kenya (CBK) building in Nairobi.

Central Bank of Kenya (CBK) building in Nairobi. PHOTO | NMG


Kenyan banks have reduced lending to the Treasury by 40 percent ($964 million) amid concerns over the government’s debt sustainability position and the rising interest rates that could leave lenders awash with worthless papers.

The latest spells doom to the government’s increased debt appetite that continues to suffer setbacks through massive undersubscriptions in weekly auctions, prompting a shift to the expensive commercial loans in foreign markets.

Central Bank of Kenya (CBK) data shows that lenders put only Ksh196.2 billion ($1.44 billion) in treasury bills and bonds last year compared with Ksh326.4 billion ($2.4 billion) in 2021.

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This translates to a 40 percent (Ksh130.2 billion, $958.06 million) decline in banks’ investment in government securities, amid sustained fears over the state’s mounting debt burden and the collapse of Silicon Valley Bank, the largest bank failure in the US since the global financial crisis.

“Quarterly growth in domestic credit extended by the banking system (to the government) moderated slightly to 1.8 percent in the fourth quarter (October-December) of 2022 from three percent in the previous quarter (July-September), largely reflecting reduced net lending to government,” says CBK.


“Lending to other public sector increased slightly, mainly due to advances to county governments and parastatals.”
CBK Quarterly economic data shows that banks channelled the excess liquidity to forex trading and the private sector, explaining the increased contribution of forex income and interest on loans and advances to the lender’s profit.

Lending to private sector increased

Bank’s lending to the private sector increased by 57 percent ($1.02 billion) to Ksh380.3 billion ($2.8 billion) in 2022 from Ksh241.9 billion ($1.78 billion) in 2021, with several lenders reporting at least a 60 percent jump in forex trading income, an indication that the existing dollar shortage and significant depreciation of the shilling against the greenback have had positive impact on bank finances.

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“Rates in the fixed income market have been on upward trend given the continued government’s demand for cash and the relatively tightened liquidity in the money market,” according to analysts at Cytonn Investments Ltd.

The shortage of the US currency has severely hit commercial transactions leading to proliferation of parallel foreign exchange markets (black market) as commercial banks and forex bureaus cashed in on the scarce currency to make huge profit.

The failure of the American Silicon Valley Bank (SVB) last month was largely as a result of the lender holding a large proportion of customer deposits in the hold-to-maturity securities whose values were significantly hit by the Fed’s decision to increase interest rates.

The collapse of SVB, the banker to many tech and life sciences companies, has sent shock waves through the global banking industry.
This has also triggered attention to the impending leadership changes at CBK as the 8-year term of current governor Patrick Njoroge and his deputy Sheila M’Mbijiwe comes to an end in June this year. The duo leave office in June 17.

Leadership changes monitored

The EastAfrican has learnt that the market is closely monitoring the leadership changes at the apex bank with industry players hoping to secure the signature of an individual that is capable of restoring sanity in the turbulent forex market, and with expertise beyond economic models to avert bank failures and strengthen depositor confidence.

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“Global financial conditions though moderating is expected to remain volatile, reflecting rising interest rates in major economies as major central banks continue with monetary policy tightening,” says CBK.

“In response to ongoing monetary tightening, global inflation is projected to decelerate from 8.8 percent in 2022 to 6.6 percent and 4.3 percent in 2023 and 2024, respectively. However, this will still be above the pre-pandemic of 3.5 percent.”

The banking sector’s overall liquidity ratio decreased to 50.8 percent in the fourth quarter of 2022, from 51.5 percent in the third quarter of 2022 largely as a result of higher increase in total short-term liabilities (1.4 percent) as compared with a 0.1 percent increase in total liquid assets between the two quarters.