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Saturday, July 22, 2017

Rate cap hurts Treasury debt raising programme

Central Bank Governor Patrick Njoroge with Treasury Cs Henry Rotich during the State of Banking sector address in Nairobi's Kenyatta Conference Center on April 8.
Photo/Enos Teche.
Central Bank Governor Patrick Njoroge with Treasury Cs Henry Rotich during the State of Banking sector address in Nairobi's Kenyatta Conference Center on April 8. Photo/Enos Teche.

A cap on commercial lending rates by the Kenyan government has hurt its own ability to raise funds in the local debt market as it struggles to keep yields below the maximum threshold.

The Central Bank of Kenya has cancelled three auctions of Treasury bills and bonds this year, after investors pushed up yields towards or past the 14 per cent, where the commercial cap stands.

“They are in a bit of a straitjacket and something will have to give,” said a senior fixed-income trader, referring to the cancelled auctions.

The cap was introduced in September last year. It limits interest rates to four percentage points above the central bank rate, which stands at 10 percent.

The government argued that lenders had some of the highest returns on the continent and that borrowers were paying the price. However, commercial banks argue that the cap makes it harder for them to lend to riskier customers.

Nairobi brokerage Kestrel Capital estimated the government has raised only Sh117 billion, out of a target of net local borrowing of 236 billion shillings for the fiscal year to the end of June.

Fixed-income traders said that level was well behind usual borrowing levels at this point in past fiscal years. Officials at the Treasury declined to comment.

Commercial banks have piled spare cash into Treasuries since rates were capped. The cap also slowed already sluggish credit growth to small and medium enterprises.

Private sector credit growth started weakening at the end of 2015 after the central bank toughened supervision. It plummeted to 4.3 per cent in December 2016 from 17.8 per cent the previous year, worsened by the rate cap.

President Uhuru Kenyatta, who faces re-election in August, called the slowdown unfortunate and said it was an “unintended consequence” of the cap.

“This is an issue that concerns us and is one that I will actively seek to resolve so that credit can start to flow again to the real drivers of our economy,” he told parliament.

The Kenyan economy has expanded by an annual average of 5.9 per cent in the past four years, but slowing credit growth and fears about potential violence in the run-up to elections are seen as the main risks to further progress.


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