Bank share of government debt has gone up by Sh119 billion in the past two months to cross the Sh1 trillion mark, in a move that could signal a prolonging of slow credit growth for the private sector.
The outstanding government domestic debt held by banks now stands at Sh1.088 trillion, equivalent to 55.1 percent of the total debt, up from Sh968.6 billion (51.1 percent) at the beginning of March.
Total government domestic debt has gone up from Sh1.895 trillion to Sh1.974 trillion in the period.
The growth in lending to the private sector has slowed down in the past one year, standing at four per cent in February compared to 16 per cent a year earlier.
“This is driven by the banks slow down on lending due to the interest rate caps, the next best viable investment option is government treasuries,” said Genghis Capital head of fixed income Kenneth Minjire.
“Most banks have been focused on building interest income from high coupon bonds.
“A 13 per cent yielding five-year bond makes more sense to invest in for a bank rather than lend at 14 per cent because it is a risk-free instrument with no administrative and running costs involved unlike a loan, as well as it counts towards a banks liquidity position.”
In the 2016 financial year, Equity Bank more than doubled its investment in government debt to Sh100.6 billion from Sh42.8 billion in 2015 while KCB #ticker: KCB increased its holdings by 18 per cent to Sh90.9 billion.
Banks had seen their percentage holding go down in the fourth quarter of 2016 through the first quarter of this year.
Analysts said it was because most tier one and two banks had met their 2016 revenue targets from fixed income trading by end of the third quarter, thus reducing participation in primary auctions.
The volume of domestic debt holdings of the pension funds the second largest domestic lender to government remained flat in the two-month period.
The funds held 28.6 per cent or Sh542.1 billion of government debt at the beginning of March, growing this by Sh0.8 billion to Sh542.9 billion (27.5 percent) by mid-April.
Credit: Business Daily