Kenya: Top banks increase lending to government by Sh132.8 billion

Tier one lenders have increased their lending to the government by Sh132.8 billion in the 12 months to June 2021, continuing a preference for the risk-free securities that are paying as much interest as customer loans.

Data compiled on banks’ half-year performance shows that the holdings of government securities grew at a faster pace compared to customer loans, as did interest income from the bonds compared to private sector loans.

The majority of banks (43 percent) told the Central Bank of Kenya (CBK) in the June 2021 credit survey report that they expect to direct excess liquidity towards government lending, wary of risks of default in private sector lending at a time when the non-performing loans ratio has climbed to 14 percent from 13.1 percent in June 2020.

The Central Bank of Kenya, in a report said “Most banks intend to deploy the additional liquidity towards lending to the private sector (28 percent), investing in Treasury bonds (23 percent), investing in Treasury bills (20 percent), interbank lending (19 percent), CBK liquidity management through repos (8 percent), and invest in other instruments including offshore (3 percent).”

By the end of June, the nine tier-one lenders together held Sh1.245 trillion government securities, up by 12 percent from Sh1.12 trillion a year earlier.

These securities earned them Sh65.4 billion in interest in the period, a 20.4 percent jump from the corresponding period in 2020.

At the same time, they grew their loan book by 9.4 percent or Sh220.4 billion to Sh2.58 trillion, with interest earned from customer loans going up by 10.5 percent to Sh137.2 billion.

Risk-free status and ease of deployment have tilted the balance in favour of government securities, as banks are still unable to load much premium on customer loans with most of the rate change requests still to be approved by the CBK.

By the end of June, the average lending rate on customer loans stood at 12.02 percent. Similarly, banks can get between 11 and 12 percent on average from bonds of five to 10-year tenors, effectively meaning that it makes more business sense to lend to the State.