One of the first miracles that former President Mwai Kibaki performed when he rose to power in 2003 was to turn some well-groomed bankers into hawkers.
They were seen pitching tents along the dusty streets of Nairobi peddling loans to a languid crowd.
Five years earlier, they could just sit in their air-conditioned, ornate offices wearing long faces while waiting for desperate customers to walk in for a loan application process that reeked of an ‘extortion’.
Data from Central Bank of Kenya (CBK) shows that such customers paid an additional Sh300 for every Sh1,000 that they borrowed from local banks. Take it or leave it.
After all, the government – the safest borrower – was paying Sh230 for every Sh1,000 it borrowed by issuing the 91-day Treasury Bill, a short-term government security.
President Kibaki, an economist and former finance minister, scuttled all this. By the end of 2004, banks were lending to the private sector at an average of 12.5 per cent.
But that is because his administration paid an average rate of 4.07 per cent for the 91-day government paper. This was a substantial drop of 119 per cent from an interest rate of 8.92 per cent in 2002.
Eight years later, it appears like Kenyans need another miracle. Spooked by the Covid-19 pandemic that has left businesses broke and employees retrenched, banks have once again turned government securities into a lucrative hunting ground.
And the government, running short of revenue-raising options, increasingly relies on domestic loans to plug its deficit hole, raising fears of crowding out the private sector.
Kenya Bankers Association (KBA) Chief Executive Habil Olaka hopes that some of the measures highlighted by Treasury Cabinet Secretary Ukur Yatani will enable the banking sector to extend credit to the private sector.
“You don’t, for example, come to crowd out the private sector by borrowing from the very same market heavily… to the point whereby they are unable to access the same credit,” he said.
KBA is a lobby for commercial banks and microfinance banks.
In the next financial year, Treasury is expected to borrow a massive Sh1 trillion from local investors, mostly banks, pension funds, and insurance companies.
This includes net borrowing of Sh658.8 billion for development activities and budgetary support and debt redemptions of Sh346.8 billion.
The borrowing will provide tough competition for the private sector that is in dire need of credit to rise from the ruins of the Covid-19 pandemic.
Analysts have noted that after the government did much of the weightlifting last year by offering tax relief to businesses and workers, cash transfers to the vulnerable, youths and women, and debt repayment holidays to borrowers distressed by Covid-19, it is now the private sector’s turn to lift the economy to recovery.
Businesses and households will thus need a lot of credit from banks. They may not get it.
Churchill Ogutu, head of research at investment bank Genghis Capital, explains that the reason the country has increasingly been tapping into the domestic market is that Kenya has not been hitting its target on tax collection and fees even as external loans from multilateral institutions, bilateral lenders, or commercial loans have fizzled out.
“So the balance that remains has to be sourced domestically,” he said. And local investors have gladly parked their money into Treasury Bills (short term government securities of up to one year) and Treasury Bonds (long term securities).
“In an environment where ordinary revenue targets were drastically scaled-down due to Covid-19, this by itself has necessitated higher domestic borrowing in the current and next financial year,” added Mr Ogutu.
Despite low yields, with interest on the 91-day T-Bill dropping to a seven-year low of 6.01 per cent, local investors, especially banks, parked most of their money in government papers.
The seven largest banks increased their investment in government securities by an average of 14.8 per cent last year to Sh1.03 trillion compared to Sh901.7 billion the previous year.
Co-operative Bank increased its share of investments by 44.2 per cent to Sh161.9 billion from Sh117.7 billion in 2019.
Equity Bank, the most profitable bank, parked an additional Sh40 billion into government securities, raising its stock of government paper to Sh162.3 billion.
Moreover, the seven banks saw their income from the government securities increase by an average of 24 per cent, shoring up their revenues in the period when lending to the private sector was deemed risky.
NCBA, the third-largest bank after KCB and Equity, saw its income from government securities increase by 82.6 per cent with the lender, associated with the Kenyatta family, raking in Sh16.8 billion compared to Sh9.2 billion in 2019.
KCB recorded a 64.5 per cent increase in revenue from its lending activities to the government, earning Sh23.2 billion from Treasury.
Equity’s earnings from government securities increased by 23 per cent to Sh20.9 billion in 2020.
Meanwhile, total loans to the private sector last year increased by 11.7 per cent to Sh3 trillion from Sh2.7 trillion in 2019.
Despite CBK slashing its benchmark lending rate to enable banks to lend cheaply to the private sector, banks avoided giving credit to businesses and households.
The pandemic roiled the markets and threw the economy into a tail-spin. People were losing jobs as airplanes stayed in hangars and the flow of tourists all but dried up.
Restaurants and pubs shut their doors and the stock market took a break for the first time in years.
It was a flight to safety. A lot of the capital either left the country to secure assets abroad or found its way into Treasury Bills or Treasury Bonds.
The government’s stock of domestic debt increase by Sh546.4 billion, 18 per cent, to Sh3.5 trillion.
Domestic debt is easily available and does not come with strings attached such as that from the International Monetary Fund (IMF) and the World Bank.
In addition, you can always avoid exchange rate fluctuations that are common with the external loans, which are denominated in foreign currencies, more so the US Dollar.
When the dollar strengthens against the Shilling as it did during the Covid-19 period, the stock of the country’s external debt automatically increased.
Moreover, a deep domestic debt market helps encourage savings among locals with a lot of households finding a safe haven to put their money.
In his Budget Speech, Yatani said the government was in the process of developing an over-the-counter secondary market platform for government securities.
“This platform will help deepen our domestic debt market, improve pricing efficiency and transparency in securities trading thereby lowering yields and cost of credit in the economy,” he said, adding that the platform will be ready by June next year.
Normally, Treasury Bonds are listed and traded at the Nairobi Securities Exchange (NSE), meaning you can always sell them to a third party if you want to exit or if the price is good.
Besides crowding out the private sector, domestic debt can be expensive. “The rates on the domestic debt on average are at double digits, so they are expensive,” said Ogutu.
Increased domestic borrowing has meant that the government has been using a lot of its tax revenues to pay creditors.
In the next fiscal year, for example, domestic debt service costs are expected to climb up to Sh768.7 billion, or 65.7 per cent of total public debt service costs, highlighting how costly domestic debt is, according to Ogutu.
When Kibaki refused to take loans from banks at their own terms, credit to the private sector grew by 30 per cent year-on-year.
This changed when the current administration plunged more into the domestic debt market with growth of private sector growing by single digits.
Yatani, reading what appears to be Kenyatta’s legacy budget, sought to show that credit had grown in leaps and bounds under the Jubilee government.
He noted that since Kenyatta came to power in 2013, interest rates have declined, translating to an increase in credit to the private sector.
The lending rate, Yatani said, declined from 17.3 per cent in 2013 to 12 per cent in 2020. Additionally, the Central Bank Rate – or the benchmark rate at which CBK lends to banks for onward lending to borrowers – dropped from 8.5 per cent in 2013 to seven per cent last year.
“As a result, credit to the private sector increased from Sh1.5 trillion in 2013 to Sh2.8 trillion in 2020,” said Yatani.