Concern raised as lack of credit to private sector hurts economy

The dominant stance assumed by the government in the Treasury bonds and bills market has crowded out the private sector, stifled the economy and needs to be reviewed urgently.

Investment analysts and economists say an arrangement where National Treasury is offering upwards of 12 per cent returns for investment in government securities while capping interest rates at 13.5 per cent is seeing an exodus of much needed cash to government coffers.

Excess cash

They say the case of excess cash finding its way into government securities has crowded out micro, small and medium enterprises (MSMEs), households and private sector in general, out of credit.

However, they add that banks are not to blame for choosing to invest in government securities as opposed to lending to, for instance, MSMEs.

“For a banker, any place that offers high returns and the least risk becomes the natural place to invest in,” said George Bodo, a sub-Saharan Africa banking analyst.

“Businesses are finding it hard to locate working capital while general cash flow is reduced. This is a very hard place for MSMEs and should be reversed for the overall good of economic growth. It means little buying and little credit to stock what is needed,” he said. A dominant position is when everything appears set up for one player to be the main party at the expense of the other.

Crowding out, on the other hand, is a situation where personal consumption of goods and services and investments by business are reduced because of increases in government spending and deficit financing sucking up available financial resources. 

Lately, banking analysts and economists have been questioning the effect of the decision of Treasury to have a dominant fiscal stance as demonstrated though the attractive returns for Treasury bonds and bills under a regime where interest rates are capped.

Statistics show that since the rate cap and the attractive returns from investing in government securities, commercial banks have been putting an average of between 30 per cent and 80 per cent of their balance sheets in government securities.

Cytonn Investments Management Plc, an independent investments management firm, says in an analysis that for the banking sector, investment in government securities recorded eight per cent growth year-on-year compared to normal loans which grew by a paltry 2.2 per cent.

“This explains banks continued preference for investments in government securities, which offer better risk-adjusted returns. Interest income increased by 6.4 per cent in 2018, compared to a decline of 2.4 per cent recorded in 2017, as banks adapted to the interest rate cap regime, with increased allocations in government securities,” it adds.

Loan book

In general, the banking sector recorded a 4.3 per cent average loan growth in 2018, slower than 6.1 per cent registered in the 2017 financial year. “This indicates that there was an even slower credit extension to the economy, due to sustained effects of the interest rate cap,” the statement by Cytonn reads in part.

Equity Bank, for example, had pumped in Sh161 billion, or 54 per cent of its loan book in government securities by the end of last year. The investment earned the bank Sh16.7 billion. National Bank of Kenya increased its investment in government securities by 89 per cent, the highest increase in 2018 followed by Housing Finance that increased its investment by 75 per cent and Barclays Bank by 59 per cent.

Such heavy investment in government securities ensures that little or no resources is left to be lent out to any other sector of the economy.

The big question now is what will happen to the economy if the trend continues and the options at the government’s disposal to fund debt should they opt out of the dominant stance.There is the proposal to do away with the interest rate caps and reduce domestic borrowing.

Proposals have also been floated to reduce government expenditures by reducing both the size of government and allowances paid to civil servants in the process reducing the wage bill.

-PeopleDailyKenya