The stance by the government to offer 12 percent returns for investment in bonds and bills while capping interest rates at 13.5 percent is denying the private sector access to credit, experts say.
The crowding out of the private sector is stifling the economy and investment analysts as well as economists have expressed concerns that much of the cash that micro, small and medium enterprises (MSMEs) need is channeled to the government.
Analysts have noted that lots of cash finding its way to the government through securities leave nothing for small businesses, that apparently are in dire need of the cash. The private sector in general, including MSMEs and households, now lack access to easy credit.
According to economic analysts, the banks are not to blame for not choosing to lend to the private sector. Since the capping of interest rates was introduced in 2016, banks minimized lending to individuals and SMEs citing high risk.
They focused on lending to corporate institutions and investing in the government as well as few other areas where returns are much desirable.
George Bodo, a sub-Saharan Africa banking analyst, said that for a banker, any place that offers high returns and the least risk becomes the natural place to invest in.
“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,” said Bodo.
The government is taking a dominant position in terms of lending. The increase in government spending and servicing of loans is sucking up the SMEs financial resources reducing personal consumption of goods and services as well as investments by small businesses.
The dominant fiscal stance of the Treasury that has been laid bare by the enticing returns for bonds and bills issued by the government is not sitting well in the minds of analysts and economists.
In a regime where interest rates were capped, statistics conspicuously show that commercial banks have been putting an average of between 30 and 80 percent of their assets in government securities.
Cytonn Investments noted that government securities registered a growth of 8 percent year-on-year as opposed to typical loans that grew marginally by 2.2 percent.
“This explains banks continued preference for investments in government securities, which offer better risk-adjusted returns. Interest income increased by 6.4 percent in 2018, compared to a decline of 2.4 percent recorded in 2017, as banks adapted to the interest rate cap regime, with increased allocations in government securities,” read a statement by Cytonn.
In 2018, the average loan growth for the banking sector stood at 4.3 percent, which is slower than the 6.1 percent recorded in 2017.
Cytonn says that this is an indication that there was an even slower credit extension to the economy, due to sustained effects of the interest rate cap.
For instance, Equity Bank had attracted 161 billion shillings, or 54 percent of its loan book in government securities by the end of 2018 earning 16.7 billion shillings in investments.
National Bank, on the other hand, also elevated its investment in government securities by 89 percent, which marked the highest increase in 2018 with Housing Finance following closely behind marking its investment by 75 percent. Barclays Bank increased its investments 59 percent.
In close scrutiny, these heavy investments by banks leave nothing to SMEs. The investments in government bonds and securities leaves little to no credit left to be loaned to the private sector.
Now there are serious concerns as to what will happen if the trend continues. Another big question left unaddressed is what will be the government’s options regarding the servicing of debts should it choose to opt out of the dominant stance.
Reducing domestic borrowing and doing away with the interest rate caps are some of the recommendations.
Also, reducing the government expenditure by reducing the size of the government and allowances to civil servants in the process of cutting the wage bill will go a long way in addressing the issue.