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The East African : Oct 3rd 2015
MONEY AND EQUITY MARKETS OCTOBER 3-9,2015 COST OF CREDIT By JAMES ANYANZWA The EastAfrican K enya is introducing alternative debt channels in an effort to lower lending rates and drive savings. The National Treasury plans to issue the first-ever government bond to be offered exclusively through mobile phones with over 23 million Kenyans expected to participate in the first Ksh5 billion ($46.83 million) issue. Investors will subscribe with amounts as low as Ksh3,000 ($28.1), down from the usual Ksh50,000 ($468.35). The product is open to investors from the other four EAC partner states — Burundi, Rwanda, Tanzania and Uganda — under a protocol that treats them as locals. The move means small investors — who get measly returns from banks, if at all — have less motivation to keep money in financial institutions. On the demand side for government securities, it means the monopoly by banks on auctions will be significantly reduced, enabling the Central Bank to raise cheaper money. This would leave the banks with higher liquidity, prompting them to innovate and lend more to the private sector at lower interest rates. The latest move comes amid concerns over the effectiveness of the Kenyan Banks’ Reference Rate (KBRR) in reducing the cost of credit. “The success in bringing down the level and spread of interest rates will depend on the implementation of measures agreed upon by the stakeholders, including the implementation of KBRR; hence KBRR alone is not the panacea,” said Habil Olaka, chief executive of the Kenya Bankers Association (KBA). According to KBA, KBRR was meant to complement other policy and structural measures to assure sustainability of the reduction in both interest rates levels and spreads. Kenya’s lending rate fell to 15.7 per cent at the end of August from 16.9 per cent in July 2014 while the interest rate spread (difference between lending and deposit rates) declined to 8.8 per cent from 10.3 per cent in the same period. As a result, CBK has called for the strengthening of the KBRR framework and enhancement of innovation by banks to lower the cost of credit. “With or without KBRR, banks need to innovate new products to lower the lending rates,” said CBK Governor Dr Patrick Njoroge. KBRR was introduced in July 2014 to ensure that lenders are transparent with respect to the cost and pricing of their loan products. “The real concern has always been that the two variables used to derive KBRR— the Central Bank Rate (CBR) and the 91-day T-bill rate— may not be fully representative of the business environment, such as cost of funds,” said George Bodo, head of banking research at Ecobank Capital Ltd. Under KBRR, banks are required to disclose and explain to their customers the effective base rate (KBRR) and any additional premium (K) above the base rate. KBRR is calculated as an average of the CBR and the 2-month weighted moving average of the 91-day Treasury-bill rate. The 91day Treasury bill rate indicates the risk free assets while CBR reflects the position of the Central Bank’s monetary policy. Thus, a customer is expected to be charged a lending rate of KBRR + “K,” where “K” includes the profit margin, risk premium and other overhead costs of the bank. Francis Mwangi, head of research at Standard Investment Bank (SIB), 15.7pc Doubts over bank rate with launch of new debt channels CBK has called fo≥ the st≥engthening of the KBRR f≥amewo≥k and enhancement of innovation by banks to lowe≥ the cost of c≥edit 49 Uganda puts limit on long te≥m secu≥ities By MARTIN LUTHER OKETCH Special Correspondent The rise in the rates on Treasury bonds and bills has forced the Uganda government to limit the issuing of longer term bonds, and instead go for short-term securities, which Treasury says are cheaper. “We have limited these longer term securities of five- and tenyear Treasury bonds because the interest rates are too high to service,” Finance Permanent Secretary and Secretary to the Treasury Keith Muhakanizi said. In this year’s Ush24 trillion ($6.5 billion) budget, the government will spend Ush6.4 trillion ($1.75 billion) on repayment of both domestic and external debts. For domestic borrowing, Ugan- Kenya’s Selected Macroeconomic Indicators (July 2014 -September 2015) da is to borrow up to Ush1.4 trillion ($383.8 million) for fiscal operations and $220 million to $250 million from external borrowing mainly for capital investments. Unsustainable interest In the 2014/15 financial year, the government borrowed domestically to the tune of Ush1.7 trillion ($466.1 million) following the suspension of development aid by the donors. As a result of that borrowing, Treasury is paying up to Ush1.5 trillion ($411.3 million) as interest, Mr Muhakanizi revealed. Executive director in charge of Kenya’s lending rate at the end of August, from 16.9pc in July 2014 said, “Since KBRR was introduced the CBR has never gone down. In such circumstances, it is difficult to assess the impact it has had on lowering lending rates.” KBRR is adjusted every six months while Central Bank’s Monetary Policy Committee (MPC) sits every two months to review the developments in the macroeconomic environment and take appropriate action by reviewing the CBR — the benchmark lending rate to commercial banks. Analysts reckon that at the time KBRR was being launched, the two variables (CBR and 91-day Tbill rate) were almost at par but they have since pulled far apart, reasearch at the Bank of Uganda Dr Adam Mugume said investors are bidding for the one-year government bonds at 29 per cent and for the five-year bond in the range of 25 to 26 per cent, which is high. “At the end of the maturity Source: Kenya National Bureau of Statistics (KNBS), Central Bank of Kenya (CBK) distorting market conditions. “In fact, the spread between the two has widened significantly to the tune of 700 basis points. This wide gap distorts market conditions. Therefore, I think there’s need to introduce one or two more variables into the calculation of KBRR,” said Mr Bodo. period of the 10-year bonds, the interest rate that the government will be paying is around 40 per cent; this is unsustainable,” he said. Dr Mugume blames high inter- est rates for the recent underperformance of government securities lately in the form of undersubscription. The latest statistics from Bank of Uganda indicate the interest rate for the 91-day Treasurybill, is 18.3 per cent, 182-day bill 20.51 per cent, 364 day-bill 20.27 per cent, two-year bond 20.31, five-year bond 19.99 per cent, 10year bond 18.04 per cent and the 15-year bond, the interest rate charged is 18.17 per cent.
Sep 26th 2015
Oct 10th 2015