Rate capping law hampers government debt auctions

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A cap on commercial lending rates by the government last year has hurt its own ability to raise funds in the local debt market as it struggles to keep yields below the maximum threshold.

And the Central Bank has cancelled three auctions of Treasury bills and bonds this year, after investors pushed up yields towards or past the 14 per cent, where the commercial cap stands.

“They are in a bit of a straitjacket and something will have to give,” said a senior fixed-income trader, referring to the cancelled auctions.

The cap was introduced in September last year. It limits interest rates to 4 percentage points above the central bank rate, which stands at 10 per cent.

The government argued that lenders had some of the highest returns on the continent and that borrowers were paying the price. However, commercial banks argue that the cap makes it harder for them to lend to riskier customers.

Nairobi brokerage Kestrel Capital estimated the government has raised only Sh117 billion out of a target of net local borrowing of Sh236 billion for the fiscal year ending in June.
Fixed-income traders said that level was well behind usual borrowing levels at this point in past fiscal years. Officials at the Treasury did not give any comment.

Commercial banks have piled spare cash into Treasuries since rates were capped. The cap has also slowed already sluggish credit growth to small and medium enterprises.

Private sector credit growth started weakening at the end of 2015 after the central bank toughened supervision. It plummeted to 4.3 per cent in December 2016 from 17.8 per cent the previous year, worsened by the rate cap.

President Uhuru Kenyatta, who faces re-election in August, termed the slowdown unfortunate and said it was an “unintended consequence” of the cap, during his State of the Nation address last month.

“This is an issue that concerns us and is one that I will actively seek to resolve so that credit can start to flow again to the real drivers of our economy,” he told parliament, an indication, perhaps, that the law might be reconsidered.

The Kenyan economy has expanded by an annual average of 5.9 per cent in the past four years, but slowing credit growth and fears about potential violence in the run-up to elections are seen as the main risks to further progress. The rate cap has also pummeled bank shares.

Executives in the banking industry said their institutions would continue to sail in troubled waters

“The market mechanism is not operational in Kenya,” said James Mwangi, chief executive of Equity Group, one of the country’s biggest lenders by customers.  (Reuters)

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