For every Sh3 that banks advanced as loans, Sh1 went to the Government while the remaining Sh2 were shared among manufacturers, real estate developers, farmers, mining companies, transporters and the 8.7 million private households in Kenya.
But it is not just banks that have been falling over themselves to lend to Government. Pension schemes, insurance companies, and even large depositors have been moving their money to Government coffers with unmatched ferocity.
They have been joined in the race by international lenders who also find Kenya a lucrative hunting for good returns as shown by the sharp surge in foreign debt that currently stands at over Sh2.5 trillion.
As of December 2015, pension schemes held close to a third of their funds in Government papers – Treasury Bills and Bonds. This has since risen to 36 per cent as of June 2018.
Insurance companies had about 53.2 per cent of their funds – Sh257.5 billion – stuck in Government papers as of the end of 2017, an increase of 40 per cent in 2013 when total investment in Government securities was Sh120.1 billion.
Even large depositors are increasingly finding Government vault the safest place to put their money.
The private sector, the economy’s biggest employer and taxpayer, is being starved of credit, making a mockery of Government’s efforts to turbo-charge the economy whose growth in 2017 was stifled by a scathing drought, a protracted electioneering period and poor credit extension to the private sector.
The share of credit to the Government, including parastatals and County Government, has been growing in recent time even as firms have been left with little cash to expand their plants or households to buy houses or cars.
Small and medium enterprises (SMEs) have especially suffered the brunt after the rate cap law lured banks away from the open market to government securities which relatively delivered a decent return at near zero risks.
The growth of credit to the private sector has stagnated at 4.3 per cent in June, July, and August with a major decline in loans to the transport sector of up to 11 per cent.
The transport sector is experiencing turmoil over disruptions of the Standard Gauge Railway, the state crackdown on illicit and counterfeit products that have stalled evacuation of cargo, higher fuel costs as a result of value added tax (VAT)on petroleum products in the midst of bullish global oil prices.
Mining and quarrying have seen a 9.6 per cent decline in credit in August while agriculture was pinched minus 4.5 per cent in loans.
The country’s mainstay is recovering from effects of a severe drought only to get a bumper harvest flowing into an oversupplied market owing to duty-free imports that came in last year.
This is forcing farmers to sell produce below the cost of production.
The government will also be a beneficiary of the recent move by banks to lower savings rate for savers after Parliament voted to remove the floor on the rate cap law that had recommended that banks pay 70 per cent of the Central Bank Rate (CBR).
At Standard Chartered Bank, those seeking to lock their money and earn interest will need to save above Sh50 million to get an annual return of six per cent.
Below Sh2 million will earn you a paltry one per cent and only two per cent below Sh5 million. Those who save below Sh10 million will get 2.5 per cent and those below Sh15 million will earn three per cent.
“Following the passing into law of the Finance Act 2018 on September 21, 2018, the Banking Act has been amended to remove the requirement for banks to pay a minimum amount of interest on interest-earning deposits,” Standard Chartered Head Retail Banking, Kenya & East Africa David Idoru wrote to a client.
“Effective October 18, 2018, the interest payable on your Savings Account has been revised to a maximum of six per cent per year, based on the credit balance held in the account,” he said.
Kenya Commercial Bank (KCB) has slashed interest rates on savings accounts as Equity Bank signalled a similar move after the deposit floor was removed. KCB will now be paying customers an interest of seven per cent per annum on KCB goal savings account, down from 8.5 per cent that it has been offering since launching the account in June last year.
Other savings accounts will also pay customers less than 6.3 per cent interest. “While this is expected to hurt the bank’s customers, with lower interest rates on deposits, we expect to see a decline in the interest expense for the bank, boosting its bottom-line. The bank has been on a lookout for cheap deposits as it looks to decrease its cost of deposits which currently stand at 2.9 per cent in the first half of 2018,” Apex Capital said. National Bank of Kenya has also introduced the tiered system although with much better rates than its peer.
The tiered rate will see savers earn one per cent for deposits between Sh5,001 and Sh50,000 and five per cent for savings between Sh50,001 and Sh2 million. Those who save above Sh2 million will earn above market rate of seven per cent.
When the rate cap was introduced, giving depositors 70 per cent of CBR, lenders opted to enforce the narrowest meaning of deposit accounts that qualify to earn the interests, shifting most savers into transactional accounts that earned zero interests.
Pension funds have been scouring the little cash they had deposited with commercial banks and shoved it to Government coffers, a sorry situation that has further reduced the pool of savings from which the private sector can tap into to expand their ventures.
Pension fund managers are not only lured by the quick and good return from short-term Government papers, but they are also running away from what is fast turning into a highly unpredictable investment option that saw some of them burn their fingers when Imperial Bank collapsed as Chase Bank faced financial woes.
Within this period, the share of pension funds have in fixed deposits has declined sharply from 6.83 per cent to 2.7 per cent.
The collapse of Imperial Bank which had issued a corporate bond has also contributed to the pension schemes to the reduction of pension schemes’ share of investment in corporate bonds.
The share of retirement benefits assets in listed corporate bonds has dropped by almost half from six per cent in December 2015 to 3.56 per cent as of June 2018.
In absolute terms, the money sunk in listed corporate bonds by pension schemes has declined from Sh48 billion to Sh41.5 billion, a worrying trend that shows debt security by Kenyan firms is becoming unattractive.
“If you are into corporate bonds after what happened to Imperial Bank and Chase Bank, the corporate bond market has been severely hit,” said Sundeep Raichura, the CEO of Zamara, a pension administrator formerly known as Alexander Forbes East Africa.
“So most of the asset managers are unwilling to look at corporate bonds,” added Mr Raichura, noting that their decision to move most of their funds from fixed deposits is informed by better returns that Government securities are offering compared to fixed deposits, with most banks capping it at below seven per cent.
“This is a crowding out by Government. This interest rate capping has this counterproductive effect. Because people are just putting into safe investments, and they are putting their money into Government securities,” said Mr Raichura.
Sanlam has lost money to Chase Bank, Imperial Bank, Athi River Mining, Real People and now Kaluworks, forcing it to reassess its investment strategy.
The National Social Security Fund (NSSF) was advised to change its investment managers who put money in Chase Bank and Imperial Bank and get new advisers. The Auditor General’s 2017 report forced NSSF to acknowledge that they sank Sh996 million in bonds and fixed deposits that are no longer recoverable.
CIC Insurance, Liberty Insurance, Diamond Trust Bank and Kenya Commercial Bank have all seen their money gets locked in struggling companies. Real People was unable to meet the principal of part of its Sh1.3 billion loan and requested that the firms that had lent it money convert the debt into shareholding. But the firms declined.
Athi River Mining has been placed under receivership with a Sh14 billion debt, including Sh6.5 billion in bank loans and Sh1.4 billion to Aureos. It also owes a corporate bond of Sh1 billion and Sh771 million in commercial papers.
Even large depositors have learned a lesson from the collapse of Imperial Bank as well as the woes facing Chase Bank where depositors have waited between two-and-a-half to three years to get their money, and in the case of Imperial Bank, they are still waiting.
Weighing the option of putting more than a million in a bank, with the heightened risk, yet the rates are neither attractive and are usually consumed in taxes and inflation, have resorted to sending their money to the altar of State finances.
According to CBK, individual investors captioned as ‘others’ increased their portfolio of State debt from Sh103 billion in October 2016 when the rate cap was imposed to Sh116 billion last week.
Besides listed corporate bonds and fixed deposits, unlisted equities and real estate investment trusts (REITs), also declined or dropped in absolute terms. Portfolio of assets in unquoted equities between December 2017 and June 2018 dropped from Sh4.06 billion to Sh3.78 billion.
“At the moment, other than an anemic stock market, almost non-existent corporate debt market and almost no foreign exposure, investors have very limited options. Of necessity, they are then forced to go rate shopping, with the results we saw when Chase went down,” Deepak Dave of Riverside Capital said.
The Government’s plan to offer a third mobile based bond, M-Akiba early next year to tap Kenyans pockets for extra cash, could only make an already bad situation worse.
With banks squeezing interest rates on deposits to stretch their spread after Parliament decided to maintain the ceiling on the price of loans but removed the floor on the price of savings, a decision by Treasury to offer higher rates or even match the banks’ rate will certainly see individuals with some money to spare give it to Government to spend rather than to the banks to lend to individuals who need to use the money.
Even worse – after elbowing the private sector from the credit market and in the process contributed to its sluggish growth, the Government has aggressively gone after their pockets with punitive taxes.
These taxes have eaten into households’ disposable income and firms’ profits, money that they would have used to expand their ventures.
Scared foreign investors have carted away their capital, leaving behind a battered stock market with Nairobi Securities Exchange benchmark index- NSE 20 touching a decade low of 2,807 points as foreigners offload their shares.
This is lower than when political uncertainty soared following the announcement of repeat polls last year. Last Thursday, the Capital Markets Authority (CMA) released a report showing that the raft of tax measures contributed to a massive Sh22.9 billion in foreign outflows.
“Actions like the eight per cent fuel VAT tax and the 20 per cent and 12 per cent excise duty on transfer of funds in banks and when transferring fund using mobile phones respectively, have exacerbated the problem,” said the Soundness Report by the Capital Market Authority.
“The convoluted ways in which taxes remove wealth from the consumer market means there is little long-term saving incentives or even a faith that the government will shield such ‘good’ savings from predatory taxes in future,” Mr Dave said.
“In the end, we have a situation where the government is basically taking up all the money in the economy and instead of multiplying it, uses it on consumption and debt while the real economy is starved of cash,” he added.
One would expect that with everyone cozying up to the government, the state would have the power to literally determine market rates. It is a move that former President Mwai Kibaki made with spectacular efficacy. When the Kibaki administration came into power in 2003, banks had moved much of their money into Treasury Bills and Bonds.
President Kibaki brought down the interest rate they offered for Government papers to almost zero per cent.
“That is when banks started hawking loans because they had no alternative but to lend,” said Einstein Kihanda, the CEO of ICEA Lion Asset Management, a fund manager.
Credit to the private sector, at some point, grew at the jet speed of nearly 30 per cent. People bought cars, houses, and other assets. The construction boom picked up, with the real estate beginning to play a critical role in the economy.
It is different from the current regime.
The state has priced itself as the most secure asset in Kenya’s troubled economy, encouraging every investor to abandon the riskier yet rewarding sections of the economy.
And this is not about to change.
“The Government’s appetite for debt is also quite high,” said Raichura. The Government has been running huge deficits, a situation that has seen its stock of domestic loans surge from Sh1 trillion in May 2013 to a high of Sh2.5 trillion as at September 2018.
The Government is well aware of the acerbic effect of its continued stay in the in the domestic credit market: The private sector is hurting.
To remedy this, it has proposed to go for cheap or concessional loans, such as those from the World Bank, African Development Bank and the International Monetary Fund (IMF). But ever since the country rebased its economy to become a low-middle income country, concessional loans have not been forthcoming.
“After the rebasing of the economy in 2014, Kenya graduated into a lower middle-income economy. The status ushered in a new class of financing terms commonly referred to as “blend” which is a mixture of commercial and concessional financing terms,” says Treasury in one of its reports on debt management.
Treasury, thus, admits that “official development assistance is limited.” But, adds Treasury, the domestic market also faces credit volume.
The Government has also tried to stay from expensive commercial loans such as syndicated loans or Eurobond except for refinancing purposes. As such, the Government has gone back to the local market, and the results have been disastrous.
While banks are reducing rates to savers including Chama’s and ensuring that the 97 per cent of depositors earn next to nothing on their accounts, the government is offering a lucrative 10 per cent on the interest-free M-Akiba bond.
According to Treasury sources the, next bond will be issued next year and regular tapping will be done pulling savers towards the State controlled market.
The net effect is a government that is taking away all the money in the economy and investors running out of options to invest in which may further eat into an already poor savings culture.
“The overall low savings rate is driven by lack of alternatives to the bank deposit culture, pricing of deposits itself will not have the impact,” Mr Dave said.
Increasingly, the economy is turning to gambling ventures, an unproductive undertaking that only serves to get young people hooked to addictive get-rich-quick schemes.
It has not helped that the CMA wants to develop speculative mobile-based products with the short-term maturity to tap youths’ betting craze instead of encouraging a savings culture.
“The above story was particularly disappointing. Even the regulators seem to have lost sight that a savings culture deepens capital availability and broadens access; it should not be about generating an endorphin high in the minds of young men,” Dave said.
He added that the availability and access increase investment and consumption and therefore grow the economy.
“Betting wins are inevitably lost back to the bookie and have no positive effect. Likening stock markets to gambling dens have been the bane of many a developing young economy in history; let’s not be next,” said Dave.
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