CBK takes on banks over low use of repos

by James Anyanzwa

Central Bank of Kenya (CBK) plans to broaden the use of horizontal repurchase agreements (Repos) beyond commercial banks.

Horizontal Repos allow banks to borrow from each other overnight, using Government securities (treasury bills and bonds) as collateral.

The CBK launched the credit window in September last year, but banks seemingly recoiled from the facility, prefering instead the inter-bank market to meet their daily obligations at the clearing house.

By July this year only a single transaction had been successfully effected between two commercial banks.

"We have plans to extend it to other players or financial institutions," Mwenda Marete, a director in-charge of secondary trading at CBK told fixed income dealers in Nairobi last week.

Mr Marete said the institutions under consideration include fund managers, pension funds and insurance companies.

A banking hall. The CBK says commercial banks recoiled from exploiting the credit window it launched in September last year while opting for the interbank market to meet their obligations. Photo: File/Standard

He acknowledged that the take up of horizontal Repos by commercial banks was poor until last month, when a total of 31 transactions valued at Sh11 billion were executed by the deposit takers.

Insufficient information

This was, however, after the launch of KenGen’s Sh15 billion-bond issue.

In July, Prof Njuguna Ndung’u, the CBK Governor, attributed the depressing response to lack of information about the credit facility with regard to its legal and technological framework and mode of evaluating interest earnings. But CBK is upbeat the credit window would gain prominence in the banking industry as a way of boosting liquidity distribution and deepening the bond market.

Banks borrow from each other overnight to meet their daily obligations at the clearinghouse.

"We rolled out the inter-bank repo transactions using government securities as collateral to facilitate the supply of money between players," Ndung’u said.

Under this arrangement a bank (borrower) offers either a treasury bond or bill as security for an overnight loan, by selling that security to another bank (lender) with promise of buying it back after an agreed term.

The relevant securities will be moved into a designated "repo" account in CBK’s central depository register, and will not be available for trade by either the entity transferring "seller" or the beneficiary of the transfer "buyer".

Last year, CBK sought approval from the Capital Markets Authority (CMA) for both the Vertical and Horizontal Repos. The bank, in conjunction with market stakeholders are working on a number of initiatives to build a competitive bond market that will support the country’s development agenda under vision 2030.

Robust financial market

These include, among others, maximising use of the horizontal repos window as a cornerstone of markets deepening and promoting investor education to ensure market confidence and increased number of investors.

A robust financial market cushions the economy against external shocks, in addition to mobilising critical resources for public and private sectors for long-term financing.

Other measures to develop a vibrant bond market include automation of bond trading at the Nairobi Stock Exchange (NSE). According to CBK’s Monthly Economic Review, the Treasury bills and bonds held by commercial banks during the first quarter of the fiscal year 2009/10, rose from Sh74.6 billion and Sh176 billion in June to Sh81.3 billion and Sh187.5 billion in September.

Public domestic debt increased by 6.2 per cent during the first quarter of the fiscal year 2009/10 from Sh518.5 billion in June 2009 to Sh550.7 billion in September 2009.

The rise in domestic debt during the period followed an increase of Sh5.4 billion in treasury bills (excluding Repos), Sh25.3 billion in Treasury bonds and Sh1.4 billion in other domestic debt.

Outstanding treasury bills increased from Sh116.8 billion in June 2009 to Sh122.2 billion in September this year.

janyanzwa@standardmedia.co.ke

 

 

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