Banks in Kenya face further squeeze as National Treasury mulls second Eurobond

NAIROBI: Banks will have to rethink their strategies on lending after the National Treasury revealed that it is considering a second Eurobond to patch the budget deficit.

The revelation by Treasury Cabinet Secretary Henry Rotich to American-based news agency Bloomberg and a confirmation by Central Bank of Kenya (CBK) that all loans will be priced at not more than four per cent above Central Bank Rate (CBR) starting this morning puts banks in a tight corner.

Mr Rotich was quoted by Bloomberg saying that he is likely to meet with potential investors in the US next month in a bid to issue Kenya’s second Eurobond. He will be attending a two-day International Monetary Fund annual meeting in Washington starting October 7.

“There will be side meetings and I need to give them progress reports on Kenya,” said the CS, adding that the government has also factored in a possible hike in US Federal Reserve interest as it seeks to borrow overseas.

Budget deficit

The 2016-17 budget has a 9.3 per cent deficit and the decision by the Government to look beyond domestic market will now leave banks with lesser options to borrow.

Even though Rotich is yet to disclose how much the Government will be seeking through Eurobond, it has made it is clear that Kenya plans to borrow about Sh462 billion from external lenders.

Offshore borrowing will mean that banks will see less of government involvement in the domestic market in what has in the recent past been partially blamed for interest rate spike.

In the wake of capped interest rates accompanied by requirement for banks to offer customers at least 7.35 per cent returns on deposits, banks may have to make do with reduced revenue streams.

The lenders will, therefore, have to intensify their drive to bring on board more borrowers to avoid suffering a squeeze in their traditional source of income. The proposed issue will be the second time Kenya is tapping into the international market. The Government had raised $2 billion from international investors in 2014.