Increased appetite for domestic debt by Government starves firms

The private sector could be starved of much-needed capital further, with the Government’s appetite for domestic borrowing at an all-time high.

Latest data from the Kenya National Bureau of Statistics (KNBS) indicates that commercial banks’ credit to the Government has almost doubled over the current financial year, crowding out the private sector.

The findings are in tandem with a recent World Bank report that showed that the private sector’s access to credit has been on the decline since 2015 partly due to the recent slowdown in the country’s economic performance.

Election-related uncertainty, the World Bank’s Kenya Economic Update released in December showed, also weakened private sector activity, further constraining its growth.

The country’s overall economic wellbeing is largely driven by a vibrant private sector.

According to KNBS, the sector has had to contend with increased competition from the Government, with commercial banks opting to lend more to the State, especially in the wake of a restrictive rate cap regime that has seen banks become more cautious in their lending patterns.

Data from the statistics agency shows that outstanding public debt from commercial banks stood at Sh708 billion as at last September, up from Sh452 billion during a similar period in 2016.

This represented a Sh256 billion surge over the period when commercial banks held back lending, following an interest rate cap introduced through the Banking Amendment Act, 2016 in the second quarter of the 2016-2017 financial year.

The National Treasury has admitted that the Government’s borrowing from the domestic market during the second quarter of the current financial year exceeded the target by 25 per cent, pushing the gross public debt to new highs.

Domestic borrowing

“By the end of September 2017, net domestic borrowing amounted to Sh49 billion against a target borrowing of Sh39 billion,” said Treasury in its latest economic review.

“The borrowing comprised Sh12.6 billion from commercial banks, Sh26.3 billion from non-banking financial institutions, Sh1.9 billion from non-residents and Sh8.3 billion from the Central Bank of Kenya.”

Overall, the Government’s stock of commercial bank debt has shot up by 140 per cent in the last three years, from Sh295 billion recorded in the 2015-2016 financial year, with the largest increase recorded over the last two years.

This is a worrying trend for private sector borrowers already finding it hard to obtain affordable credit as banks opt to lend to the Government, which guarantees returns, while seeking to cut down on non-performing loans.

According to KNBS, commercial bank loans and advances to most sectors reduced marginally in 2016 compared to significant increases recorded in previous years.

Loans and advances to the manufacturing sector, for instance, went down from Sh290 billion recorded in 2015 to Sh276 billion in 2016 while credit to the mining and quarrying sector dropped from Sh20 billion to Sh16 billion over the same period.

Loans and advances to traders and other businesses similarly recorded a downward trend, dropping by Sh49 billion and Sh43 billion respectively.

“The recently introduced interest rate caps have become a barrier to fundraising and developers are finding it difficult to raise money for new projects,” said Knight Frank Chief Executive Bob Woodhams.