The Government is the chief beneficiary of the rate cap law and is now borrowing cheaply otherwise without the limit, the market would have charged a premium.
Banks do not have excess money, especially following a monetary policy move by the Central Bank of Kenya to mop up liquidity to guard against currency jitters.
Reuters reported that the Kenyan shilling strengthened against the dollar on Wednesday due to tight liquidity in the money market and thin dollar demand from merchant importers ahead of the holiday season.
The rising inter-bank lending clearly shows that banks do not have enough money of their own. The interest at which they lend to each other, referred to as interbank rate, is at a three-year high.
“Interbank money market activity signalled reduced liquidity, with the average interbank rate rising from 7.5 per cent to 10.2 per cent as average volumes increased from Sh13 billion to Sh15.4 billion,” investment firm, Britam, said in a market report.
While the banks are out of liquid cash, the little they have they would rather give to the National Treasury.
The government has sold a 10-year bond twice in two weeks and is expected to raise close to its Sh40 billion.
At the first try last week, the auction managed to raise Sh26.2 billion, translating into a performance rate of 72.2 per cent. The average yield on the auction came in at 12.5 per cent.
Treasury is back in the market with a Sh13.8 billion tap sale this week, which analysts estimate could bring in as much as Sh10 billion.
“This is not the case before the cap where market tightness could mean higher rates for Government. With currency stability and inflation in check, the Government will have no trouble raising money,” said Stanbic Bank Regional Economist Jibran Qureishi.
“I do not see the rates coming up in the next two months or so.”
In 2015 when the Government was desperate for cash, banks adjusted their rates, giving the State money at 22 per cent. That era ended with the rate cap.
Mr Qureishi said the issue of tight liquidity will be offset in the coming months once the Government pays back some of its maturing debts. This includes interest payments for 13 bonds within January and February alone.
The Government is so comfortable borrowing locally that it ramped up its targets for local borrowing by over Sh100 billion, from Sh217 billion to Sh319 billion.
But while the State can borrow cheaply, the private sector is hurting since borrowers are unattractive to banks. It only takes one Treasury manager in a bank to manage debt with the Government, which is not expected to default. It takes an army of salespeople, tellers, advertisement and relationship managers to manage an account for a retail client who may still default.
Credit to the private sector rose by 4.4 per cent in October, according to CBK data, from 3.9 per cent in September and 4.3 per cent in August.
The market survey showed that private sector credit growth expectations declined across all the bank tiers relative to the July 2018 survey, with respondents attributing this to interest rate caps and the resultant challenges to effectively price risk.