Why bank vaults are brimming as Wanjiku’s pockets go empty

A bank vault.[Getty Images]

In July last year when millions had lost their jobs due to the adverse effects of the Covid-19 pandemic, the Central Bank of Kenya (CBK) issued a number of Treasury bonds seeking to raise a combined Sh100 billion.

The response from investors bellied the grim state of the economy.

For the reopened five and 10-year Treasury bonds - long-term government security - in which CBK at the behest of the National Treasury sought to borrow Sh40 billion from local investors, the regulator received bids totalling Sh105.1 billion.

This translated into an oversubscription rate of 262. 8 per cent.

In the same month, CBK floated three other Treasury bonds seeking to raise Sh60 billion. It received Sh181.8 billion in bids, three times what the CBK had issued. 

This, in effect, went to show there was a lot of money in the economy.  

Since Kenya recorded its first case of Covid-19 in March last year, the economy has experienced a sharp downturn, resulting in the untimely death of several businesses.

Airlines, hotels, pubs, nightclubs and transport companies were buckling under the weight of the stringent containment measures aimed at curbing the spread of the Covid-19 pandemic.

The stock market was bleeding, with foreign investors cashing out in droves from the Nairobi Securities Exchange (NSE).

This capital flight, coupled with dwindling tourist receipts and export earnings, devastated the country’s foreign exchange reserves. The exchange rate also went on a downward spiral.

Spooked by the adverse effects of the pandemic on the business environment, rich individuals and businesses frantically stashed an additional Sh174.5 billion in fixed deposit accounts by the end of June, according to CBK data. 

This pushed up the fraction of money in fixed deposit accounts in various banks to Sh1.6 trillion, an increase of 12 per cent from the Sh1.42 trillion in March last year.

This means that on average, an additional Sh11.6 billion was put in time-saving accounts every month since March last year as rich individuals and firms sought to protect their wealth.

Others who had a stake in this pot of cash were pension funds, insurance companies and parastatals.

The rich also converted much of their wealth into dollars, with money in foreign deposit accounts rising by Sh137.5 billion to Sh779.7 billion in March this year before it declined slightly to Sh760.3 billion.

Some of the money came from the government. In a bid to inject some liquidity into the economy, the National Treasury paid businesses tax refunds and pending bills. 

Banks were also able to get cheap cash from CBK after the monetary policy committee (MPC), the highest decision-making organ of the apex bank, cut and retained its benchmarking rate from 8.25 per cent to seven per cent.

A lot of inflows

The cash reserve ratio, the percentage of cash required to be kept in reserves against the bank’s total deposit, also reduced from 5.25 per cent to 4.25 per cent, freeing up additional funds for lenders. 

The liquidity has been too high such that CBK moved in to mop up the excess cash from the economy through the open markets operations (OMO).

The move, which saw CBK buy dollars from the market, was initiated after Treasury received a lot of inflows from external financiers, with some of the dollars percolating into the economy through the payment of pending bills and disbursements to counties.

With OMO, the regulator enters repurchase agreements with commercial banks, where it sells to the government securities for a set period in what is aimed at adjusting the amount of money in the market.

But where did this money go? Economics, experts agree, is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants.

Just how these resources should actually be allocated has been the bone of contention among economists for ages.

Who, for example, between the private and public sector is better placed to effectively and efficiently allocate Covid-19 vaccines to the populace to help the society and economy return to normalcy?

The billions that have been shoved into banks have not been left to lie idle. Because these deposits are a liability to banks that have to pay interest on them, they have tried to put the money into profitable areas. 

The private sector, the biggest employer and taxpayer, has not benefited a lot from this cash bonanza. 

The property market was hit as investors opted not to put their money in real estate.

There was a decrease in the value of mortgages in the market by Sh5 billion “mainly due to repayments and decreased mortgage facilities advanced by banks due to effects of Covid-19,” according to the Central Bank report.

Instead, a big chunk of this money was taken up by the government to be spent on development projects, including activities that it insisted were critical in helping the economy recover.

Between March last year and June this year, loans to the private sector have increased by a paltry 8.9 per cent (Sh243.1 billion) to Sh 2.98 trillion.

On the other hand, loans to the national government have increased by 35 per cent, or Sh369.3 billion, to Sh1.4 trillion.

Between March last year and August this year, the government offered Treasury bonds totalling Sh1.17 trillion. It received bids valued at Sh1.66 trillion, an oversubscription of 141.7 per cent.

Even pension funds have increased their holding of government papers by Sh274 billion during the pandemic.

The volatile business environment has meant that the government has done much of the weight-lifting, borrowing billions from both domestic and foreign investors to try and turbo-charge the economy.

Ndoho Wahoro, the chief executive of Euclid Capital and former director-general of public debt management, said in a time of recession, the government is usually the main player in the market.

“And so it makes perfect sense if you are a corporate to put your money in government,” said Mr Wahoro.  

Besides the fact that the government has been running out of wiggle room to keep chalking up debt, it has not been very efficient in allocating resources.

Experts agree that the government’s role should be significant in public goods and public safety.

Moreover, billions of shillings of the borrowed cash - much of which could have gone to the private sector - have been wasted with the auditor general flagging most of the expenditures. 

Paul Mwai, the CEO of AIB Investments, said the fact that the State has been offering government securities at interest rates higher than inflation has seen a lot of investors, even in ordinary times, avoid the riskier areas such as the stock market and real estate. 

This has resulted in a different form of crowding-out.

“There is no incentive for investors to take risk and go to the stock market,” said Mr Mwai, noting that many of them would rather put their money in government securities.

The solution would be for the government to stop borrowing completely as it happened during retired President Mwai Kibaki’s first years in office. 

This forced banks to pitch tents along the dusty streets of Nairobi peddling loans to a languid crowd.

Five years earlier, they would just sit in their air-conditioned, ornate offices wearing long faces, waiting for desperate customers to walk in for loans. 

CBK data shows that such customers paid an additional Sh300 for every Sh1,000 that they borrowed from local banks. It was more like “take it or leave it.”

After all, the government - the safest borrower - was paying Sh230 for every Sh1,000 it borrowed through the 91-day Treasury bill, a short-term government security. 

President Kibaki, an economist and a former finance minister, scuttled all this. By the end of 2004, banks were lending to the private sector at an average of 12.5 per cent. 

But that is because the government paid an average rate of 4.07 per cent for the 91-day government paper. This was a substantial drop of 119 per cent from an interest rate of 8.92 per cent in 2002.

Ndoho of Euclid Capital said the current government could decide not to borrow at all from the domestic market. This would then mean cutting expenditure, especially payroll.

This is an unlikely option in an election year.

To unlock credit to micro, small and medium enterprises (MSMEs) that might have trouble accessing loans due to start or expand their businesses due to their high risk, Treasury set aside Sh3 billion for the Credit Guarantee Scheme.

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