Banks lose grip of juicy State domestic debt deals
The share of government security debt held by the Central Bank of Kenya has fallen over the past four years, reinforcing the shift in favour of pension fund managers.
What you need to know:
- Treasury data shows both commercial banks and CBK by June held 48.7 per cent of State’s Sh4.28 trillion domestic debt, from 51.4 per cent in a similar period last year.
- The share by commercial banks in Kenya’s domestic debt dropped from 49.1 per cent in June 2021 to 46.2 per cent by June 2022, the report stated.
- Government securities come with a promise of the full repayment of invested principal at maturity.
The share of government domestic debt held by banking institutions slid to a four-year low in the period to June, also reinforcing a trend in which the lenders’ stake in this lucrative segment has sunk below 50 per cent for the first time in almost a decade.
Latest data by the Treasury shows that banks (both commercial and the Central Bank of Kenya) as of June this year held 48.7 per cent of the State’s Sh4.28trillion domestic debt, a drop from 51.4 per cent in a similar period last year as other classes of investors including pension funds bought more fixed-income securities.
This marked the third time in four years that the portion of government domestic debt held by banks has shrunk, having dropped from 55.6 per cent in the year to June 2018, when the government owed local commercial banks and the Central Bank of Kenya (CBK) some Sh1.37 trillion.
The share by commercial banks in Kenya’s domestic debt dropped from 49.1 per cent in June 2021 to 46.2 per cent by June 2022, the report stated.
“Risk-averse pension fund managers are particularly going deep into government securities and squeezing banks’ dominance of this segment,” George Bodo, a financial analyst, told Smart Business.
As domestic debts rose by Sh591.24 billion in the year to June, pushing the total domestic public debt stock to Sh4.288 trillion, the share held by non-bank lenders also rose.
“The non-bank financial institutions holding increased to 51.3 per cent from 48.6 per cent while banks decreased their holding to 48.7 per cent from 51.4 per cent in June 2022,” the Treasury said about the government debt in the domestic market.
“This was a major shift from the past experience where banks have been dominant in the domestic government securities market,” it added.
The report shows that over the past two years, non-bank lending to the State has grown by about Sh770 billion, while commercial banks have grown theirs by about Sh350 billion.
Pension funds
But as banks lost their share in the government’s domestic debt, pension funds and insurance companies retained a good run, eating the lunch of the lenders.
“Domestic debt stock held by pension funds and insurance companies increased to 32.6 per cent and 7.2 per cent in June 2022 from 30.7 per cent and 6.7 per cent in June 2021 respectively while others remained unchanged,” the Treasury said about the outstanding domestic debt stock held as at June 2022.
Data by the Insurance Regulatory Authority (IRA) shows that in the second quarter that ended June this year, the total investments in long-term insurance business amounted to Sh550.91 billion, an increase of 11.6 per cent compared to Sh493.78 billion reported in a similar quarter of 2021.
The statistics showed that Kenya government securities (treasury bills and bonds) maintained their attractiveness to long-term insurers in the quarter to June, comprising 79.3 per cent or Sh436.85 billion of the total long-term insurers’ investments.
This is a remarkable change from three years ago when total investments in the long-term insurance business as of June 30, 2019, amounted to Sh382.97 billion, having risen 13.3 per cent compared to Sh338.15 billion as at end of Quarter Two of 2018.
As at end of June 2019, long-term investment in government securities accounted for 67.3 per cent of the total Sh257.56 billion investment by insurers.
The appetite for government security by pension fund managers shows their risk aversion amid low returns from the equity markets.
Government securities come with a promise of the full repayment of invested principal at maturity.
Some government securities may also pay periodic coupon or interest payments.
These securities are considered conservative investments with low risk since they have the backing of the government.
Government securities
Due to their low default risk, government securities tend to be safe-haven plays for investors with some of these securities even exempt from State and local taxes.
Pension schemes prefer long-term investment since their customers will require their money after years and decades as opposed to banks that face constant liquidity needs for depositors.
The pension funds and insurance firms were attracted by attractive interest payments on domestic debt.
Overall, average interest rates remained stable during the year. The average interest rates for the 91-day, 182-day, and 364-day Treasury bills were 7.9 per cent, 9.1 per cent, and 10 per cent in June 2022 compared to 6.7 per cent, 7.3 per cent, and 8.4 per cent per annum respectively in June 2021.
This is reflected in the uptake of long-term debt facilities.
Although the Treasury bills and bonds maturing in one year have declined over the years from 35.8 per cent in June 2018 to 18.7 per cent in June 2022, the proportion of Treasury bonds of between one to five years increased to 35 per cent in June 2022 from 21.5 per cent in June 2021.
The share of Treasury bonds of between six to nine years increased from 19.8 per cent to 24.1 per cent.
The total interest payments and other charges on the overall domestic debt were Sh456.84 billion as of the end of June 2022, having risen 17.5 per cent from Sh388.83 billion last year.
“By the end of June 2022, the ratios of domestic interest payments total revenue decreased to 23.8 per cent from 24.9 per cent, while the ratio of interest to GDP increased to 3.6 per cent from 3.4 per cent in June 2021, respectively, the Treasury said.
The share of government security debt held by the CBK has also been a fall over the past four years, reinforcing the shift in favour of pension fund managers.
As of the second quarter of this year, the domestic debt held by the CBK stood at Sh85.14 billion or two per cent of the total market share.
This is a substantive drop from the second quarter of 2018 when the apex bank accounted for Sh110.78 billion of government domestic debt, which was equivalent to 4.5percent of the total share.
