Governor faults banks’ dependence on government securities

Standard Bank regional CEO Kitili Mbathi said banks were keen to invest in bonds as long as there were good returns. FILE 

By GEOFFREY IRUNGU,

In Summary

• Prof Ndungu said that banks held as much as 52 per cent of government securities.
• He said banks ought to retain good customers as borrowers and not deny them loans so as to put cash in government securities.
• Bankers said their investment in government securities was informed by attractive interest rates and their assessment of asset allocation.

Central Bank of Kenya (CBK) governor Njuguna Ndung’u wants banks to invest in screening and monitoring of borrowers to expand lending.

Prof Ndung’u said local banks tended to depend disproportionately on government securities at the expense of the private sector.

Noting that banks had not yet reached a point where they could be regarded as crowding out the private sector, Prof Ndungu said that banks held as much as 52 per cent of government securities.

He said banks ought to retain good customers as borrowers and not deny them loans so as to put cash in government securities.

Prof Ndung’u was answering questions from participants during the just-ended conference co-hosted by the Kenyan National Treasury, the CBK and the International Monetary Fund (IMF) at the Fairmont Norfolk Hotel in Nairobi.

“It is not a matter of crowding out, but why are banks not investing in screening and monitoring customers and are rushing to invest in government securities?” asked Prof Ndung’u.

In funding both the private and the public sectors to power economic growth, the governor said that whereas equity and debt financing were equally important, the critical thing is to balance the two.

Bankers said their investment in government securities was informed by attractive interest rates and their assessment of asset allocation.

Prof Ndung’u acknowledged there were binding constraints in the credit market but asked banks to come up with innovative ways of expanding short-term credit as well as long-term lending in the mortgage market.

There are currently 18,000 mortgage accounts in Kenya, in spite of having a market of over two million formal sector employees and years of pushing home financing products.

“We should come up with innovative ways to expand the mortgage market. Its growth has been rather slow,” said Prof Ndung’u.

Kitili Mbathi, the regional chief executive of Standard Bank, said banks were always keen to invest in bonds as long as there were good returns.

“The governor has challenged banks to put together evaluation technology so that they are not dependent on government credit. That is good but if banks find a bond having attractive interest rates they will invest for returns,” said Mr Mbathi.

He said the reality was that banks were also in a position to turn on the taps of private sector lending reasonably quickly.

He pointed to the crisis in late 2011 when interest rates spiked and banks lent a lot of cash to government, but lending to the private sector resumed as soon as interest rates begun to come down.

“There is a point at which lending to the private sector can be done. The governor has also challenged banks on the mortgage market. We are moving in the direction of making mortgages more affordable,” said Mr Mbathi.