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Monday, June 30, 2014

High bank mark-ups risk clouds bond cash respite for borrowers

Money Markets
Treasury secretary Henry Rotich with Solicitor-General Njee Muturi and Debt Management director Felistus Kavisi when they announced the outcome of Sh176 billion Eurobond issue at State House, Nairobi, last Wednesday. EVANS HABIL 
By CHARLES MWANIKI
In Summary
  • Some analysts said the reduction of interest rates to single digit could be hindered by banks having a leeway to add a mark-up on the policy rate.

Expectations of a significant drop in interest rates following the successful flotation of the Sh176 billion Eurobond may be dashed by the premium commercial banks load on the reference price to be set by the Central Bank from next week.

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Some analysts said the reduction of interest rates to single digit could be hindered by banks having a leeway to add a mark-up on the policy rate based on market realities such as the cost of money, inflation, administrative costs and a borrower’s profile.
“The question is whether they will try to regulate the premium as well. It may not be automatic that the rates will come down,” said Standard Investment Bank head of research Francis Mwangi.
Treasury secretary Henry Rotich said on Wednesday that the government hoped to bring down interest rates through a Kenya Banks Reference Rate (KBRR) and full disclosure of bank charges through the introduction of an Annual Percentage Rate (APR).
“I don’t see lending rates coming down any time soon just because the sovereign bond has been floated. It did not happen in Ghana and Zambia when they floated similar bonds. Lenders still have to look at several factors, including risk, before deciding to lower rates,” said an industry insider who requested not to be identified.
The KBRR, which will be computed as an average of the Central Bank rate and the average 91-day Treasury Bill rate, will be published by the CBK for the first time after the next Monetary Policy Committee meeting on July 8. It will be effective for the next six months.
The government is also counting on its reduced appetite for local money to bring down Treasury Bill rates, which will impact directly on the KBRR.
Whether this will be achieved remains to be seen, with Sh191 billion in domestic borrowing having been factored in the budget. Domestic borrowing targets were exceeded in the last financial year and are on course to spill this year.
“Rates could even go up if the government is still big in the domestic market,” said a commercial bank chief executive in an interview.
Banks have in the past blamed the high cost of money and operating costs for high interest rates, which observers see as more driven by the commercial imperative.
“There has been a lot of money circulating in the economy before the Eurobond, as shown by the CBK mopping actions and the interbank rate, which is stable at around 6.8 per cent, yet we have not seen an impact on the interest rates,” said Mr Mwangi.
Stricter control of lending rates could force banks to scale down on longer term deposits from commercial entities, which are deemed more expensive, and favour partnerships with development finance institutions.
“The price control may limit banks’ ability to take term deposits, and may only help banks with huge retail deposits,” said ABC Capital corporate finance manager Johnson Nderi.
The Eurobond is seen as key in short term support for the shilling before the money is disbursed to project funding, giving CBK extra ammunition to contain any exchange rate fluctuations.
“CBK will also not be dipping into the open market for dollars whenever there are dollar denominated bills to pay, making holding of long dollar positions by market players unattractive. This will ensure that the market will have higher dollar supply,” said Family Bank treasury manager Joseph Gathege.

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