Banks share of domestic debt hits 7-year low

The Central Bank of Kenya head office. FILE PHOTO | NMG

By CHARLES MWANIKI
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Summary

• The proportion of government domestic debt held by banks has gone down to a seven-year low.
• Banks held 50.98 percent of the total outstanding domestic debt of Sh3.66 trillion as at May 13, latest Central Bank of Kenya (CBK) statistics show.

The proportion of government domestic debt held by banks has gone down to a seven-year low, affected by the recent issuances of long-dated bonds that are unattractive to the lenders.

Banks held 50.98 percent of the total outstanding domestic debt of Sh3.66 trillion as at May 13, latest Central Bank of Kenya (CBK) statistics show, down from 54.8 percent at the beginning of the current fiscal year in July 2020 — when outstanding debt stood at Sh3.18 trillion.

The fall in the percentage share held by banks is also attributable to the higher uptake of new bond issuances by other classes of investors, most notable pension funds and retail investors.

In the period since July, banks have seen their absolute holdings of the debt go up by 6.9 percent or Sh121.8 billion, lagging pension funds which have increased their holdings by Sh201 billion or 21.9 percent.

“We have been seeing a lot of the longer tenor issues in the current fiscal year, which are now ideal for pension funds and long life insurance companies. As pension funds have outpaced the banks’ increase, they have clawed back the overall share of domestic debt,” said Churchill Ogutu, Genghis Capital head of research.

Banks normally prefer short-term paper due to their shifting liquidity needs, while pension funds and long-term insurers prefer longer bonds which tie in well with their long investment horizons. In the past 11 months, retail investors, which include Saccos, listed and private companies, self-help groups, educational institutions, religious institutions and individuals, have raised their holdings of government debt at a faster pace than all other classes of buyers.

They have raised their holdings by 62.3 percent or Sh85 billion in the period and now account for 6.12 percent of the total debt pile compared to 4.3 percent last July.

“It is partly due to the Covid-19 period where we have seen an increase in cautionary savings. Opportunities during this period have opened up in bonds rather than other investment classes such as equities because of the safe-haven effect,” said Mr Ogutu.