Combined, commercial banks are now holding more cash reserves than ever before even as the private sector languishes in a cash-crunch strangle hold.
The banking sector liquidity which informs of lenders cash and near cash stocks peaked at an all-time average high of 50.3 percent in the half year reporting period to June 30, 2019 from a similar period in 2018.
The high cash holdings by the banks has been evidenced by a high subscription rate to issued domestic debt securities whose average subscription for Treasury bills and bonds topped 131.1 percent and 111.9 percent across the review period.
At the same time, the average interbank rate which makes for the soundest measure of market liquidity remained relatively low at 3.7 from an expanded average of 5.2 percent in the first half of 2018.
However, while lenders glow from their virtual inexhaustible stock of cash, the private sector has remained in the shadows of the beaming cash surplus as both individuals and businesses feel the heat of squeezing cash flows.
Private sector credit growth which fell into the single digits in late 2016 only picked up marginally to 4.2 percent from 2.9 percent in a similar 2018 period to mirror the ongoing strive for the much needed credit in the economy.
The elephant in the lending room
At the centre of the deteriorated private sector credit growth is the far reaching old debate on the interest rate capping environment enacted first in September 2016.
Credit flow to the real economy changed course for the worse in the aftermath of the lending altering interest rate cap law as banks closed off their loan books to the majority of the private sector members.
Subsequently, the banks have found a safe haven in lending to the risk free and fixed yielding government securities as the majority of the commercial lenders find credit advancement to the private sector a high risk affair.
At the same time, banks have pursued a multi-faceted approach to grow their bottom-line under a combination of aggressive lending and deposit mobilization and a push towards high non-interest funded income under new business streams.
However, asset quality depletion has remained an Achilles heel for the commercial lenders having seen the rate surge to 12.7 percent from a flat 12 percent a year ago.
Greater cash reserves have however most recently hit back at the lenders as commercial interest rates contract.
The interest rate charge on Treasury’s domestic debt has been on the decline falling by a greater 22.3 percent, 14.3 percent and 12.5 percent on the 182-day, the 364 and 91 day T-Bill respectively.
The rate charged on customer loans has similarly tumbled by an average 7.7 percent to 12.5 percent even as banks now pay lesser funding costs.
The sudden changeover in interest rates is however expected to shift banking funds into the private sector.
“We should see a gradual increase in private sector credit growth as banks lend due to a combination of high liquidity and significant low rates on domestic debt,” Sterling Capital noted in its note for the half year banking sector performance.
Your empty wallet
Private sector credit growth easing during the rest of the year is further linked to the possible lifting to lending rates as the banking sector renews its push for the offsetting of the capping environment.
This is as the banks remain wary of the ongoing deterioration of assets as the lenders average non-performing loan portfolio hit a high 12.7 percent to mark a significant shift in the rise of bad loans from 5.6 percent in 2014.
A poor economic performance show coupled with an acceleration of pending government and private sector payments to essential segments including construction and manufacturing has additionally worsened the flow of credit to individuals and businesses.
To live beyond the asset class polarization, firms have had to cut their fat by downsizing their staff base, effectively painting gloom on employment creation for the year in a repeated sequence of costs optimization.
“The interest rate capping law has restricted the ability to grow their top line for banks. Non-banking sector growth has also remained in the single digits. The only way for firms to remain competitive is by becoming more efficient in their cost base which involves layoffs to an extent,” ICEA Lion Head of Research Judd Murigi said in an interview conducted earlier in January.
The quest to have caps lifted has however been met by resounding concerns from parliament which has maintained its authority to stem customer exploitation by the ‘cunning commercial banks’ who prior to the rate cap charged exorbitant interest rates in loans and advances to clients.
Commercial banks which have seen an approximated 5,000 jobs wiped off by the rate cap have however backed reforms in the sector including the push towards a fair and transparent lending regime under the Central Bank of Kenya (CBK) Banking Sector Charter to correct the previous anomaly.
“Will we be responsible if the caps are removed? What should stop us from pricing loans at 25 percent? Ultimately, parliament has the final say on what is too high, banks have learnt from this and wouldn’t be going back to the previously charged rates,” Kenya Bankers Association (KBA) Chairman Joshua Oigara told MPs last month.
Individuals and businesses will hope to rope in a piece of the pie in a post interest rate cap environment with banks now holding a significant Ksh.4.6 and Ksh.3.4 trillion in loans and customer deposits respectively as at the close of May this year.
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