The third quarter in the banking sector may witness a significant uptick, driven by a government initiative to issue a Kes50 billion infrastructure bond scheduled for 13th November 2023. Kenya introduced this tax-free bond, which extends over six and a half years, with its coupon rate to be determined by the market. This decision followed a two-year bond that garnered only 35.1 percent of bids at 17.9 percent.

Evidently, this signals the government's openness to accept more aggressive bids, which, according to lenders constituting 45.2 percent of bond investors, may reach as high as 20 percent.

The KCB Monthly Economic Brief has indicated that bankers stand to secure highly profitable rates, especially at a time when elevated global and local interest rates are driving up the overall cost of conducting business.

The report states, "Pressure on interest rates continues as investors continue to prefer short-term instruments, especially the 91-day treasury bill. The government is releasing a 6.5-year Infrastructure bond valued at Kes50 billion, dated 13th November 2023, with a market-determined coupon rate, aimed at funding infrastructure projects in the FY 2023/24 budget. Investors are expected to submit high rate quotations for this bond, ranging between 18.0 percent and 20.0 percent," as noted in the KCB October Economic Brief.

As the demands for high-interest rates mount among investors in government securities, lending to the sovereign is poised to become a dominant activity in the banking sector, allowing banks to finish a challenging year on a more positive financial footing.

Kenyan banks have encountered a modest year marked by significant economic shocks, including a slowdown in global economic growth, persistent high inflation, and currency depreciation.

Read also: KCB’s elite cards target high net-worth customers

Bond rates in Kenya

Despite these challenges, Kenya's economy achieved a robust growth rate of 5.4 percent in the second quarter, thanks to favourable rainfall patterns that ended extended periods of drought.

The country's thriving service sector has also withstood price shocks, leading to continued strong growth in loans, with private sector credit reaching 12.6 percent in August 2023 and 10.3 percent in July.

However, the notable surge in banking activity is primarily attributed to loans extended to the government, with investors concentrating on 91-day treasury bills.

The Kenyan government faces substantial maturing local and international debt but has encountered obstacles in commercial loan markets due to exceedingly high interest rates.

Consequently, it has resorted to multilateral lenders, who have provided significant support. Nevertheless, bureaucratic processes and periodic reviews have led to slow disbursements, coupled with demanding tax requirements.

Additionally, the tax authority has signalled slowing collections, with total revenue collection from July to September 2023/24 amounting to Kes586.9 billion against a target of Kes665.9 billion. This resulted in a performance rate of 88.1 percent, leading to a deficit of Sh79 billion and a growth rate of 8.4 percent.

Given these mounting pressures, lenders are speculating that the Kenyan government will pay substantially higher interest rates than President William Ruto had predicted just 12 months ago when he anticipated bond prices to fall below 10 percent.

[email protected] and [email protected]