- The 91-day Treasury bill rate broke through the 7% mark on March 8 and reached the current high of 7.13%, compared to an average of 6.23% during the quarter ended September of the year. last.
- Average bank lending rates also rose to 12.02% in February from a low of 11.75% in September.
- The increase in domestic borrowing should influence short-term lending rates.
A rise in interest rates on short-term Treasury bills prompts banks to start pricing up their loans, creating expensive credit for homes and businesses in a recovering economy.
Absa Bank Kenya, for example, has informed some customers that the base rate on their loans will increase by half a percentage point to 7.5% from June 4.
The lender attributed the rise to an increase in Treasury bill rates in recent weeks, as more banks consider raising their base rates amid an economic environment where the state does not have a full control over loan prices.
Banks use a base rate which is normally the cost of funds plus a margin and risk premium to determine how much they charge a particular customer.
They are reviewing base rates and many have called on the Central Bank of Kenya to revise the risk premium upwards in what could end the era of cheap credit.
“We are forced to raise the interest rate on deposits for our wealthy depositors when treasury bills go up because we compete with the government for funds,” the CEO of a major bank told the Business Daily while seeking anonymity for fear of CBK reprisals.
“Treasury bills are rising and the industry faces pressure to increase lending on the high cost of deposits.”
The 91-day Treasury bill rate broke through the 7% mark on March 8 and reached the current high of 7.13%, compared to an average of 6.23% during the quarter ended September of the year. last.
Average bank lending rates also rose to 12.02% in February from a low of 11.75% in September.
The increase in domestic borrowing should influence short-term lending rates.
The government plans to borrow some 662 billion shillings domestically in the new fiscal year starting July 1, compared to 540 billion shillings for the current period.
Analysts say rising rates on government debt securities are forcing banks to also raise yields on large-scale deposits from cash-rich companies and wealthy investors like pension plans.
Ultimately, this puts more pressure on lending rates, as deposits from large savers influence loan pricing.
Besides 91-day Treasury bills, other government securities have also seen significant rate increases in recent weeks.
The rate on 364-day Treasury bills, for example, crossed the 9% mark on March 1 and stood at 9.47% at the recent auction, against an average of 6.67%. in September.
“Furthermore, the government’s relentless domestic borrowing continues to negatively impact credit to the private sector,” the Parliamentary Budget Office (PBO) said in a January report.
The PBO added that private sector credit take-up is still low, attributing this to “either weak demand for credit in the private sector or ‘cautious lending’ from commercial banks.”
While banks are allowed to adjust their base rates to keep up with treasury bill rates, they are not allowed to add a risk premium on lending despite the removal of lending rate controls on November 7, 2019.
The Central Bank of Kenya asked banks to submit new loan pricing formulas that would serve as the basis for setting interest rates on new credit in an environment where the government did not control loan costs.
The CBK, however, remained silent and did not approve their submissions, forcing them to continue operating as if under loan rate controls to avoid getting in trouble with the regulator.
The CBK wants each lender to justify the margins it puts in its formulas but does not commit the institutions.
Banks say the late shift to risk-based lending has forced many to invest more in government securities and restrict lending to high-quality customers with lower risk of default.