Rate cap repeal to cost State dearly

Banks foresee a rise in income from lending to the Government once the rate cap is repealed.

Analysts said if the Government continues to spend more than its revenue from taxes and without the rate cap, banks are likely to charge a premium for their money.

According to the State of Banking Report launched on Tuesday, between 2003 and 2013, the Government borrowed Sh1 trillion locally, but in the last five years, Treasury has borrowed almost twice the amount at Sh1.6 trillion.

Without the rate cap, as was seen in 2015, the Government was paying over 20 per cent on locally sourced funds.

But in the wake of the rate cap, Treasury has been enjoying rates of as low as six per cent because of banks would rather lend to the Government as opposed to the “risky” individual borrowers.

Finance Cabinet Secretary Henry Rotich has sought to repeal the rate cap through the Finance Bill 2019, which will prompt banks to increase lending to the private sector and review the rates they charge the State.

“I would expect the National Treasury to play hardball for a few months, meaning rejecting bids, dumping options, but the reality is that the yield curve is compressed if you look at the long end of the bond... there is no reason to believe there will be no increase even if it is moderate on the yield curve,” said Jibran Qureishi, regional economist for East Africa at Stanbic Bank.

On the flip side, if the rate cap is repealed, individual borrowers are likely to pay even higher rates than the Government.

Treasury has the option of cutting down its spending to avoid the higher rates, although lower tax collection is expected to persist, guaranteeing banks a constant source of funds.

However, Stanbic’s Qureishi said the National Treasury could always go for more Eurobonds.

This is considering that the international markets will be awash with cheap cash if the US Fed cuts its lending rates.