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Shares pledged for bank loans fall amid high rates
Banks typically issue loans against equities at a significant discount to the value of the shares to mitigate risks of loss in case the borrower defaults and the stock price declines.
The number of listed shares pledged by investors as security for loans dropped by 127.6 million units to 6.23 billion in the year to June 2024, indicating that banks may be demanding less risky collateral amid increased defaults from borrowers.
The decline also comes amid high interest rates on loans that have topped 25 percent, putting off prospective borrowers and resulting in a fall in the banking sector's overall loan book.
Latest data from the Capital Markets Authority (CMA) shows that the number of investors committing the shares as collateral also fell, from 39,959 in June 2023 to 39,649 in June 2024.
Banks typically issue loans against equities at a significant discount to the value of the shares to mitigate risks of loss in case the borrower defaults and the stock price declines.
Given the general bearish sentiment on majority of stocks at the Nairobi Securities Exchange (NSE) and the rise in non-performing loans in the banking sector, the lenders have become choosier over which stocks to accept as collateral for fear of losses.
The reduction therefore indicates that the pace of release of pledged units upon clearance of loans is happening faster than new ones being committed by other borrowers.
The Kenyan stock market has 1.82 million individual investors on its books, holding a total of 13.51 billion shares. The remainder of the market’s total of 99.96 billion issued shares are held by institutional investors, both local and foreign.
This means that investors at the bourse have committed about 6.2 percent of their stock as collateral for loans. The bulk of the pledges are likely to come from individual investors however.
The pledging of shares is also used by companies to secure loans to meet a variety of needs, including working capital requirements and ventures such as acquisitions.
The CMA, the NSE and the Central Bank of Kenya (CBK) –the banking sector regulator— do not disclose the value of bank loans secured by the pledged shares, the worth of the encumbered portfolio or the companies whose shares are pledged.
However, 6.2 percent of the market’s total investor wealth of Sh1.59 trillion equals to about Sh99 billion, indicating the scale of the loans tied to shares.
Borrowing against shares helps investors to access funds without selling their stock at a loss or before reaping benefits, including through capital gains and dividends.
The owners of pledged shares retain the ownership of the securities, but cannot transact on them until the lender signs a pledge release form.
The borrower is also required to make up for the shortfall in collateral from fluctuations in share prices, although banks hedge against this eventuality by through the valuation discounts on the shares being pledged.
