An option granted to investors by the Central Bank of Kenya (CBK) to directly purchase government securities, including Treasury bills and bonds, through a digital portal has rattled commercial banks amid an exodus of clients.
CBK in July 2023, launched an improved over-the-counter trading platform dubbed DhowCSD that has allowed investors to open and transact on the central security depository (CSD) accounts from the convenience of smartphones and the internet.
This has eliminated the previously lengthy process of physically visiting the CBK to open securities trading accounts.
The banks said that the switch has resulted in competition for deposits, raising their cost of funds, and are now asking the State to intervene to manage the loss of their intermediary role.
Buyers of Treasury bills and bonds previously bought T-bills and bonds through banks before the CBK introduced the direct-window option.
“Bank respondents indicated that there was a need for intervention by the government to manage disintermediation of banks as fixed-term deposit customers switch to the purchase of T-bills and T-bonds and thus increasing the cost of deposits, heightening aggressive competition for wholesale deposits between banks and crowding out lending to the private sector,” commercial banks told CBK in survey responses.
High interest rates on Treasury bills and bonds along with the liberalisation of government securities access through the DhowCSD platform, has increased the participation of retail investors in the direct purchase of the securities.
Yields on government securities reached new highs this year as the CBK raised its benchmark lending rate and the government’s risk profile soared, lifting the return on Treasuries.
February’s tax-free infrastructure bond for instance delivered a coupon/interest rate of 18.46 percent making it the highest-grossing asset in 2024.
The upgraded CDS infrastructure- DhowCSD which went live on July 31 last year, boosted efficiency in investing in government securities by allowing retail investors to buy T-bills and T-bonds through their smartphones.
Signups to the platform crossed the 80,000 mark by June this year with the number of CDS accounts doubling in the past year.
Holdings of government domestic debt by retail investors have increased after the launch of DhowCSD reaching a share of 13.53 percent as of October 9, 2024, or Sh730 billion compared to a share of 7.13 percent, or Sh342 billion as at the end of June last year.
The retail investors who are categorised as other investors currently hold a greater share of government domestic debt than insurance companies and parastatals combined.
Commercial banks have responded to the attraction of government securities to retail investors, by sweetening their return on time and savings deposits/term deposits.
The average commercial bank deposit rate for instance soared to a peak of 11.48 percent in June this year, compared to 7.8 percent at the same time last year.
Fixed deposit balances rose to surpass Sh2 trillion for the first time in July, anchored on the sweetened returns despite the banks' fright of the switch to government securities.
The balances touched Sh2.02 trillion, representing a 13.6 percent growth rate from Sh1.76 trillion in July 2023. Commercial banks have previously lamented the crowding out of the private sector in credit disbursements.
The higher return paid out to bank term depositors has raised the commercial banks' funding base, putting pressure on their lending margins which form the bread and butter of the industry’s earnings.
Interest rates on both fixed deposits and government securities are however set for a downshift in the near term as domestic rates moderate.
