Cash crunch pushes cost of loans to new high as tax declines

Families and small businesses will be hit hardest by the government’s borrowing spree, which has pushed the Treasury Bill and bank interest rates to highs last seen more than a decade ago.

The government is seeking to borrow a staggering Sh78.8 billion in syndicated loans from local banks to plug a gaping Sh600 billion hole in the budget, which has been made worse by low tax collection and wastage.

Last week, the government paid a record 21.35 per cent for the 91-day Treasury Bill as pressure to borrow more led investors to demand higher returns.

Analysts have warned that those who have taken bank loans are likely to suffer the most as they will face higher lending rates as banks go for risk-free government loans.

“We are definitely headed for a high interest rates regime and we expect to see a lot of loan re-pricing,” said Mr Eric Munywoki, an analyst at Old Mutual Securities.

At present, banks are charging borrowers an average of 15.26 per cent before adding their risk premium. When other charges are added, coupled with a borrower’s risk profile, the rates have been averaging at over 20 per cent.

While citing the increase in Treasury Bill rates, Victoria Commercial Bank has this week written to its customers, informing them of its intentions to raise the lending rate by six percentage points.

COST OF CREDIT

“It is not feasible for the bank to maintain its pricing on Kenyan shilling denominated credit... Consequently, the premium rate shall be increased by 6 per cent per annum, with effect from November 12,” the bank said in a note that it sent to its customers on Monday.

The bank’s move is likely to be replicated in the industry, as others pass the rising cost of money to borrowers. However, the industry is still waiting for the review of the lending rate expected in January

Kenya Bankers Association CEO Habil Olaka yesterday said the decision to raise lending rates would be driven by individual banks and the cost of credit.

“I do not want to speculate, but banks make decisions to increase based on the cost of funding,” he told the Nation.

The National Treasury needs money to end the cash crisis that has starved counties, public schools and the National Assembly of funds. Counties have warned that services will grind to a halt if their allocations are not released soon.

Secondary schools have also protested that they do not have money to buy equipment and materials needed for the ongoing national examinations, while primary schools have no money to run operations.

BEEN AFFECTED

On Monday, Education Cabinet Secretary Jacob Kaimenyi said money for schools was released on Friday but headteachers said they were yet to get it.

Some Parliamentary Service Commission employees are also yet to receive their September salaries.

The Constituency Development Fund, rural electricity connection projects and some commissions, including the Independent Electoral and Boundaries Commission, have also been affected by lack of finances.

The Kenya Revenue Authority collected Sh181.2 billion in July and August, below the expected average for the period, according to the Parliamentary Budget Office.

All revenue receipts are below average, said the team of economic and budget experts employed by Parliament to advise MPs. This has raised doubts about the State's likelihood of meeting its tax revenue targets for the year. The shortfall could also be aggravated by the poor performance of local firms this year, owing to forex losses.

Firms in the manufacturing, construction, commercial and automobile sectors have seen their margins shrink, and as a result some of them have issued profit warnings.

Parliament has summoned National Treasury Cabinet Secretary Henry Rotich to appear before its Budget and Appropriations Committee on Thursday to shed light on the cash crunch.