Banks that have issued corporate bonds at high rates for on-lending are staring at thin trading margins under the current rate-capping regime on funds so far unused.
This may mean the institutions could stop issuing of any remaining tranches or sharply cut offered rates going forward.
The lenders raised bonds with coupon rates of about 13.6 per cent, meaning their margins — the difference between a product or service’s selling price and its cost — is less than 1 per cent once they apply the requirement of the Banking Amendment law that caps lending rates at 14.5 per cent.
“It is a fact that those banks which were raising funds in the wholesale markets are essentially now priced out of the banking business. This is a Schumpeter moment of creative destruction and these banks need to quickly look at the business model,” said Mr Aly-Khan Satchu, CEO of investment advisory firm Rich Management Ltd.
Consolidated Bank issued two seven-year fixed notes in July 2012, with its Sh1.4 billion issue fixed at 13.25 per cent coupon rate while the Sh1.9 billion bond was issued at 13.6 per cent.
CFC Stanbic, which issued a seven year bond in 2009 has a coupon rate of 12.5 per cent on its Sh24 billion bond.
I&M’s 2013 medium term Sh226 million bond is paying 12.8 per cent while NIC Bank is paying 12.5 per cent on Sh5 billion bond issued in 2014.
Commercial Bank of Africa (CBA) has a Sh7 billion note that pays 12.7 per cent while Chase Bank’s fixed Sh4.8 billion note is paying 13.2 per cent.
Mr Satchu said the lenders are stuck with the costly fund unless they can trigger common clause in contracts that frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs.