Ex­perts push for T-bills use

BANK­ING Plan will see small lenders use gov­ern­ment se­cu­ri­ties as col­lat­eral when bor­row­ing from peers

Business Daily (Kenya) - - FRONT PAGE - Charles Mwaniki cmwaniki@ke.na­tion­media.com Lack of ac­cess is forc­ing small banks to take up ex­pen­sive credit

The skewed dis­tri­bu­tion of liq­uid­ity that has hit small lenders can be re­solved by re­viv­ing the plat­form for banks to lend to each other us­ing gov­ern­ment se­cu­rity hold­ings as col­lat­eral, money mar­ket ex­perts say .

The skewed dis­tri­bu­tion of liq­uid­ity that has hit small lenders can be re­solved by re­viv­ing the plat­form for banks to lend to each other us­ing gov­ern­ment se­cu­rity hold­ings as col­lat­eral, money mar­ket ex­perts say.

Mort­gag­ing of trea­suries and al­low­ing sale in case of de­fault will make smaller banks rel­a­tively risk-free, a de-risk­ing that is very im­por­tant given the jit­ters from re­cent col­lapse peers.

This type of lend­ing, tech­ni­cally known as hor­i­zon­tal repo, has hardly been used by Kenyan lenders who in­stead rely on the overnight or in­ter­bank mar­ket to sat­isfy short-term cash de­mand, as well as the ver­ti­cal repo that sees banks bor­row from the Cen­tral Bank of Kenya (CBK) us­ing se­cu­ri­ties as col­lat­eral.

Eleven fund man­agers, econ­o­mists and trea­sury deal­ers sur­veyed by HTM Cap­i­tal say while the CBK has been ac­tive in try­ing to re­dis­tribute liq­uid­ity in the mar­ket, this role is dis­torted by the reg­u­la­tor’s role as the fis­cal agent, which some­times calls for with­drawal of liq­uid­ity at the same time.

“The break-down of mar­ket driven liq­uid­ity dis­tri­bu­tion via the in­ter­bank is mainly not work­ing be­cause of coun­ter­party risk con­cerns. Un­til when mar­ket play­ers are con­fi­dent to lend to each other, the CBK’S in­ter­ven­tion in restor­ing the mar­ket mech­a­nism is limited,” says HTM in the re­port.

“The mar­ket can de­velop the hor­i­zon­tal Repo mar­ket for banks to freely share liq­uid­ity…a medium term ob­jec­tive to re­store a mar­ket-driven mech­a­nism is to ad­dress the struc­tural is­sue of a seg­mented in­ter­bank mar­ket.”

The liq­uid­ity in the mar­ket

has tra­di­tion­ally been skewed in favour of the large lenders. In re­cent months they have been re­luc­tant to lend to smaller coun­ter­parts fol­low­ing the col­lapse of three banks in 2015 and 2016 and the in­tro­duc­tion of a rate cap which has hit smaller lenders’ mar­gins.

This lack of ac­cess to the in­ter­bank mar­ket is also forc­ing the smaller lenders to take up other types of ex­pen­sive credit, which hurts prof­itabil­ity.

The hor­i­zon­tal repo mar­ket was launched in 2008 and was meant to en­cour­age banks lend more to each other to re­bal­ance the liq­uid­ity in the sec­tor.

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