James Anyanzwa
15 April 2008
Nairobi — The Central Bank of Kenya (CBK) has entered into a quiet deal with receiving banks of Safaricom's initial public offering in what is seen as an attempt to forestall a liquidity crunch in the money market.
The strategic pact seeks to ensure financial order in the market to cushion the economy against the possible recurrence of a liquidity crisis witnessed during KenGen public offering.
"We have started feeling the effects of liquidity in the bond and money markets. There is a tight liquidity in the money market as banks are re-directing most of their funds towards financing Safaricom IPO," says Mr Charles Ocholla, head of investment banking and fund management at Suntra Investment Bank.
Last week, the Government's 91-Day Treasury Bill suffered a massive under subscription with the performance rate falling by more than 50 per cent, according to analysts. "The 91-Day TB rate rose 38.4 basis points, which is very high," says Ocholla.
According to CBK official data, the 91-Day Treasury Bill rate rose to 7.36 per cent in last week's auction from 6.98 in the previous weeks auction. Similarly 182-day Treasury Bill rate surged to 8.24 per cent from 7.94 per cent over a similar period.
The regulator has, however, instructed receiving banks leading the Safaricom IPO to maintain their inter-bank rates (the rate private banks charge each other) at not more than 100 basis points (one per cent) below the prevailing Central Bank Rate (CBR). The move is in a bid to forestall any imbalances in the money market and avoid distortion of inter-bank lending rates.
Central Bank, Nairobi: The financial regulator has stepped up efforts to avert a cash crisis over the Safaricom IPO. Photo: file
"They have agreed to set their lending limits against this cap to ease liquidity. This is meant to ensure we don't fall again into a liquidity crunch," says Ocholla.
The local financial system has suffered from liquidity crisis in past IPOs as disproportionately huge amounts ended up in the receiving banks at the expense of other banks.
The situation was particularly dire during the 2006 KenGen IPO when an estimated Sh26 billion was stuck in KCB, which was the sole receiving bank.
Other banks were forced to borrow at what was considered 'exploitative' rates to meet their daily Central Bank regulatory liquidity requirement ratios.
However, under the latest agreement, the consortium of banks - Citi Bank, National Bank and Equity Bank - will avail credit lines to other banks at a uniform rate of 7.75 per cent below the prevailing CBR of 8.75 per cent, to maintain sanity in the inter-bank market.
It is also understood that a standing committee will be created to monitor and co-ordinate the management of any unforeseen adverse effects that may arise from the IPO transactions.
Recent reports indicate that the three consortium banks agreed on the move at a meeting between the CBK and the Kenya Bankers Association (KBA) executive council, which was held on March 27 to assess the impact the Safaricom IPO is likely to have on the exchange and market interest rates.
Member banks will also be required to conduct inter-bank business in a manner that will not cause moral hazard.
The Safaricom IPO has led to an under-subscription of Government Treasury Bills in its weekly auctions for three consecutive weeks, increasing pressure on the Government to raise the payable T-Bill rates.
Banks prefer to lend to Safaricom IPO applicants, which is being seen as a more lucrative investment alternative putting a strain on Government borrowing.
The move has sparked fears of a likely increase in the cost of borrowing that would further erode the purchasing power of consumers already weighed down by high inflation of 21 per cent.
"Definitely, because of tight liquidity, interest rates are going to rise. Most banks are going to restructure their interest rates," says Ocholla.
Analysts attribute the under-subscription of Treasury Bills to a rush by banks offering loans to investors buying the Safaricom shares, which offers a potentially higher return than the 7.36 per cent and 8.24 per cent being paid on the 91-day and 182-day T-Bills respectively, following last week's CBK data.
KBA, the banking industry's umbrella body, however, views the move by banks as purely individual business decisions.
"These are individual players, and individual banks can take individual business decisions. However, an upright bank has to be very careful as to what level of exposure it subjects itself to," says Mr John Wanyela, the KBA executive director.
Personal loans advanced to investors for the Safaricom IPO attract average interest rates of between 15 to 18 per cent. The relatively high oversubscription level on the 15-year bond is attributed to the shortage of long term Government papers, especially for insurance companies and fund managers who have long term liabilities in their portfolios, which they would wish to match with the long term assets.
Market watchers have raised concern in the past over the rationale of issuing loans by commercial banks to finance IPOs, which exposes the banks to potential default losses should the market price of the IPO fall.
In such a scenario, the customer would have little incentive to pay off the loan upon realising that the value of their investment has depreciated, while the banks are left holding on to collaterals that are below the loan amounts.
However, having learnt from past experience, banks are now mitigating against such potential losses by technically holding ownership of the IPO shares until they receive full repayment of their loans, and also by making oversubscription refunds payable to them.
This leaves the banks' exposure only to the share portion allocated to the investors.
But the move is acting to the detriment of retail investors who will lose out on capital gains once the Safaricom shares are listed on June 9.
"Most of the retail investors will lose out," says Ocholla.
The Government is offloading 25 per cent stake, representing 10 billion shares, in the region's most profitable mobile phone company through an initial public offering. The share price for local investors with an allocation of 6.5 billion shares is set at Sh5 a share, while foreign investors with 3.5 billion shares will have their price determined through the book building process.
The Government plans to raise Sh50 billion from the offer to reduce part of its Sh109.8 billion Budget deficit and to channel the rest towards its infrastructure projects.
Be the first to Write a Comment!
Copyright © 2008 The East African Standard. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
