Kenya and Tanzania are among the top 10 countries in Africa whose commercial banks are exposed to sovereign risks due to their heavy investment in Treasury bills and bonds.
A new study of African banks by the global rating agency Moody's Investors Service shows that such banks which have invested heavily in government securities risk having their creditworthiness affected when the sovereign rating of their governments is reviewed.
Other countries whose lenders have put a large amounts of money in government securities are Angola, Egypt, Ghana, Mauritius, Morocco, Nigeria, South Africa and Tunisia.
According to research findings released last week, African governments face persistent budget deficits, leading them to rely on domestic borrowing and particularly from local banks to ease their revenue pressures.
"We expect high exposure to be maintained in light of the on-going high fiscal deficits that -- to a large extent -- are financed by local banks. Many African banks are rated on par with their respective governments," says Moody's.
According to the agency, banks' exposure to their respective government securities has left their credit profiles vulnerable to sovereign risk.
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It is estimated that over 90 per cent of banks rating actions have been driven by sovereign risks that have a direct impact on their creditworthiness even if banks' financial performance is unaffected.
In Kenya, the agency says, interest rate caps will keep credit growth at low levels and particularly squeeze credit to small and medium-sized enterprises reducing banks' profitability and increase financial stability risks.
In Tanzania, policy uncertainty will continue to affect the business climate and loan quality, credit growth and the profitability of banks.
According to the report banks with subsidiaries in DRC are expected to face funding and asset quality challenges due to the country's widespread use of dollars.