Finance Committee faults Banks for over investing in Government Securities at the expense of cash starved MSMEs

Finance Committee faults Banks for over investing in Government Securities at the expense of cash starved MSMEs

𝐊𝐈𝐂𝐂 𝐀𝐌𝐏𝐇𝐈𝐓𝐇𝐄𝐀𝐓𝐄𝐑
𝐖𝐞𝐝𝐧𝐞𝐬𝐝𝐚𝐲, 𝐍𝐨𝐯𝐞𝐦𝐛e𝐫 𝟐𝟕, 𝟐𝟎𝟐𝟒

A House Committee has slammed Banks for over-Investing in Government Securities while neglecting the Micro, Small and Medium-sized enterprises (MSMEs).

Speaking when the Kenya Bankers Association (KBA) appeared before the Hon. Kuria Kimani- led Departmental

Committee on Finance and National Planning, the lawmakers took the Association to task for starving MSMEs off cash for quick returns from government security.c

Debate on the matter was sparked by a proposal by the Kenya Bankers Association to stagger timelines for increase of core capital, claiming the timeline was too short.

“Hon. Members were proposing to the increase of Kshs. 1B every year over the next 8 years and not 3 years as proposed. The proposed timeline may lead to a run on 24 banks-making them unattractive to strategic partners”, KBA’s Ag. CEO, Raimond Molenje told the Committee. 

This prompted the Chairperson to enquire on the challenges envisaged by Association if banks were to raise the required core capital. 

In response, KBA submitted that 24 banks would require to top up their capital ( totalling Kshs. 150 billion) to meet the proposed requirement and timelines. 

“The affected institutions may struggle to meet the new core capital requirements, potentially leading to forced acquisitions, mergers or closures”, KBA explained. 

However, Members led by Hon. Kimani faulted the banks for neglecting the MSMEs to concentrate on quick returns from government securities, thus abandoning a sector responsibility to promote the growth of MSEMs.

“What challenges would you you face if you were to raise the required core capital? You cannot just be collecting deposits from the public and instead of supporting your depositors who are managing start-ups or MSEMs, you prioritize investing in government securities?”, Hon. Kimani stated. 

“Some KBA Members long stopped lending to start-ups and MSEMs to concentrate on government securities. We need to devise a way of discouraging banks from abandoning their traditional business of supporting businesses through lending to heavily investing in government bonds”, Committee Vice Chairperson, Hon. Benjamin Langat noted 

Other Committee Members sought to know when banks would lower their interest rates.

“When do we expect to see single digit interest rates on credit facilities offered by banks?”, Kitui Rural MP, David Mboni sought to know.

Commenting on KBA’s proposal for tax relief on green bonds, Turkana South MP, observed that green bonds are very lucrative and should not be exempted from taxation. 

In response, KBA told the Committee that they had recently committed to the President to support committed Kshs. 150 billion towards supporting Micro, Small, and Medium-sized enterprises (MSMEs) over the next three years as part of the banking sector’s commitment to support MSMEs access more affordable credit to boost their growth and development.

They noted that this is a double increament from the current Kshs. 75 million. 

With regard to interest rates, KBA pledged to lower interest rates but noted that there was need for the government to pay suppliers to facilitate cheaper credit. 

Last month, the National Treasury in its latest annual borrowing plan (ABP) for the 2024/2025 fiscal year hinted that it was seeking to reduce the dominance of banks in government securities investments by opening up the market to non-bank financial institution. 

In a move geared towards taming the high interest rates demanded by investors in government bond, the National Treasury said it is leading reforms in the domestic debt market that includes roping in several non-banking institutions such as the post- retirement medical funds to diversify the investor base.

Latest statistics indicate that Commercial banks hold a significant investment of Kshs. 2.7 trillion in Treasury bonds or 44.8 per cent of all outstanding long-term government securities.