Bloomberg News

Kenya Bill Demand Smallest in 2 Months as Bank Curbs Lending

July 13, 2011

(Updates with analyst’s comment in fourth paragraph.)

July 13 (Bloomberg) -- Kenya got the smallest amount of bids for six-month bills in more than two months as the central bank curbed overnight borrowing, preventing lenders from using those funds to invest in yields at almost nine-year highs.

The bank issued 567.3 million shillings ($6 million) of debt after investors bid for 575.7 million shillings, or 19 percent, of the 3 billion shillings offered, the Nairobi-based Central Bank of Kenya said in an e-mailed statement. The yield on the 182-bills fell for a third sale to 9.845 percent from 9.854 percent at the June 29 auction, it said. The yield reached 9.949 percent, the highest since May 2002, on June 2.

Banks planning to lend to other operators in the interbank market can’t access funds through the discount window on the same day, the central bank said yesterday. It also reversed an increase in the rate it charges lenders for overnight loans back to 6.25 percent after raising it just two weeks ago.

“Banks were making full use of the arbitrage opportunity created by low overnight borrowing rates, and reinvesting the proceeds” in bills, until the rate was raised, Razia Khan, regional head of research for Africa at Standard Chartered Bank Plc, wrote in an e-mailed note to clients before the auction. “A sell-off at the short end of the Kenyan curve now looks increasingly likely as banks, without the usual access to the discount window, scramble to meet their liquidity.”

Lenders were using the 8 percent rate as a base for interbank lending, resulting in “distortions in the money market,” the central bank said. Weekly borrowing is now capped to a maximum of banks’ statutory cash reserves, or the money kept at the central bank, it added.

‘Last Resort’

The bank had raised the overnight rate to 8 percent from 6.25 percent on June 29 to rein in inflationary expectations and curb speculative trading in the shilling, which reached the weakest level in 17 years on June 22.

The central bank said it was concerned that lenders “have not been using the discount window as a last resort, but as a permanent supply of liquidity.” Commercial banks “should consider other avenues” such as selling bills, bonds and foreign currency “to satisfy their liquidity requirements before considering the discount window,” it said.

Inflation accelerated to the strongest in more than two years as East Africa’s biggest economy faced higher food and fuel costs.

“The new measures will lead to tight liquidity and investors will have to seek higher yields above the interbank rates to lock in their funds for six months,” Anne Musyoka, a fixed-income trader at Nairobi-based Tsavo Securities Ltd., said in a phone interview today before the auction.

Kenya’s government plans to borrow 119 billion shillings on the domestic market in the fiscal year through June 2012, Finance Minister Uhuru Kenyatta said in his annual budget speech on June 8.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Johnstone Ole Turana in Nairobi at

To contact the editor responsible for this story: Antony Sguazzin at

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