Kenya’s biggest bank by market value has suspended plans to sell its first green bond in its home country and a social bond in the Democratic Republic of Congo due to relatively high borrowing costs.
(Bloomberg) — Kenya’s biggest bank by market value has suspended plans to sell its first green bond in its home country and a social bond in the Democratic Republic of Congo due to relatively high borrowing costs.
Equity Group Holdings Plc has been working with the International Finance Corp. to sell the bonds by 2025, but “stubbornly high interest rates” offered by the government in Kenya is stifling demand for private-sector debt, according to Chief Executive Officer James Mwangi.
The Central Bank of Kenya has increased its benchmark interest rate by 350 basis points in the past 15 months, while monetary policy authorities in Congo more than doubled the key interest rate to 25% last week.
“We have been caught up by the macroeconomic environment that has forced us to put that on hold because of the high interest rates that the government is offering,” Mwangi said of Kenyan securities in an interview in the capital, Nairobi. “We can’t successfully offer a bond that undermines the current interest regimes because people will be forced to mark-to-market.”
Borrowers can hardly compete with a coupon rate of 16.8% for a five-year Kenyan Treasury bond. Equity, which had started reducing investment in government securities, reversed that move and bumped up purchases by 33% to lock in the attractive returns.
Read More: Biggest Kenyan Bank Plans Green, Social Bonds Within Three Years
Another constraint to funding will be the shift in the Libor rate. Nearly 50% of Equity’s loan book is funded in dollars, which means its US currency funding costs climbed to 10.5% from 4.5% in the past year, according to Nairobi-based Sterling Research.
The Nairobi-based bank sees high inflation persisting and disposable income remaining low in its six African markets during the next six to 12 months, said Mary Nteere, Equity’s head of financial and regulatory reporting.
Equity’s cost of risk — the proportion of money associated with managing risk — will be in the high range of 1.9% to 2.5%, she said. Non-performing loans ratio rose to 9.8% and the lender boosted its bad loans coverage by 73% in the first half.
“That ratio you’re seeing of 9.8% is likely to remain sticky in that period and in light of that we’d like to retain our cost of risk high so that we retain our coverage,” Nteere told investors.
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