In a remarkable turn of events, retail investors have significantly increased their lending to the government, contributing Sh130.4 billion in the first eight months of this year, reaching a record high of Sh418 billion. This surge in lending comes as retail investors seek higher yields in the face of diminishing returns in other asset classes within the economy.

The Sh130.4 billion increment in lending by retail bond buyers accounts for a striking 39 percent of the Sh337 billion growth in the government’s domestic debt since the beginning of the year.

This development signifies that retail investors are now outpacing banks, pension funds, insurance companies, and parastatals in their pace of lending to the government. Although they started from a smaller base, retail investors have now surpassed the latter group to become the third-largest holders of State debt.

In the government’s debt classification, retail lenders are categorized as ‘other investors,’ encompassing saccos, listed and private companies, self-help groups, educational institutions, religious institutions, and individual investors.

This shift in the composition of debt holders not only reflects the economic landscape but also highlights the growing awareness among retail investors about the potential of bond investments.

The stock market has endured an extended bear market, resulting in a collective loss of Sh445.4 billion for investors since the start of the year. Simultaneously, fixed bank accounts have yielded returns ranging from 7.4 percent to 8.1 percent, pale in comparison to the lucrative returns of up to 18 percent available through bonds and 14 percent from Treasury bills.

Professor XN Iraki, an economist at the University of Nairobi, commented, “The ‘others’ might be shifting money from badly performing stocks. With hard economic times, coupons are very attractive too. Banks could be diversifying by putting less money into bonds, as they understand better the fall in value as interest rates rise…others might not have the intimate knowledge of bonds that banks have.”

As of September 8, the government’s domestic debt has surged to Sh4.81 trillion from Sh4.473 trillion at the beginning of the year.

Banks, the largest domestic lenders to the government in absolute terms, have increased their debt holdings by Sh74.7 billion from January to September, now standing at Sh2.17 trillion. Pension funds, the second-largest lenders to the state, have raised their bond holdings by Sh89 billion, reaching Sh1.58 trillion.

Insurance firms and parastatals have also increased their State debt holdings by Sh23.4 billion and Sh18.5 billion, respectively, to reach Sh353.1 billion and Sh289.6 billion.

Comparatively, during the same period in 2022, pension funds were the most significant contributors of new loans to the State at Sh131.5 billion, followed by banks (Sh64.9 billion), parastatals (Sh41.5 billion), insurers (Sh38.6 billion), while retail investors contributed Sh21 billion.

During this period, the issuance conditions favored pension funds over banks, as the government rolled out long-tenor bonds, whereas banks typically prefer Treasury bills and shorter-dated bonds.

Paper losses on the mark-to-market valuation of bonds have also influenced the strategies of banks and insurance funds in their financial reporting, although these losses do not translate into actual losses unless the bonds are liquidated.

Photo Source: Google

19th September, 2023
Delino Gayweh
Serrari Financial Analyst