* Lending rate cap announced in August, effective September
* Government said banks were charging borrowers too much
* Cap spooked markets, sending bank shares tumbling
* Experts said could hurt lending to smaller clients
By George Obulutsa
NAIROBI, Oct 5A decision by Kenya's government
to cap commercial lending rates has stoked appetite for
short-term government debt, pushing down yields on 91-day bills
to their lowest since July.
Last month, Kenya imposed a cap on commercial lending rates
of 400 basis points above the central bank's key rate, which is
10 percent. The government said banks had failed to respond to
non-legislative encouragement to lower costs for borrowers.
The rule, announced in August for implementation in
September, also set a minimum rate banks must offer depositors
of 70 percent of the central bank rate, which equates to 7
Analysts said that, for the time being, that had set a floor
on Treasury bill yields.
The cap spooked investors, sending bank shares tumbling,
amid concerns it would restrict lending to small firms and other
borrowers deemed risky bets.
With banks concerned about the impact of the cap seeking
safer investments, high demand at last week's action saw the
91-day yield slip to 7.816 percent from 8.601 percent in August.
That brought it closer to three-year lows around 7 percent
that were touched in July.
Yields on six-month and one-year bills eased to below 10.5
percent from 11 percent or more.
"The new law ... brought demand for Treasury bills and bonds
as most banks waited for clarity on its implementation," said
Alexander Muiruri, fixed income analyst at Kestrel Capital.
With inflation in the year to September at 6.3 percent,
traders said further sharp falls in T-bill yields looked
"My sense is that we are almost at the bottom. We can't go
any lower, even on the 91-day, relative to inflation.
(Otherwise) they start becoming real negative interest rates,"
said Ignatius Chicha, head of trading at Citibank Kenya.
The central bank's next rate-setting meeting is on Nov 28.
It cut its benchmark lending rate by 50 basis points to 10
percent last month.
(Editing by Edmund Blair and John Stonestreet)