Barclays' $74m bond to open way for other banks to enter long-term lending arena

Raring to go: Barclays Bank CEO Aden Mohammed. Barclays’ foray into the long-term lending end of the market is the most significant development in the long-term lending side of the Kenyan market in years.

The final regulatory approvals for the Ksh5 billion ($74.63 million) bond issue by Barclays Bank of Kenya were in the last stages by the weekend as the highly liquid capital market in Kenya readied itself for an issue expected to open the way for big corporates to raise second-tier capital for long-term lending.

As we went to press, the Capital Markets Authority and the Nairobi Stock Exchange had asked for the pricing supplement — the document with details on the price and tenor.

It is now expected that the bond issue may open as early as this week.

The Barclays Bank bond issue is a landmark issue, paving the way for banks in the country to engage in off-balance lending, allowing them to access money which they can lend without having to obey the restrictive gearing rations by the Central Bank of Kenya.

The largest bank in Kenya in terms of assets, Barclays’ foray into the long-term lending end of the market will be the most significant thing to happen to the long-term lending side of the market in years.

It will now be possible for the banks to lend long-term money to borrowers at a fixed interest rate.

The most attractive aspect of the move by Barclays is that it is an arrangement that allows a borrower to take a long-term loan knowing how much he will pay in interest throughout the tenor of the facility, thus allowing the borrower to plan.

Kenya’s long-term lending sector has been in doldrums for many years. All the development finance companies — Industrial Development Bank, Development Bank of Kenya and Industrial Commercial and Development — have faced major problems mainly because they lent in dollars but also because some of them made long-term loans from short-term deposits, committing the sin of mismatched assets.

Yet these are the institutions which were the pillars of the first stage of the country’s industrialisation strategy.

Problems worsened for the long-term lending sector in the 1990s when the Central Bank influenced institutions in this sector to convert into commercial banks. Most of the long-term lenders, which sought banking licences were forced to convert into commercial banks. Barclays is also set to play a more aggressive role in the property development segment of the market that has shown major growth prospects.

Currently, it is projected that Kenya’s population will be 50 per cent urban-based by 2015.

Yet only 35,000 housing units are currently being produced annually, against a government target of 150,000 homes per annum.

Of these, only 20 per cent or 6,000 units, cater for the lower income groups, which account for 77 per cent of the country’s labour force.

As at December 2006, bank lending towards home purchases stood at only 4.2 per cent of total loans.

The bank has announced that it will issue a seven-year bond for $74.63 million to extend the maturity of its portfolio. “It’s for a total of Ksh5 billion and we will be issuing it in tranches,” said Kihara Maina, the bank’s country treasurer. “We are looking to lengthening the maturity of our liabilities.”

The first tranche will be between Ksh1 billion ($14.9 million) and Ksh1.5 billion ($22.3 million), and will have a floating rate of 50 basis points above the 91-day Treasury bill rate.

The 91-day Treasury bill rate currently stands at an average of 7.8 per cent from central bank’s latest auctions.

Originally, the plan was that the first tranche would be on offer between October 29 and November 8 and will be listed on the Nairobi Stock Exchange on November 19.

The second tranche was to be issued in the first half of 2008 and the third in 2009.

In early 2004, the bank tried to issue a Ksh3 billion ($44.7 million) bond, which it wanted to use to offer long-term mortgages.

But the government blocked the issue mainly as a consequence of intense lobbying by the local stock broking community.

Elements with the local broking community were opposed to the bond on the manifestly ridiculous grounds that it would allow Barclays to dominate the mortgage market.

Business rivalry was also a motive. The brokers were especially irked by the fact that Barclays had gone ahead to incorporate an investment bank of its own to provide transaction advisory services and, therefore, deny them a share of the business.

Last week, there was a feeling of de ja vu when reports said that the Nairobi Stock Exchange appeared bent on delaying the issue on flimsy technicalities.