Kenyan multinational banks increased their lending to affiliate companies abroad by 61 percent in the six months to June compared to the corresponding period last year, raising concerns about Kenyan forex deposits funding external assets.
Filings by banks show that the lenders with external parents had lent affiliates in foreign markets a total of Ksh177.7 billion ($1.22 billion) by the end of June, up from Ksh110.5 billion ($760 million) a year earlier.
Banks with common majority shareholders often collaborate and may lend to as well as borrow from one another.
The terms of the transactions the lenders have with their affiliate firms are normally not disclosed, but they are expected to treat the sister companies the same way they deal with other customers.
Central Bank of Kenya guidelines stipulate loans to connected parties should be on market terms and should not be more favourable with regard to amount, maturity, rate and collateral than those provided to other customers.
"Banks transfer monies within the group to help balance assets and liabilities because a local market cannot smooth out an imbalance. This is perfectly acceptable as long as the group overall is managing risks well,” said Deepak Dave, founder of Riverside Capital.
“Less acceptable are two other motivations for intragroup lending—evading taxes or currency controls by deliberately raising monies in one country and assisting another subsidiary pad its books as appropriate and evading regulatory caps or limits on large lending. But a bank can clear up any concerns with a frank disclosure."
He added that jurisdictions with formal caps, informal practice or tradition and prudent risk management call for a 10 percent to 15 percent intragroup loans-to-deposit ratio.
Overall, the higher intragroup lending has come in a period of rising dollar deposits in the country, as well as a strengthening of the US currency globally due to interest rate hikes in the world’s largest economy.
