Someone should ask ndungu...

Why would a bank lend to anyone but the government at less than 18%?

12.57% (nett of taxes of 30%) = 18%

The risk profile of a local private business is much higher than CBK/GoK

If you look at Kenyan Banks' results/balance sheets for 3Q 2009... you can see the HUGE jump in GoK securities...

Inflation inducing since GoK will start spending this cash...

Not a good feedback loop... pay high rates, increase government spending, increase inflation, pay higher rates... Zimbabwe, anyone?

@imanyara - Not so. You are wrong...

1) Consumer demand can be increased by lowering prices, which can be reduced by lower input costs including debt/interest costs.

2) Lower interest costs can make loans 'more affordable' thus increasing uptake to produce/procure goods/services people will want... Often demand has to be created...

There was hardly any demand for cell phones or airtime... Safaricom lowered the cost of cell phones & then airtime sales boomed...

@Imanyara - Yes, in classical (&neo-) Keynesian theory. The problem in Kenya (pragmatism & realism) is the WASTE generated by government spending.

Take the recent car purchases (Passats)... these will increase GDP since CMC will show increased sales as well as 'new' jobs through training, etc. (Please note this is not about whether the Passats were a good buy or not vs the mercs/prados).

Unfortunately for Kenyans, the 'real' cash will leave (leak) Kenya's economy since the cars are 100% manufactured in Germany.

Now I sort of support the infrastructure bonds BUT I wish they were done through a SPV (Special Purpose Vehicle) which was controlled by the Private Sector.

I believe that despite all the failings of the Private Sector... it is a far more efficient user of capital.

Following the results of the 2nd infrastructure bond and the oversubscription, it very likely that the bond market has been cornered by commercial banks. This may not be illegal in the country, but going by the market power banks enjoy to the extent that they can make monetary policy tools ineffective -CBR rate-, then government is not crowding out but is being outwitted. The auction process for government securities needs to be reformulated to lower market power of commercial banks because of the impact on credit in the economy. One way to do this is to regulate minimum holding periods of govt securities by commercial banks, raise the minimum bids, three fix the maximum spread at auction on the govt securities from the coupon rate for certain amounts etc.

Crowding out is what it appears to be but it would mean that the banks have not loan applications at their doors, which i doubt to be the case.