[2008-09-22]  Safaricom share price dip rattles investors
Commercial banks that signed away billions of shillings to speculative investors for the Safaricom IPO may now be forced to revise provisions for possible loan defaults as the share price remains stubbornly stuck below the discounted offer price of five shillings.

More than Sh20 billion is believed to be outstanding to Kenyan borrowers who turned to debt to buy Safaricom shares.

The loan book is equivalent to about 3.6 per cent of all borrowing in Kenya that stood at Sh554 billion at the end of March.

Last week’s downward spiral of Safaricom share price to below the offer price now means borrowers must find extra funds to cover these loans, which are worth more — even without interest payments — than the value of the shares they bought in May.

This raft of lending to consumers against assets that have slumped in value has opened significant exposure for the banking sector to the possibility that the loans will not be repaid.

Statistics from Central Bank (CBK) show that banks doled out an estimated Sh48 billion to ecstatic retail investors who were eager to cash in on the IPO by betting that the share price would skyrocket on the company’s listing on the stock exchange.

However, the Safaricom share oscillated between a new low of Sh4.60 and Sh4.90 for three consecutive trading days last week, adding to the woes of retail investors whose panic selling has largely been blamed for the share’s consistent slump.

Despite there being no obvious material shift in the telecommunications company’s fundamentals since its listing at the NSE, the share has been on a steady decline from a high of Sh8.15 attained on June 9, its first day of trading at the bourse.

The free slide in market price has contributed to a Sh130 billion loss in Safaricom’s market capitalisation to Tuesday’s low of Sh196 billion from a debut high of Sh326 billion.

And with many retail investors battling through hard economic times mainly underpinned by runaway inflation and high interest rates on loans, focus is starting to shift to the exposure faced by commercial banks that literally pitched tent and lured the public to take up loans on the streets, with the familiar promise for “up to 100 per cent financing.”

Though some banks required borrowers to leverage on the loans by contributing a certain proportion of the money sought for purposes of buying shares, a large fraction of the financial services providers offered borrowers full financing.

Many financial services sector observers fret that the banks doled out too much money after lowering the requirements to the bare minimum. All that was required for collateral by most banks was evidence that the borrower was an account holder with the lending institution.

Repayment records so far remain the bankers’ well guarded secret; but the question of just how far bankers can go with margin lending — advancing money to borrowers who intend to invest it in the stock market — now arises.

In many developed markets such as the United States, banks are legally barred from engaging in margin lending because of the risk it is known to bear.

It is a relatively new phenomenon in Kenya, having only begun with KenGen’s initial public offering in 2006, whose growth is being seen as the result of a failure on the part of the Central Bank of Kenya to formulate the relevant regulations.

There is also concern on just how far the lenders can expose their depositors and shareholders by concentrating credit to one sector of the economy as was clearly the case with Safaricom.

Prof Njuguna Ndung’u, the CBK governor, admits there exists gaps that need to be covered with regard to guidelines to check undue exposure.

Prof Ndung’u says that banking institutions are required to avoid over-exposure to one sector or a single entity by referring to laid out risk management guidelines
Source: ALLAFRICA