Markets & Finance

Banks fall below legal cash balances as liquidity tightens

cbk

The Central Bank of Kenya has been mopping up liquidity in the market to stabilise the shilling and stem inflation. Photo/FILE

A number of commercial banks fell below their legal cash balances by Sh900 million in the week to April 16 as tax payments and Central Bank actions tightened liquidity.

The latest CBK Weekly Statistical Bulletin shows that the minimum cash reserve ratio (CRR) of 5.25 per cent — which is fraction of deposits that is supposed to be kept with the regulator — was not met. Banks ought to have had Sh101.2 billion with the CBK.

“Commercial banks recorded a deficit of Sh0.9 billion in their settlement accounts in relation to the monthly average cash reserve requirement of 5.25 per cent of Sh101.2 billion at the Central Bank in the week to April 16, 2014 compared with a surplus of Sh7.7 billion recorded in the previous week,” said the CBK.

Market players said the Central Bank of Kenya (CBK) was mopping shillings to keep the currency stable in view of recent dollar strength caused by Fed assurances that US interest rates would not be slashed.

The shilling has been trading close to Sh87 to the greenback in recent weeks, and sank further to Sh87.05/87.15.

READ: Shilling stable despite low tourism and tea earnings

Depreciation of the currency increases pressure on domestic prices since Kenya is a net importer. Persistent deficit in the deposit reserves kept in the Central Bank settlement accounts attracts penalties from the regulator.

CBK said its own sucking of liquidity from the market caused the failure by the banks to meet the liquidity target.

“The depletion of the surplus is attributed to payment of taxes and sterilisation of liquidity through open market operations,” said the CBK in the bulletin.

Market players said the shortage could persist if CBK continues to mop liquidity to stabilise the currency and stem inflation.

“I think it is a good thing for the CBK to stabilise the local currency since we do not want instability. That is the reason the CBK has been active in the market, especially given that inflows have not been high,” said Andlip Nazir, senior trader at the I&M Bank treasury.

Mr Nazir said the demand for dollars was not matched by inflows, especially with the low international prices for coffee and tea and subdued international tourism arrivals.

“With the end-of-month demand that is now underway, we expect that pressure will remain on the Kenya shilling and so we expect the CBK might continue with the mopping,” said Mr Nazir.

He said the shilling would not depreciate below Sh87.50 to the dollar.

Latest data shows that tea and coffee prices at the weekly auctions have fallen by at least 30 per cent in the past month.

A researcher working with financial institutions said the fluctuations would be reversed soon. “This is only a temporary situation and may actually reverse after a while.

I wouldn’t say taxes are a destabilising factor for the industry because sooner or later the money will be back into the economy,” said the researcher who cannot be named because of his contractual ties with some banks.

The CBK has been sensitive to currency value fluctuations since late 2011 when the greenback cost Sh107 as inflation hit 20 per cent, the highest level in two decades.

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