I&M Bank Nyeri branch. I&M Bank is offering to pay up to one percentage point above the Kenya Banks Reference Rate for large sums deposited for over a year and 0.5 percentage points below KBRR for lower volumes above Sh50,000. FILE PHOTO | JOSEPH KANYI |
What you need to know:
The introduction of a floating-fixed deposit rate is expected to shield banks from excess interest expenses incurred when large depositors lock in high-deposit rates for long periods.
KBRR was primarily introduced for pricing of loans in a bid to make the industry more transparent and competitive.
Banks have started using the industry base lending rate introduced by the Central Bank of Kenya (CBK) to offer floating-deposit rates to large depositors in a move that could stabilise lenders’ net interest income.
In a statement to customers, I&M Bank is offering to pay up to one percentage point above the Kenya Banks Reference Rate (KBRR) for large sums deposited for over a year and 0.5 percentage points below KBRR for lower volumes above Sh50,000.
Currently the KBRR is 9.13 per cent meaning that those who keep Sh50,000 with the bank for 12 months will earn 8.63 per cent while those with over Sh50 million will earn 10.13 per cent.
“Rate of interest will be floating and as and when the KBRR is revised in January and July every year; the rates for these deposits will also be revised with immediate effect,” said the bank.
Going by data from CBK, the average fixed deposit rate is currently just 6.6 per cent.
The introduction of a floating-fixed deposit rate is expected to shield banks from excess interest expenses incurred when large depositors lock in high-deposit rates for long periods as was the case in 2011.
A spike in interest rates in early 2011 combined with low liquidity in the market forced banks to offer high returns to attract and retain deposits.
When interest rates dropped banks had to see out their contracts with depositors as they were in no position to revise the rates downwards.
“We took the opportunity because it matches the asset and liability risk — previously there was no benchmark for offering the floating rate,” said Suprio Sen Gupta, I&M’s head of marketing and product development.
KBRR was primarily introduced for pricing of loans in a bid to make the industry more transparent and competitive. It is calculated every January and July as an average of the Central Bank Rate (CBR) and the 91-day Treasury bill rate.
Banks are allowed to load a premium over the base rate depending on their operating expenses and cost of funds. The latest average premium is three per cent for mortgages and four per cent for corporate loans.
Deposits rose
I&M deposits in Kenya rose to Sh77 billion in June this year from Sh74 billion a year earlier for which it paid an interest of Sh2.3 billion compared to Sh1.9 billion last year.
“It was bound to happen because the pricing for deposits was previously on Treasury bills but lending rates were not, so it makes sense to have one reference point,” said Standard Investment Bank head of research Francis Mwangi.
The 91-day Treasury bill is currently priced at 8.6 per cent. Depositors will also be shielded from losing out on opportunities to make additional interest income when they offer deposits at low-interest rate followed by a spike in market rates.
Most depositors have taken to putting cash in short-term fixed deposits so that they can take advantage of fresh opportunities arising.
This has left the banking industry with a huge mismatch between the tenor of deposits and loan book.
Banks have a higher appetite for current accounts as they do not earn interest while saving accounts attract negligible amounts. The average interest paid to savings accounts is 1.3 per cent, as per CBK.
