Banks’ overnight loans in steep fall as liquidity eases
CBK headquarters in Nairobi. The amount of money borrowed by commercial banks from the Central Bank of Kenya’s overnight lending window dropped by Sh244 billion in the six months to April signalling increased liquidity in the economy. File
The amount of money borrowed by commercial banks from the Central Bank of Kenya’s overnight lending window dropped by Sh244 billion in the six months to April signalling increased liquidity in the economy.
Commercial banks typically use CBK’s emergency window to borrow overnight loans to help them balance their books.
Between November last year and April, the banks borrowed Sh8.09 billion from CBK compared to Sh252.7 billion in a similar period a year earlier.
“The banks only accessed funds totalling Sh8.09 billion from the CBK Discount Window between November 2012 and April 2013 compared with Sh252.71 billion between November 2011 and April 2012 when a tight monetary policy stance had been adopted by the CBK,” said the Monetary Policy Committee (MPC) in its latest bi-annual report.
The low borrowing indicates that there is sufficient cash flowing in the economy, a pointer to a likely drop in cost of loans.
“The lower the borrowing from CBK the better for lending; a bank can’t borrow from CBK for on-lending. You can see that since the end of the first quarter the rates have been coming down,” said Alexander Muiruri a fixed income analyst at African Alliance.
Several banks have since last week announced reductions in their minimum lending rates with CFC Stanbic dropping to the lowest at 13.5 per cent.
Apart from lending to the private sector, commercial banks also have the option of investing their cash in risk-free government securities. However the returns on T-bills and bonds have been on a downward trend, making it more attractive for the banks to consider lending the money to the private sector.
In last week’s auction the average return for the 91 day T-bill was 5.5 per cent while that of the one-year paper was 8.4 per cent. Banks usually prefer the short-term papers to easily take advantage of any changes in interest rates.
The Central Bank lends money to commercial banks at a punitive rate to discourage the lenders from taking overnight loans regularly. Currently the overnight lending rate is 14.5 per cent. This is higher than the rate at which banks are lending to each other at the inter-bank market, currently at 9.38 per cent.
The regulator has been keen to stop banks from borrowing through the overnight window to use the cash for foreign exchange trading as it says this exposes the shilling to speculative attacks. CBK has increased liquidity in the economy to boost economic growth through easing access to credit.
Since June last year, the MPC, which meets again today, has reduced the indicative Central Bank Rate (CBR) from a high of 18 per cent to 8.75 per cent.
“Liquidity conditions in the market improved following the adoption of a gradual easing of the monetary policy stance coupled with sale of foreign exchange by banks to the CBK and higher redemptions of Government securities relative to new issues” reads the report.
Last year most banks also asked for additional capital from their shareholders, improving their liquidity.
“Fresh injection provides long term capital so the banks don’t need to borrow and the money market was liquid during the elections,” said Mr Muiruri.
Some of the banks that raised additional capital last year include Standard Chartered, CFC Stanbic, NIC, DTB, Oriental, Fina, Ecobank, United Bank of Africa (UBA) and Chase Bank.
During a parliamentary investigation of the depreciation of the shilling some of the banks had complained that the interbank market was not effective as a source of emergency cash for the lenders as some big banks were not willing to lend to the smaller players, forcing them to borrow from CBK.
