Banks struggle to meet cash reserve ratio on paying tax

Banks struggled to meet the cash reserve ratio (CRR) requirement last week as firms paid taxes, recording a deficit of nearly Sh10 billion as the financial markets tightened.

For the week ending September 16, the banks had a deficit of Sh9.67 billion in relation to the CRR — the fraction of deposits put at the CBK without earning interest — against the requirement of 5.25 per cent or Sh130.7 billion.

“Commercial banks’ clearing account recorded a deficit of Sh9.67 billion in relation to the cash reserve requirement of 5.25 per cent or Sh130.7 billion in the week ending September 16, 2015,” said the Central Bank of Kenya (CBK) weekly report.

At the same time the institutions were finding it difficult securing cheap money from one another.

The CBK said scarcity of cash in the market saw the interbank rate shoot up by more than 4.5 percentage points to 17.93 per cent in just five days.

“The average interbank rate increased to 17.9 per cent in the week ending September 16, 2015 from 13.4 per cent in the previous week.

The volume transacted increased to Sh22.8 billion from Sh14.9 billion traded in the previous week,” said the CBK.

The banks regulator said money was scarce as tax payments fell due in the week. Value added tax and withholding taxes, among others, are normally due by the 20th of each month.

That meant corporates had to pay by last Saturday, thereby trapping cash in Kenya Revenue Authority accounts at the CBK and some commercial banks.

“The money market was relatively tight during the week ending September 16, 2015 on account of tax remittances by commercial banks,” said the CBK in the report.

Tax payments going through banks to the government amounted to Sh34 billion, with the figures distributed almost evenly through the week.

Another factor that reduced liquidity was the money the government raised money from the market through treasury bills and bonds during the past week. The cash goes to the National Treasury’s accounts at the CBK.

Total liquidity was reduced by Sh72.7 billion in the course of the week. In a bid to mitigate the shortage of liquidity, the CBK injected Sh79.8 billion in the five days to September 16, leading to net liquidity injection of Sh7.1 billion.

The market was tightest on September 16 when there was a net shortfall of Sh5.7 billion even after a Sh4.9 billion cash injection.

Out of the total amount injected, Sh16.2 billion came from government payments, but the CBK report did not clarify to whom the money was being paid through the commercial banks.

Most of the other liquidity came from maturities of treasury bills and bonds as well as repurchasing agreements.