Banks struggle to meet statutory reserve ratios

Banks mandatory deposits with the Central Bank of Kenya (CBK) last week fell below the prescribed levels by Sh15 billion as cash became difficult to tap from the market.

The banks fell below the cash reserve requirement (CRR) of 5.25 per cent or Sh122.8 billion which is the portion of total deposits they must surrender to the regulator as part of effort to maintain market confidence.

Fixed-income industry players pointed at the infrastructure bond that raised Sh50 billion in two tranches of Sh25 billion each in quick succession, as a major cause of low liquidity as institutions such as banks and pension funds were paying for their CRR share.

“Commercial banks’ clearing account during the CRR cycle ending April 14, had a deficit of Sh14.9 billion in relation to the cash reserve requirement of 5.25 per cent compared with a surplus of Sh9 billion recorded the previous week,” said the CBK in its weekly update.

The financial institutions were scrambling for cash from each other with the amount demanded and transacted rising by Sh1.2 billion from the previous week to Sh17.92 billion.

The weekly report said the market was tight because many companies were also paying taxes while banks themselves were surrendering good amounts of cash to the government through fixed-income securities floated by the National Treasury.

Low liquidity

“The money market was relatively tight during the week ending April 15, largely on account of payment of taxes and issuance of government securities,” the CBK said.

To in part deal with the liquidity shortfall in the market, the regulator injected a total of Sh13.4 billion into commercial banks, translating to about Sh2.7 billion daily. This provided the financial institutions with more cash apart from what was available in the interbank market.

“The low liquidity in the market was clear as we also saw the bond turnover reflecting this as it also went down. This was because liquidity had been withdrawn after institutions paid for the infrastructure bond. You know the bond raised Sh50 billion in two tranches,” said Crispus Otieno, a fixed-income dealer at Nairobi-based brokerage firm Afrika Investment Bank.

Bonds turnover fell by 2.7 per cent to Sh6.9 billion compared with the previous week.

Although the amount transacted in the interbank market was higher on account of demand, the actual interbank average interest rate was slightly lower at 7.92 per cent from 8.05 per cent in the previous week partly thanks to CBK.

More transactions

“The average interbank rate decreased to 7.92 per cent in the week ending April 15, from 8.05 per cent in the previous week. The volume transacted increased to Sh17.92 billion from Sh16.72 billion traded in the previous week,” said the CBK.

The number of deals increased to 59 from 49 in the previous week, indicating there were more transactions owing to the tightness in the market.

In a note to investors, ABC Capital said the interbank market rate had plateaued from April 13 when it stood at 7.7 per cent, even though the average for the week was higher at 7.92 per cent due to the fact that the rates were higher earlier in the week.