CBK limits banks’ access to lucrative overnight lending
Central Bank of Kenya (CBK) has banned commercial banks borrowing cheaply using its emergency overnight window and lending to each other at a higher rate. File
Central Bank of Kenya (CBK) has closed a loophole through which commercial banks were profiting on money borrowed from it.
The bank Wednesday raised the cost of its distress lending facility, the Central Bank Rate, from 6.25 per cent to 8 per cent, bringing it closer to the Treasury Bill rate and the Interbank market rate.
Commercial banks were exploiting the difference between the CBR, Treasury bill rates and the interbank rate - at which banks lend overnight to one another - to make instant windfalls by borrowing from CBK and lending the same money to their rivals.
A bank could therefore borrow at the CBR of 6.25 per cent and lend to a distressed bank at 8.00 per cent, making Sh1.75 for every Sh100 lent, in a transaction known as arbitrage.
CBR was last at 8.00 per cent in May 2009.
The Central Bank also suspended the CBR and came up with a more dynamic facility called the CBK Discount Window that will be reviewed every day and posted, more or less the way indicative foreign exchange rates are managed.
"Henceforth, the operational interest rate for CBK Discount Window will be reviewed from time to time and posted on the CBK website on a daily basis by 9.00 am,” said Jackson Kitili, the director of banking services and national payment system, in a circular to chief executives of commercial banks.
In recent days, the interbank market has experienced heated activity that surpassed the CBR which was raised to 6.25 per cent just last month.
“There is need to minimise arbitrage activities in the interbank market. The CBK has therefore revised the rules that guide the operations of the CBK Discount Window,” said Mr Kitili.
It also warned of stiff penalties for banks that engage in arbitrage in both the interbank and foreign exchange markets.
Commercial bank dealers were Wednesday forced to stop transactions midstream following the policy action.
However, Alexander Muiruri, a fixed-income dealer at African Alliance Investment Bank, said opportunities for arbitrage still existed with regard to the 91-day Treasury bill which is at about 9 per cent.
Thus, an aggressive bank can still borrow overnight and renew the borrowing daily and go on to lend the same money to the government at the T-bill rate.
Razia Khan, London-based StanChart head of research on Africa, last week called for a major tightening of the monetary policy stance blaming it for the fall of the shilling to a record 91.90 to the dollar and for creating arbitrage opportunities.
