CBK injected Sh76bn to soften Imperial Bank closure impact
What you need to know:
The Central Bank of Kenya has injected Sh76.6 billion net liquidity into the market over the last 10 weeks after the collapse of Imperial Bank, underlining the impact the closure had on the country’s financial system.
Imperial Bank’s closure on October 13, shook public confidence in small banks resulting in runs and regulatory support.
There are 21 banks classified as small lenders by the regulator. These banks usually have to pay a premium to attract deposits owing to fears of collapse and the Imperial Bank crisis just made matters worse.
The Central Bank of Kenya has injected Sh76.6 billion net liquidity into the market over the last 10 weeks after the collapse of Imperial Bank, underlining the impact the closure had on the country’s financial system.
In the 10 weeks before the closure, the regulator had mopped up Sh28.3 billion from the market as it sought to support a weak shilling.
“The CBK stands ready to use all instruments at its disposal to provide adequate liquidity support to the banking system to ensure its stability and robustness at this time,” said the CBK governor Patrick Njoroge, after the collapse of the lender.
In the first week following the closure, CBK injected Sh72 billion into the system. Imperial Bank’s closure on October 13, shook public confidence in small banks resulting in runs and regulatory support.
The withdrawal was further aggravated by social media rumours indicating other small lenders were likely to also close shop. Equity Bank has confirmed benefitting from the run to safety with its deposits surging over Sh30 billion in the one month. Other banks said to have benefitted from the run include multinationals and local banks classified as large banks.
Mr Njoroge had urged the large banks to lend to their smaller rivals to redistribute the liquidity in Kenya’s banking sector.
Banks lend to one another through the interbank window and the horizontal repo (interbank) market which was previously dubbed ineffective with the large lenders holding on to their deposits.
The CBK reported the number of horizontal repo transactions conducted in the six months to October rose to 25 compared to six in the six months to April as large banks heeded the governor’s call.
The interbank rate had shot to highs of 25 per cent but slid to single digit following the injection from the CBK and more willingness of the larger players to redistribute liquidity.
“This normalisation has also been witnessed in the interbank market with the rate declining from a high of 15.1 per cent on October 21, to 6.4 per cent on November 20, 2015 reflecting improved liquidity conditions in the money market,” said research firm Stratlink in a market report.
There are 21 banks classified as small lenders by the regulator. These banks usually have to pay a premium to attract deposits owing to fears of collapse and the Imperial Bank crisis just made matters worse.
As at end of last year the six banks classified as large in the country held more than 50 per cent of the country’s total savings.
The closure of Imperial Bank also locked out more than Sh60 billion which was held by the bank as savings from circulation.
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