CBK loans to be repaid in six months instead of overnight

Central Bank of Kenya capital will be increased four-fold to Sh20 billion to allow the regulator issue emergency loans to banks for up to six months and shield the economy from sharp changes in the currency and lending markets.

The bank’s capital currently stands at Sh5 billion, a level CBK says has limited its interventions in the market.

The proposal for the higher capital levels is contained in the draft Central Bank of Kenya Bill, 2014 that also seeks to limit the governor to a single term of six years from the current maximum two terms of four years each.

The new capital level will strengthen CBK’s participation in the currency market where it buys and releases dollars to support the shilling.

It will also allow CBK to increase its lending to commercial banks for a period of up to six months from the current one day in an emergency product that will for the first time be available to micro-finance institutions.

“In exceptional circumstances, the bank may, on such terms and conditions as the board determines, grant financial assistance for fixed periods not exceeding six months to banks, microfinance banks or mortgage finance companies, against prevailing market-related interest rates,” reads the draft Bill.

READ: Draft Bill proposes single term for the central bank chief

Banks are required by CBK to balance their books as per daily liquidity requirements set by the regulator.

They are also required to hold an adequate amount of liquid assets, such as cash, to manage any potential bank runs by clients.

The central bank acts as the lender of last resort since distressed banks are expected to borrow from their peers through the interbank money market.

The interbank rate stood at 7.1 per cent on April 1 while CBK’s overnight lending window currently stands at 14.5 per cent. The window has a floor rate 8.5 per cent.

But emergency window will now be available to the nine deposit-taking micro financiers in the country that had 1,895,026 deposit accounts as at end of September. 

This will put the lenders, including Kenya Women Finance Trust, Faulu and SMEP, in the class of sensitive institutions whose liquidity is closely monitored by the regulator.

Analysts reckon that a wider capital base coupled with the six-month window is set to lower the cost of credit in the market.

“The bigger amount of capital will allow the central bank to be able to lend more to the commercial banks, which will boost their loanable funds. With more loanable funds, then lending rates should come down,” said a source with knowledge of CBK’s plans.

“It may not happen immediately, but the ultimate aim is to bring down interest rates.”