CBK pushing for select lenders to retain tax billions

Central Bank of Kenya (CBK) has asked the Treasury to open accounts with commercial banks so as to earn interest income from its vast cash while boosting market liquidity.

The government revenue custodian proposes that the Treasury uses the banks to receive and only submit taxes when needed. Currently tax revenues totalling Sh963 billion collected last year by the Kenya Revenue Authority (KRA) are only held at the Central Bank, even when remitted through banks, pulling the money out of circulation till it is disbursed to the relevant ministries.

Excessive accumulation of government deposits at the CBK tightens liquidity and pushes up interest rates as was witnessed in August.

South Africa operates the system referred to as “loan-tax accounts” where four major banks receive taxes on behalf of the government. CBK said the system gives confidence to the country’s financial system.
“This arrangement minimises the burden of the Reserve Bank in managing liquidity in the system and associated costs since unspent government money is not tied up at the Reserve Bank, but it is within the financial system,” said Central Bank in an e-mail response to the Business Daily.
“In addition, concerned banks pay the government interest on the money held before it calls up for spending, therefore creating additional income for the government,” said CBK.

Banks would be expected to tender for the business to avoid claims of favouritism as the contracted banks would have a higher lending capacity. “Selection of such banks is based on strict criteria, including branch network, outreach and ability to handle large transactions,” said CBK.
Banks are expected to hold capital in tandem with their deposits meaning the selected banks are large or will raise their capital levels.

Analysts have supported the proposal saying it would stabilise the interbank rate and it could be used to create a secondary bond market that would ensure banks do not need additional capital.

“The proposal would correct many of the liquidity constraints that result from money being unutilised at the Central Bank and possibly enhance the market-making ability for government securities as the major banks invest in assets that would not present significant capital or balance sheet growth problems,” said Alex Muiruri, head of income trading at Kestrel Capital.

However, by depositing the cash with banks, the government would be running the risk of having the money loaned back to it through purchase of Treasury bills. Government expenditures were low in August as the financial year was still at its infant stage, which resulted in the cash being held up at CBK resulting in tight liquidity.

During the month, the interbank rate touched a high of 13.8 per cent before falling to 9.1 per cent three days later after Treasury released Sh29 billion to counties.

The operation of accounts with commercial banks will come as good news for lenders looking at losing government related accounts as the single expenditure account comes into force.

The Treasury wants to consolidate all accounts of ministries, parastatals and other units to improve cash management and ensuring no unit holds idle cash as other suffer.
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