A banking hall in Nairobi. Commercial Banks currently hold an estimated Sh1.5 trillion in customer deposits. file
Commercial banks will cede up to Sh7.5 billion to the Central Bank of Kenya (CBK) beginning Thursday following an increase in the cash reserve ratio requirement by a half percentage point.
This is expected to tighten availability of cash in the banking system, exerting pressure on the growth of the financiers’ loan books and on the lending rates to borrowers.
The cash reserve ratio (CRR) is a proportion of customer deposits that lenders are supposed to cede to the regulator as a buffer for ensuring that banks have money to meet their clients’ withdrawal requests.
CBK increased the reserve ratio requirement by 0.5 percentage points to 5.25 per cent in its meeting on December 1. Total customer deposits held by banks are currently estimated at about Sh1.5 trillion.
“This will result in tighter inter-bank liquidity, the inter-bank rate could retest its recent high of 33 per cent,” said Sterling Capital in a research note.
The average inter-bank rate declined to 20.95 per cent last week from 29.89 per cent in the previous week, indicating a general easing in liquidity within the banking system.
The rate shot up after CBK increased its benchmark lending rate to 18 per cent as part of its monetary tightening stance that was targeted at slowing the uptake of new loans-- which were seen to have been fuelling inflation.
Banks had six weeks—up to December 15—to adjust to the new reserve ratio.
Philip Butiko, a dealer at the Bank of Africa, said banks were cashing maturing Treasury bills to boost their liquidity positions. “Banks are sitting on excess funds in anticipation so the inter-bank rate may not rise significantly,” said Mr Butiko.
Fred Mweni, the chief executive of transaction advisory firm, Tsavo Securities, said dealers expect Treasury bonds worth Sh40 billion to mature this month and Sh30 billion in January.
The withdrawal of Sh7.5 billion from the system is also expected to slow down banks ability to give loans.
“They will go slow on loans because they would have used the funds to lend,” said Mr Mweni, who is also chairman of the Kenya Bond Traders Association.
The Central Bank raised the rate at which it lends to commercial banks to 18 per cent from 11 per cent at the beginning of this month.
Banks took cue, raising their minimum lending rates to about 24 per cent. Strict guidelines introduced by regulator on the emergency lending window has seen banks shy away from borrowing from CBK.
The lenders have cashed their investment in government securities in order to boost their cash positions.
Data from the Central Bank indicates that banks reduced their investment in Treasury bills and bonds by Sh3 billion in November.
Last week CBK issued a two-year bond worth Sh10 billion, implying that if it is successful it will have mopped up Sh17 billion from circulation.
Banks have also started aggressive deposit mobilisation, with some raising their deposit rates to attract customer savings .The gloomy outlook in the sector has impacted on the prices of banks’ shares at the Nairobi Securities Exchange, as investors factor in fears of loan defaults.
“Effectively, we are likely to see the stocks trade at new year lows,” said Sterling Capital.
Most of the banking sector stocks are trading at record or near 12-month lows in a market that has slumped with rise in the cost of living.
The inflation rate rose to 19.72 per cent in November.
The Central Bank has also been battling with a weak shilling which touched an all time low of 107 units to the dollar in mid October.
The tightening of monetary policy has helped the shilling to rally to below 90 units to the dollar from an all-time-low of 107 units in October.
