Markets & Finance

Interbank rate hits 9pc as banks rush to meet statutory ratios

cbk

The Central Bank of Kenya headquarters in Nairobi. PHOTO | FILE

The interbank market has tightened since March 21 to hit a high of nine per cent with some banks increasingly resorting to the Central Bank of Kenya to meet their cash positions.

The tightening of the market came as some banks were squaring their liquidity positions, trying to get cash in order to be compliant with regulatory requirements ahead of the March 31 (quarterly) reporting deadline.

The tightening also came after the March 20 deadline for meeting tax obligations passed, indicating money was locked away from the lenders to move into the exchequer accounts.

“Some commercial banks are keen to square their positions ahead of reporting deadline when they have to be compliant or face the wrath of the regulator,” said a fixed-income source who declined to be quoted in order to speak candidly.

By law, commercial banks are supposed to keep liquid assets at a minimum of 20 per cent of the total assets.

As at March 29, the interbank rate stood at a high of eight per cent with transactions of Sh20.8 billion, more than triple the Sh5.96 billion the industry traded on March 18, which fell on a Friday and was therefore the effective deadline for tax payment during the month.

On March 24, which was the last working day preceding March 29, the market traded an even higher amount of Sh24.8 billion with a high rate of eight per cent and a low of 2.5 per cent. The volume was more than four times that transacted on the day of the tax deadline.

After weeks of no activity, the discount window of the CBK, which is a punitive lending facility of the regulator currently at the rate of 17.5 per cent, suddenly bustled with action.

Data from the regulator indicated that Sh1.44 billion was borrowed through the window on March 29, another Sh4.74 billion was taken on March 23 and Sh5.5 billion was lent to cash-strapped banks two days’ earlier. The only other borrowing — amounting to only Sh880 million — on the discount window since mid-last December was on March 1.

Last December 16, banks lent each other Sh3.3 billion overnight. CBK data showed commercial banks also had less deposits with the regulator —relative to the minimum of 5.25 per cent of total deposits — in the week ending March 23 compared to the previous week. The excess deposits fell by Sh5 billion.

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“Commercial banks’ daily free reserves based on the cash reserve requirement of 5.25 per cent averaged Sh11.15 billion in the week ending March 23, 2016 compared to Sh16.33 billion recorded in the previous week,” said the CBK.