Long-term deposits deny banks room to cut lending rates

The implication of this is that banks are likely to reduce their focus on the expensive route of raising working capital through the corporate bond or commercial paper markets.

No bank has recently indicated its intention to raise money through a corporate bond.

Both types of instruments are priced such that they offer a premium on corresponding Treasury instruments, indicating that banks would have to offer higher rates to obtain money from investors.

Even preference shares in some institutions have raised the cost of money for them and even increased the risks despite the overall high growth of the sector.

Bridge mismatch

A major reason for banks to raise new long-term funds that inevitably turn out to be more expensive is that they need to reduce the mismatch between assets and liabilities in the sense that deposits are mostly short term but the growth areas such as mortgages require long-term financing.

“The banking sector in Kenya is faced more and more with increasing asset-liability mismatches as the earning assets mix gets more long term in nature, while the deposit and savings character remains the same,” said an analytical report by Faida Investment Bank.

The report noted that some banks are locally tapping the domestic markets to raise currency through fixed-income instruments to bridge the mismatch.

“Where this has been successful, the cost of funds has been much higher, three or four times, than ordinary retail deposit funding costs,” says Faida.