Small banks struggle for cash as big peers maintain tight fist
A bank customer withdraws cash at an ATM. FILE | NATION MEDIA GROUP
What you need to know:
The liquidity in the Kenyan banking sector remains skewed in favour of larger lenders.
The imposition of the rate cap law has robbed the smaller lenders of the opportunity to attract deposits by offering higher interest rates, given that they cannot raise their lending rates in tandem to maintain margins.
Bank executives interviewed by Rencap said that the larger lenders have not seen liquidity stress, and have therefore been able to channel some deposits into government securities.
Small banks are still struggling for cash amid tighter liquidity in the market as their larger peers remain cautious on lending to them in the interbank market, analysts at Dyer & Blair Investment Bank and Renaissance Capital say.
The liquidity in the Kenyan banking sector remains skewed in favour of larger lenders. The collapse of three lenders (Chase Bank, Dubai Bank and Imperial Bank) between August 2015 and April 2016 was a major factor that led to the defensive position adopted by the larger banks in the interbank market.
Latest Central Bank of Kenya (CBK) data shows that lenders’ reserve cash position has been in the negative since mid-January. As at the end of last week, the banks had a deficit of Sh5.6 billion on the 5.25 per cent average reserve requirement, while in the previous week the deficit stood at Sh1.2 billion.
The interbank rate, at which the lenders borrow from each other on short- term basis, averaged eight per cent last month, having gone up progressively from 4.9 per cent last October.
The imposition of the rate cap law has also robbed the smaller lenders of the opportunity to attract deposits by offering higher interest rates, given that they cannot raise their lending rates in tandem to maintain margins.
“Skewed liquidity distribution between the three tiers of banks has in the last one year been compounded by flight to safety of deposits following the placement of Chase and Imperial banks under receivership as well as the introduction of a floor on interest paid to deposit accounts under the rate cap law,” said Dyer & Blair analyst Edwin Chui in the February fixed income update.
“As a result, tier two and three banks are experiencing liquidity shortages. Moreover, a number of top tier banks are by policy no longer lending directly to tier two and three banks, choosing instead to lend via CBK through Term Auction Deposits, which in turn lends to the smaller banks.”
The smaller lenders tap into the CBK cash pool through the reverse repo market, where the interest is 10 per cent, and average monthly flows have risen significantly in the past six months.
Analysis done by Renaissance Capital shows that between August 2016 and January, reverse repo purchases at the CBK totalled Sh97 billion, working out an average of Sh16.2 billion per month over the period. On the other hand, in the period between March and August 2016, the repo market moved Sh45 billion, averaging about Sh9 billion per month.
“Looking at the CBK’s intervention in the interbank market, we find that liquidity injections into the market were highest in April (post Chase Bank being placed in receivership), August (shortly after the announcement of the implementation of the rate cap law) and December. There appears to be no short-term respite for the smaller Kenyan banks, in our view,” said Renaissance Capital banking sector analyst Olamipo Ogunsanya in a note on Kenyan banks.
Bank executives interviewed by Rencap said that the larger lenders have not seen liquidity stress, and have therefore been able to channel some deposits into government securities.
