Banks cut deposits at CBK by half to meet liquidity

Commercial banks cut their deposits at the central bank by half last week as they sought to meet liquidity needs, thereby partly avoiding the interbank market.

The deposits — which do not earn interest — stood at Sh4.8 billion down from Sh9.7 billion the previous week, this being the excess reserves above the 5.25 per cent requirement.

Commercial banks must keep 5.25 per cent of their total customer deposits with the Central Bank of Kenya (CBK) for prudential purposes, namely to mitigate the risk that comes with all cash being held only in the individual financial institutions.

“The money market was relatively tight during the week ending August 17, 2016 with commercial banks’ excess reserves above the 5.25 per cent averaging requirement by Sh4.8 billion compared with Sh9.7 billion the previous week,” said the CBK in its latest weekly bulletin.

Liquidity was mainly coming from government payments to contractors or suppliers and redemptions of Treasury bill securities.

There were no T-bill rediscounts or redemptions from Treasury bonds nor were there maturities from repurchasing agreements (repos).

Even then liquidity injections into the system were less than withdrawals, leading to the need for rollover of maturing reverse repos (equivalent to injection of money) to ensure there was cash circulating for optimal banking operations.

“Liquidity flows comprised mainly government payments and Treasury bills redemptions. These were more than offset by withdrawals through taxes, Treasury bills issues and reverse repos maturities, leading to a net withdrawal of Sh2.5 billion from the market,” said the CBK.

READ: Sh25bn T-bill fire sale raises liquidity queries

“The central bank rolled over some of the maturing reverse repos to improve liquidity distribution in the money market,” the regulator added.

The CBK floated Sh35 billion worth of reverse repos, but it only accepted Sh10.6 billion, leaving some of the institutions to take cash from the interbank market.

The CBK has been saying that distribution of liquidity is the main cause of the frequent tightness in the market, rather than actual lack of money among the banks. Cash tends to be concentrated among large banks to the detriment of small and medium-sized institutions.

CBK governor Patrick Njoroge is on record saying that 80 per cent of the liquidity in the market is concentrated among seven banks.

As a result of the fall in commercial banks deposits at the CBK, the institutions were partly able to avoid the interbank market that in turn saw their rates fall by 1.13 percentage points to 4.25 per cent.

“The average interbank rate declined by 112.8 basis points (1.13 percentage points) to 4.25 per cent from 5.38 per cent on a slightly lower volume of Sh18.6 billion compared to Sh19.0 billion transacted the previous week,” said the CBK.

The interbank rates were pressured down by the fact that the volumes traded were low.

“Despite tight liquidity in the market, high volumes traded at below the previous week’s average weighed down the interbank rate,” said the central bank.

The highest rate hit realised in the bank-to-bank money market last week was 4.37 per cent compared to the highest of 6.2 per cent in the previous week.