Markets & Finance

CBK imposes cash ratio requirement on microfinance banks

PAT

Dr Patrick Njoroge, the Central Bank of Kenya governor. PHOTO | DIANA NGILA

Deposit-taking microfinance institutions will now be required to hold cash with the Central Bank of Kenya (CBK) proportionate to their deposit base following a change of law.

Cash Reserve Ratio (CRR) to be held by the micro-lenders will be set by the CBK in a move meant to protect customer deposits while helping the regulator keep a grip on the cash supply in the economy.

The microfinance banks currently observe capital adequacy and liquidity ratios similar to banks.

“The Cabinet Secretary for the National Treasury, on the recommendation of the Central Bank of Kenya, specifies a microfinance bank licensed under the Microfinance Bank Act, 2006, to be an institution for the purposes of section 38 of the Central Bank of Kenya Act,” reads a notice published in the Kenya gazette.

The specified section gives the CBK powers to require institutions, among which the micro-lenders have now been included, to maintain minimum cash balances as reserve against their deposit and other liabilities.

The request by the CBK to loop in small lenders comes at a time of turbulence in the banking sector with the collapse of three lenders.

Chase Bank, one of the ill-fated lenders, owns Rafiki, the second-largest deposit-taking microfinance. Rafiki was hit by a tide of withdrawals after news of Chase Bank closure forcing it to limit withdrawals.

The CBK has also been seeking closer monitoring of the cash in circulation to ensure its monetary policies are realistic and impactful.

CRR is pegged on the total deposits held by a lender enabling the CBK to continually keep tabs on the size of free cash in the economy. Currently commercial banks are required to keep a cash reserve ratio of 5.25 per cent.

The requirement will result in higher operating costs for the micro-lenders. The cash that previously used to generate income will now lie idle at the CBK.

There are 12 microfinance banks in the country. They had issued Sh46.1 billion in loans as at last September and were holding deposits of Sh39.2 billion.

The micro-lenders have 2,365,323 deposit accounts and 415,528 loan accounts.