Small banks continued to struggle for cash in the money markets last week despite the sector registering healthy overall liquidity levels, forcing the Central Bank of Kenya (CBK) to inject Sh12.8 billion into the banking system in support.
The CBK says in its latest weekly report that the market remained relatively liquid on account of government payments and Treasury bill redemptions, but that there was concentration of cash in only a few banks.
Constrained liquidity in the small and (sometimes) in medium-sized banks forces them to take up more expensive cash, which increases their overall financing costs and which are often eventually passed on to the customer in the form of expensive loans.
“The money market was relatively liquid during the week ending August 10 with liquidity injection and withdrawals fairly matched. Liquidity injection was mainly through government payments and Treasury bills redemption.
This was fairly matched by withdrawals through taxes and Treasury bills issuance. However, given skewed liquidity distribution in favour of a few banks, the central bank injected Sh12.8 billion to stabilise the market,” said the CBK in the weekly bulletin.
The support to the banking sector was through reverse repos, which involve commercial banks receiving cash from the CBK using their holdings of Treasury bills as collateral. The reverse repo rate last week was slightly above 10 per cent, more than double the interbank rate which stood at 4.4 per cent on Friday, from 5.98 per cent the previous week.
Since the beginning of July, reverse repo transactions have totalled Sh47.7 billion.
The banks turned to the repo market even as Treasury bill maturities brought into the markets Sh25.4 billion, while government payments injected Sh12.9 billion.
The CBK has often pointed out that the money markets liquidity has not been evenly distributed, with seven large banks controlling up to 80 per cent of the available cash.
This gives them a lot of leeway in the determination of the interbank rate. The regulator also noted the skewed distribution of liquidity - in the small and medium-sized banks - in its latest 2015 supervision report.
Following the collapse of Dubai, Imperial and Chase banks last year, the interbank market has become constricted, with some industry players suggesting that the larger banks are only comfortable lending to each other to the exclusion of smaller rivals, who they perceive to carry a high default risk.
Customers have also shown a preference towards the bigger lenders in the wake of the collapse of the three banks in nine months or are demanding even higher interest rates to bank their money with the smaller banks.
In addition, the latest CBK data shows that the seven banks classified in the top tier of the industry held Sh1.46 trillion in customer deposits as at December, representing 59 per cent of total Sh2.49 trillion deposits.
In mid-July, a number of holders of Treasury bills—most likely small banks—sold back securities worth nearly Sh25 billion to CBK (rediscounting), in what was seen as an indication of their acute need for liquidity.
The firesale of T-Bills before their maturity date is punitive for the seller who loses three per cent on the value since the CBK’s policy is that rediscounting be a last resort.