Markets & Finance

Interbank rate rise on scarce market liquidity

The cost of overnight funds has risen in the past few weeks due to poor or skewed distribution of liquidity among commercial banks, the Central Bank of Kenya (CBK) says in its latest weekly report.

The CBK said 43 per cent of liquidity, mostly in excess of Sh15 billion per day, was transacted at a cost exceeding six per cent in the past week. In some cases, banks paid as high as nine per cent to get cash from peers.

“The average interbank rate increased to 5.98 per cent in the week ending August 3, 2016 from 4.79 per cent in the previous week...distribution was skewed with 43 per cent of the volumes transacting at above six per cent,” said the CBK.

In the course of the week, the CBK had to inject liquidity to the tune of Sh13.5 billion to ensure cash-starved banks were operating smoothly. The injections came mainly from maturities of term auction deposits (repos of 3-90 days) and redemptions for treasury bills to the tune of Sh22.8 billion.

An industry problem

The central bank has acknowledged that liquidity distribution has been an industry problem after some banks collapsed. It said the liquidity was only restored as the year ended. However, the constraint reappeared in April after the fall of Chase Bank, which has since been revived.

“Several small and medium banks experienced a liquidity squeeze… The liquidity challenges were primarily caused by liquidity segmentation in the inter-bank market,” said the CBK in the annual supervision report released last week.

Another factor that has increasingly indicated strained liquidity in the past few months is the amount commercial banks keep with the CBK. While this amount exceeded Sh20 billion in June and May, it had generally been low since early last month.

As of last week the average amount of cash banks kept at the regulator’s vaults amounted to a little over Sh8 billion.

Analysts said the problem in the banking sector liquidity has mainly been that of small banks being unable to access the interbank market at reasonable prices, whenever there is a confidence crisis in the industry.

“The liquidity constraint has mainly been affecting small banks because others are reluctant to lend to them. That is why you are seeing interbank rates rising,” said Faith Mwangi, a research analyst at Standard Investment Bank.