Interbank rate shoots up as lenders remit tax to Treasury

What you need to know:

Tax transfers from banks to the government hit Sh22.2 billion causing the average interbank rate to double.

Banks last week increased the price at which they lend each other as the industry remitted tax billions to the Treasury squeezing out liquidity.
Tax transfers from banks to the government hit Sh22.2 billion causing the average interbank rate to double.

“Liquidity in the money market remained tight after banks remitted the quarterly tax payments for June

2016. Consequently, the average interbank rate increased significantly by 419 basis points to 8.12 per cent in the week ending June 29, 2016 from 3.93 per cent in the previous week,” the Central Bank of Kenya (CBK) said in its weekly brief.

Rich Management CEO Aly Khan Satchu said the interbank had reversed sharply after it fell to record lows in early June touching 2.23 per cent.

“The interbank rate had collapsed to a multi-year lows. I think therefore some reversion to the mean was to be expected and that in fact the central bank would surely prefer a more balanced and in equilibrium overnight rate. So yes this correction was expected and the tax-related reasoning is also correct,” Mr Satchu said.

The financial analyst also pointed out that the interbank market is largely dominated by Tier 1 lenders which may not reflect the general market conditions.

The CBK Governor Patrick Njoroge had previously pointed out the skewed relationship in the interbank market noting that an elite group of about eight banks were rigging the interbank market to maintain monopoly.

“About eight banks holding around 80 per cent of the deposits are lending to each other at very low rates, but not everyone is in that club, the rest are getting very high rates,” he said at an earlier press briefing.

Banks borrow and lend money in the interbank market to manage liquidity and meet statutory requirements.

The interbank rate is also an indication of the cost and supply of money in the economy.

Dr Njoroge said there was need to reform the market and provide ways of making it effective to translate to lower borrowing costs for individuals and businesses.