Central Bank of Kenya’s (CBK) move to allow banks to reduce cash held at the regulator has cut the cost at which lenders borrow from each other by nearly 10 percentage points over the past week.
The interbank rate dropped sharply over the past week from a high of 26.25 per cent on August 13, to 15.3 per cent on Friday.
Market liquidity has improved due to the more relaxed cash ratio requirements but this has in turn contributed to the shilling’s weakening to 103.42 from 101.07 during the week.
“Liquidity continued to filter into the market after the CBK adopted a new cash reserve ratio (CRR) regime allowing banks to go down to three per cent on days following the 14th of the month,” said Genghis Capital in a fixed income report last week.
The cash reserve ratio (CRR) is a proportion of customer deposits that lenders are required to put at CBK to ensure they have money to meet client withdrawal requests.
The ratio stands at 5.25 per cent, equivalent to Sh131.4 billion as per latest CBK figures, meaning the provision to allow banks to go down to three per cent frees up billions to the lenders.
The new cycle gives the lenders an opening to maintain a CRR of three per cent for half of the month on condition that the monthly average ratio adds up to 5.25 per cent.
Banks that had sold dollars in order to meet the shilling reserve requirements before the 14th were buying the US currency again last week with an eye on the usual month-end dollar demand from importers.
The money market has progressively tightened over recent months as CBK aggressively mopped up liquidity in support of the weakening shilling, a tool that is preferred to the sale of dollars to the market.
The mop-ups pushed banks to borrow from each other regularly in order to meet the statutory minimum liquidity ratios, in turn making the interbank rate fluctuate by wide margins over short periods.
In the second week of July, the rate had fallen to just eight per cent due to disbursement of government payments, before the rise to 26.25 per cent in just four weeks.
In terms of volume, the banks have so far borrowed a total of Sh385.64 billion from each other on emergency basis this month, at an average rate of 20.7 per cent. Over a similar period last month, they had borrowed Sh263.97 billion from each other at an average rate of 10.2 per cent.