Large depositors gain from high interest rates as cash crunch bites

Large depositors are cashing in on the prevailing high interest rates as scarcity of cash in the economy fuels stiff competition between the government and bankers.

Banks are offering as high as 20 per cent on deposits, matching the government returns for Treasury bills and bonds in an attempt to encourage larger depositors to opt for them instead of lending to the Treasury.

“Open a marathon saver account now and enjoy a preferential savings interest rate of up to 15 per cent,” said Standard Chartered in a notice.

Other lenders that have advertised for deposits include CFC Stanbic, Faulu Kenya and Bank of Africa.

Bankers interviewed by the Business Daily said they were offering up to 20 per cent to savvy customers who were bargaining for better returns.

Small lenders usually pay higher for deposits than their large rivals due to the risk perception attached to them, especially with the recent closures of Imperial and Dubai banks.

Banks are also suffering from low liquidity following Central Bank’s decision to tighten monetary policy to support the shilling. This has forced commercial banks to raise their lending rates partly in an effort to protect their profit margins.

“Due to the prevailing challenging economic conditions and subsequent tightening of the monetary policy by the Central Bank of Kenya (CBK), it has become necessary for Standard Chartered Bank Kenya Limited to review its current pricing mechanism on our Kenya shilling credit facilities.

As a result, effective November 19, 2015 the margin applicable on your credit facility will be increased,” said Standard Chartered in a notice to its customers.

Banks are currently restrained in raising interest rates following introduction of a standardised pricing strategy commonly referred to as Kenya Banks Reference Rate (KBRR) — set by the Central Bank to serve as the base rate for all banks across the industry.

READ: Banks lower growth forecasts on high interest rates

Banks are now riding on the premium they are allowed to load on to the KBRR to pass on the higher cost of funds.

Illiquidity in the market has seen some of the lenders scale back their lending. The Treasury has also had to borrow heavily from the domestic market in a bid to beat a cash crunch that had resulted in salary delays, withdrawal of utility services owing to bill accumulation and slow down in development projects.

The government’s increased borrowing from the local market has pushed the bench mark 91-day Treasury bill yield to 22.1 per cent from 13.9 per cent a month ago.

In the period between June and September, the government had raised Sh130 billion against maturities of Sh170 billion leaving it behind budget by 118 per cent.

Following the rate hike, the government securities have received huge oversubscription with the Treasury absorbing most of the cash offered.

Small savers, however, are not likely to make significant gains in the current market environment as their rate of return has remained at about two per cent since banks have increased their reliance on wholesale deposits to support their lending.