Markets & Finance

Sh25bn T-bill fire sale raises liquidity queries


NSE staff: The market is one of the disposal avenues available to T-bill investors. PHOTO | FILE

Investors sold back Treasury bills worth nearly Sh25 billion to the Central Bank of Kenya (CBK) just over a week ago, indicating those facing low liquidity were unable to borrow from the market hence the move to liquidate income generating securities.

Small banks were the likeliest sellers of their securities to plug a liquidity shortage, which has been an underlying problem for them in the past few months as bigger lenders become more wary of lending to them on overnight basis following the collapse of Dubai, Imperial and Chase banks.

Rediscounting of T-bills refers to the resale of the securities to the central bank before maturity.

The seller however is punished in terms of the return, losing three per cent on the value, since the CBK prefers that rediscounting be a last resort.

Although the CBK weekly bulletin shows relatively high rediscount levels on July 18, the daily interbank money market report issued on the day by the CBK shows only Sh2.5 million as having been rediscounted.

The figures were revised when the bulletin came out on July 22. Despite being given a whole week, the CBK had not respond to queries from the Business Daily on the rediscounting by last Friday.

“The high T-bill rediscount that we saw shows that there must have been investors with a significant liquidity crunch. Usually the T-bill rediscounting rate is punitive to investors as it is calculated at three per cent higher than the prevailing interest rate,” said Cytonn Investments in a weekly market analysis.

Banks and other investors can also raise cash by selling their holdings of Treasury bonds on the Nairobi Securities Exchange, but this can take time as a willing buyer has to be found to take the securities off their hands.

READ: Short-term inter-bank lending falls after Chase Bank debacle

The CBK has in the past raised concerns over the concentration of liquidity in the big banks, revealing that the seven banks control up to 80 per cent of the available liquidity in the industry.

Reluctance to lend to smaller rivals therefore places the smaller banks under pressure to meet the daily CBK cash requirements. Their other option, borrowing through the CBK discount window, is also expensive, with the rate currently standing at 16.5 per cent.

The heavy rediscounts last week came even as the interbank rate fell from the levels seen the previous week, indicating that not all players in the financial sector would have been under liquidity distress.

On Thursday banks were lending to each other at 4.8 per cent, with the CBK saying in the weekly bulletin that the drop in the rate over the past fortnight is attributed to the large banks trading larger volumes at low interest rates.

There were also high rediscounts of Sh6.75 billion towards the end of the second quarter of the year—on June 29—, with analysts saying that these were likely coming from lower tier banks attempting to recapitalise to comply with market regulations.