Wealthy individuals and cash-rich institutions are making the best returns on bank deposits in more than five years, as Kenyan banks compete for funds.
The rising competition for funds between banks, the government and collective investment schemes have pushed the rate that lenders are paying for deposits.
Banks were paying an average of 7.69 percent for these deposits by the end of April, the latest industry statistics from the Central Bank of Kenya (CBK) show, the highest rate since September 2018, and which represented an eighth straight month of higher cost of funds for the lenders.
The lenders have in the past responded to higher deposit rates by raising the interest rates they charge on customer loans to protect their margins.
In April — when the average lending rate stood at 13.1 percent—this margin stood at 5.41 percent compared to 5.49 percent a month earlier, and 5.5 percent at the beginning of this year.
The actual cost of a loan paid by customers is, however, significantly higher once processing fees are factored in.
The rise in deposit rates at a faster pace than lending rates signals increased competition for money in the economy among banks themselves and also with other actors such as the Treasury.
Genghis Capital analyst Wesley Manambo said that although Kenyan depositors aren’t as nimble as those in developed markets in moving funds between bank accounts and alternative investments such as Treasury bills, there is rising awareness of a need to maximise the returns on cash holdings.
This has been seen in the growing popularity of unit trusts—largely money market funds— and the holdings of government securities by ‘other investors’ who comprise individuals, saccos, private companies, self-help groups, educational and religious institutions.
By the end of December, unit trusts' assets under management had grown to Sh161 billion, up from Sh134.7 billion a year earlier.
Meanwhile, the value of government debt held by retail investors has risen by 13.4 percent or Sh31 billion to Sh313 billion in the past one year.
“Banks have to be competitive to keep the fixed deposits sticky. They are competing with peers within the sector for these deposits, and also with money market funds and the government. All this is driven by the rising yields on government paper, which also translate into the returns of the money funds,” said Mr Manambo.
The higher return on fixed deposits is, however, more of a windfall for fund managers and large institutions who are the majority investors in the accounts. Retail depositors largely hold a call or short-term deposits.
Kenyan banks offer two types of fixed deposit accounts; call deposits and time deposits, with a significant gap in the interest rates offered on each.
In April, while term deposits were paying an average of 7.69 percent, the rate on call deposits stood at 3.59 percent. Out of the Sh4.48 trillion worth of total deposits in banks by the end of March 2022, according to the latest figures from CBK, Sh1.72 trillion was in the form of long-term deposits.
While competition for funds has been the major factor in the rise in the cost of money for all actors in the economy, the CBK’s signalling has also played a significant part.
Over the past one year, the monetary regulator has raised the base lending rate from 7.0 percent to 9.5 percent in a bid to arrest high inflation.
At the same time, the government has been raising the rates on its securities auctions to keep investors interested in lending to the exchequer amid the high inflation and weakening exchange rate that have eaten into real returns.
The subsequent rise in Treasury bill rates to 11.79 percent for the 91-day paper, 11.86 percent for the 182-day and 11.93 percent for the 364-day paper has forced banks to adjust interest on non-current deposits in order to encourage larger depositors to leave their money with them instead of lending to the State.
