Banks and microfinance institutions tapped Sh54.2 billion in loans from the Central Bank of Kenya (CBK) to boost their liquidity positions in the financial year ended June, pointing to a growing challenge among smaller lenders.
Disclosures in the CBK's annual report show a 6.3 percent increase in loans advanced to the financial institutions from Sh51.03 billion that was borrowed in the preceding similar period.
The enhanced use of the loans, under the liquidity support framework, was on the back of the sector’s overall liquidity dropping from 52.5 percent to 49.7 percent at the close of June. A 49.7 percent liquidity ratio is more than double the minimum statutory level of 20 percent and the use of the support facility points to a skewed distribution of liquidity in the sector.
The regulator had earlier said, without giving names, that three commercial banks in the year to December 2022 violated Section 19 (1) of the Banking Act on maintaining the minimum statutory liquidity ratio at 20 percent.
The ratio is a key metric for assessing banks’ ability to settle their maturing obligations without difficulties.
The CBK’s ramped-up liquidity support to the banking system has also come in an environment of rising interest rates on the interbank market.
Banks have other tools for addressing their liquidity, including tapping into the inter-bank market and the discount window but the rates under these options were rising during the review period.
Rates at the interbank market nearly doubled from 5.3 percent at the end of June last year to 10.2 percent at the close of June 2023 and is now at 12.3 percent.
Borrowing from the discount window has been at 14.5 percent compared with 13.5 percent in the previous year.
At Sh54.2 billion, the liquidity support framework was the highest securities and advances from the CBK to banks followed by Sh41.14 billion repurchase agreements — securitised borrowings by banks using T-bills and T-bonds.
The regulator has been alert to avoid a confidence crisis in the market such as the one caused by three lenders —Dubai, Imperial and Chase banks— that sank into receivership owing to mismanagement.
In April 2016, the CBK announced the rollout of the liquidity support facility for commercial and microfinance banks that come under liquidity pressures not borne out of mismanagement.
Financial obligations
Banks tapped Sh6.5 billion from this window in the year to June 2016 and its use has been rising, hitting a record Sh55.47 billion in the year ended June 2021.
The regulator opened the window following the placement of Chase Bank under receivership on April 7, 2016, due to its inability to meet its financial obligations.
“We will avail [sic] a facility to any commercial or microfinance bank that comes under liquidity pressures arising from no fault of its own,” the CBK said then.
“We will avail sic this facility for as long as is necessary to return stability and confidence to the Kenyan financial sector.”
The CBK said the short-term liquidity support would mitigate the potential threat to financial stability by addressing skewed liquidity distribution attributed to the segmentation of the interbank market along bank tier groups.
In the three months ended June 2023, more than a third (37 percent) of banks surveyed by the CBK indicated that their liquidity position had deteriorated.
However, 63 percent said they had seen improved liquidity positions on increased deposits, maturity of government securities, loan recovery and fresh capital injections.
Thirty-five percent of banks with enhanced liquidity told the CBK they intended to lend the money to the private sector while 19 percent and 17 percent planned to invest in Treasury bonds and bills respectively, according to the report.
The CBK data shows banks’ pre-tax profit for seven months to July this year hit Sh142 billion, a slight drop from the Sh142.3 billion posted in a similar period last year.
Non-performing loans have been the biggest headache for banks this year, with the ratio of defaulted loans hitting 15 percent of the total in September, being levels last seen 16 years ago.
A part of the defaults has been linked to the mounting pending bills by national and county governments to suppliers and contractors for deliveries.
