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Windfall for depositors as interest rates hit 24-year high
Faced with increased competition from alternative instruments including Treasury bills –whose interest rates top 16 percent— banks raised the interest paid on fixed deposit accounts by 67.2 percent from Sh37.48 billion in the same quarter last year.
Cash-rich firms and individuals earned Sh62.7 billion in the first quarter to March as returns on deposits hit 24-year high amid cut-throat competition by lenders to cling onto high value deposits in the wake of capital flight by investors from the country.
The Central Bank of Kenya (CBK) data shows that the commercial banks average deposit rate - the yield on fixed deposit accounts - hit 10.1 percent in December 2023, as lenders raced to avoid losing out deposits from investors chasing higher returns.
This is the first time in 24 years that interests rose past the double-digit mark, before rising even further to 10.32 percent at the end of February 2024.
The rise in interest expense comes on the back of interest rate offered on fixed deposits hitting levels last seen in January 2000 as banks sought to stop high-value depositors from taking their money to other asset classes such as Treasury bills and bonds where returns were rising.
The windfall has been driven largely by Kenya’s top nine listed banks, which raised returns on the short-term accounts in a competitive market.
Faced with increased competition from alternative instruments including Treasury bills –whose interest rates top 16 percent— banks raised the interest paid on fixed deposit accounts by 67.2 percent from Sh37.48 billion in the same quarter last year.
Fixed deposit accounts, which lock cash for one to 12 months, are one of the primary sources of funds for banks’ lending business. A jump in lending rates to highs of 26 percent allowed banks to also raise the interest in fixed deposit accounts to reach 10.32 percent in February 2024.
Unlike savings accounts that can be withdrawn at any time, fixed deposit accounts are more stable and enable banks to lend over a longer period of time.
Banks typically require customers to deposit large amounts in fixed deposit accounts, with cash-rich firms such as Bamburi Cement, WPP Scangroup and Williamson Tea Kenya parking millions to hundreds of millions of shillings in such accounts.
The 67.2 percent rise in interest expense on deposits came in a period when the period deposits held by the nine banks rose to Sh5.421 trillion from Sh4.697 trillion, translating to a 15.4 percent growth.
This means the increased spending on interest expense was driven more by higher interest rate on deposits as opposed to holding more deposits. The nine listed banks —KCB Group, Equity Group, Co-operative Bank of Kenya, NCBA Group, Standard Chartered Bank of Kenya, Stanbic Bank Kenya, I&M Group, DTB and Absa Kenya— saw the stock of their deposits rise by between 1.01 percent and 25.5 percent.
Stanbic Bank Kenya had the steepest rise in spending on deposits, with the expense rising 2.7 times to Sh4.95 billion from Sh1.83 billion, while the lowest rise was seen by Diamond Trust Bank where the spending increased 30.3 percent to Sh5.86 billion.
The return from 91-day, 182-day and 364-day Treasury bills averaged 15.94 percent, 16.94 percent and 16.62 percent respectively in the auction held on May 23. The same papers fetched 9.39 percent, 9.85 percent and 10.37 percent in the first auction of the year on January 5.
Such increases on government paper returns have forced banks to adjust upwards their rates on deposits to avoid losing out deposits as investors chase higher returns.
KCB, whose deposits rose the fastest (25.5 percent) to Sh1.501 trillion, saw its interest expense jump 67.6 percent to Sh13.08 billion, making it the highest spender in keeping customers’ money.
Equity’s spending on interest payment jumped 49.2 percent to Sh11.07 billion in the period deposits rose 11.3 percent to Sh1.236 trillion.
Other lenders who saw big jumps in interest expense were Absa (99.8 percent), NCBA (74 percent), I&M (72.7 percent) and StanChart (66.5 percent).
Banks’ spending on deposits rose faster than the interest income on loans, which grew 35.77 percent to Sh200.23 billion, meaning that the nine banks were absorbing part of the cost of funds as opposed to passing it in entirety to borrowers.
Commercial banks usually offer a premium to customers locking in deposits for a specified period with the deposits serving to form the lenders’ funding base, which is then deployed in lending activities.
Deposits are banks’ primary source of funding loan book and a rise in interest on deposits is usually accompanied by a rise in the interest rate on loans. The CBK in 2023 raised the central bank rate thrice —in March, June and December— taking the rate to 12.5 percent at the end of last year, before taking it to 13 percent in February this year.
CBK will meet on June 5, where it could retain, cut or increase the rate further.
The increased interest rates have served a setback to borrowers through increased monthly deductions to service their loans. Those not willing to pay more per month have had to renegotiate their loans into longer repayment periods.
