The cash reserve ratio is a requirement for commercial banks in Kenya to retain a specified proportion of their total deposits at the central bank to facilitate liquidity management.
The Central Bank of Kenya (CBK) will periodically set the reserve requirement- this is currently set at 3.25 percent. Commercial banks are currently required to maintain their CRR based on the daily average level of deposits from the 15th day of the previous month to the 14th of the current month.
How does the CRR weigh on the liquidity of banks?
The reserve requirement will impact the size of funds available to banks for on lending from their deposits. A lower reserve requirement suggests that banks can tap most of their deposits for lending while in the vice versa, a higher reserve requirement will limit the pool of deposits available to banks for lending.
How does the CBK deploy the reserves requirement as a monetary policy tool?
When the central bank wants to increase the pool of funds available to banks, the CRR is lowered, releasing fresh liquidity to lenders. In the vice-versa it will lift the reserve requirement to cut the pool of funding available to banks which reduces the amount of money in the market.
At the onset of the pandemic, the CBK for instance trimmed the CRR from 5.25 percent to 4.25 percent as it targeted to keep the loan taps open for households and businesses to limit the economic impact of the health shock.
The move helped to release Sh35.2 billion as additional liquidity to banks to directly support distressed borrowers.
The CBK further trimmed the reserve requirement to 3.25 percent last week in its fresh attempt to support private sector lending amid a squeeze forced by high lending rates and increased loan delinquencies.
How will the impact of CRR cut differ from lowering of the central bank rate?
The result of the lowered reserve requirement is expected to be immediate and have a direct transmission as commercial banks have instant access to funds freed from the revision.
Adjustments to the central bank rate (CBR) are, meanwhile, representative of signaling as to the direction that domestic interest rates are likely headed next. This means that the transmission of CBR adjustments is usually slower relative to CRR changes.
Commercial banks' lending rates have, for instance, remained sticky through the end of last year despite significant cuts to the CBR since August 2024.
How long will it take banks to deploy funds released from the lowering of the CRR?
According to the Kenya Bankers Association (KBA) Chief Executive Officer Raimond Molenje, the conversion of the freed deposits to loans will follow each individual bank strategy on liquidity management and other market conditions that shape lending.
The additional funds would, therefore, be converted to loans at various time intervals.
How much has been released from the lowering of the CRR?
While the CBK did not explicitly put a number to the fresh liquidity release, this can be estimated at Sh57 billion based on the industry’s gross deposits of Sh5.681 trillion as at the end of November last year.
Why do banks keep reserves above the requirement threshold?
Commercial banks held Sh17.3 billion as excess reserves in relation to the CRR as of Thursday last week despite the CBK move to lower the requirement and free up additional liquidity to the lenders.
Banks can, however, maintain reserve higher than the CRR whenever there are anticipated higher cash withdrawals such as festivities when customers tend to spend more.
These excess reserves are managed to ensure that customers can access their funds when there is increased demand for liquidity.
Banks will also sometimes keep excess reserves with the CBK to ensure that their maturing interbank obligations are sufficiently met/covered.
Are banks liquid enough?
CBK describes the banking sector as stable and resilient with strong liquidity and capital adequacy ratios.
The industry’s ratio of non-performing loans ratio (NPLs) has also begun softening, falling from 16.7 percent in September to 16.5 percent in October, and then further to 16.4 percent in December 2024.
What does the CBK expect from the lowering of the CRR?
The CBK monetary policy committee noted the reduction in the CRR would release additional liquidity to banks, lowering the cost of funds and lending rates and support growth of credit to the crucial private sector.
