Capital Markets

Bank deposit interest rates hit new high of 10pc

interest rate

Banks are wooing corporates and high-net-worth depositors with higher rates. PHOTO | SHUTTERSTOCK

Commercial banks have raised the returns paid to cash-rich firms and high-net-worth depositors into the double-digit level, setting a new 24-year high record.

According to data from the Central Bank of Kenya (CBK) the average commercial bank deposit rate—the yield offered on fixed deposit accounts—hit 10.1 percent in December 2023, reaching the first double-digit return since January 2000.

The sweetened return for the cash-rich depositors comes in the backdrop of elevated interest rates on various investment classes, including Treasury bills and bonds, which have forced lenders to raise the accounts’ attractiveness to preserve the high-value deposits.

Read: Banks give best returns on deposits in 5 years

The deposit rate has steadily grown over the past year, climbing from a low of 7.17 percent in December 2022.

Commercial banks usually offer a premium return to customers locking in funds for a specified period and deploying the deposits in lending activities.

Competition from alternative asset classes, including Treasury bills whose returns are presently edging towards 17 percent and collective investment schemes/unit trusts whose rates have hit double digits recently have compelled commercial banks to equally raise their depositors’ returns.

Term depositors in banks could get an even sweeter deal in coming months as lenders price in the effects of increased lending rates signalled by this week’s increase on the CBK benchmark rate from 12.5 percent to 13 percent.

Subsequent to the record deposit rate, commercial banks’ lending margins—the difference between the lending rate and the deposit rate— has narrowed to a near three-decade low spread of 4.53 percent revealing reduced net interest incomes for commercial banks.

Interest income from lending activities is usually netted for interest expenses or interest paid to term depositors with deduction being representative of banks’ cost of funds.

The reduction of the margins will mean reduced incomes from lending activities for banks amid asset quality concerns as non-performing loans remain elevated.

Read: Banks lure savers with 23-year high deposit rates

The implementation of risk-based pricing on loans by most commercial banks will however offset some of the contraction from increased fixed deposit rates.

The average commercial bank lending rate climbed to a near seven-year high of 14.63 percent in December 2023 in the backdrop of a two-percent jumbo interest rate increase by the CBK in its monetary policy meeting for that month.

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