Capital Markets

Banks fixed deposit rate rises to a three-year high of 7.16 pc


The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

Banks have raised the average rate for fixed deposits to a three-and-a-half-year high of 7.16 percent, reacting to the hiking of the base lending rate by the Central Bank of Kenya (CBK) and increased appetite by depositors for government securities.

The CBK raised the base lending rate by 1.75 percentage points to 8.75 percent last year in a bid to arrest high inflation, signalling a higher cost of money in the economy for both borrowers and banks.

The subsequent rise in short-term government securities’ rates to highs of between four (182 and 364-day Treasury bill) and seven years (91-day T-bill) 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.

Read: Inflation wipes out returns on fixed deposit accounts

CBK data shows that lenders also adjusted the average lending rate upwards to 12.7 percent from 12.16 percent in December 2021 in order to protect their margins, although the actual cost of a loan paid by customers is significantly higher once processing fees are factored in.

“Commercial banks' average lending rate increased to 12.7 percent in December 2022 from 12.27 percent in June, reflecting the monetary policy stance. Similarly, the average commercial banks deposit rate increased to 7.16 percent in December 2022 from 6.62 percent in June…consequently, the interest spread decreased slightly from 5.66 percent to 5.53 percent,” said the CBK.

Deposits held longer than three months attracted the highest interest at 7.93 percent in December, while those held for less than three months were being paid 7.38 percent.

The savings rate stood at 3.55 percent, up from 2.55 percent a year earlier, while the demand deposit rate remained a slim 1.93 percent, up from 1.16 percent.

Read: Banks fixed deposit rates fall to 5-year low on Covid

On the loan cost side, the approval of the majority of lenders’ risk-based pricing plans means that customers are likely to face even steeper rates once banks add a premium to reflect the risk of default.

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