The rise follows a drop in the growth rate of the deposits in the three months to December compared to the previous quarter, forcing banks to increase rates to attract cash.
The rate on savings accounts on the other hand declined to 2.56 percent in February from 3.37 percent in the same month last year.
Cash-rich companies and individuals dominate the fixed deposit market where most accounts have millions of shillings locked up for months to one year.
Interest rates on fixed deposit accounts rose to an 18-month high of 6.61 percent in February, indicating increased demand by commercial banks for funds to expand their lending activities.
Data from the Central Bank of Kenya (CBK) shows the deposit rate rose from 6.47 percent in February 2021.
It is the highest since the 6.64 percent recorded in August 2020.
The rise follows a drop in the growth rate of the deposits in the three months to December compared to the previous quarter, forcing banks to increase rates to attract cash.
“The rise may not be significant at least when you compare with 2020, but it is possibly a case of banks seeking to attract more deposits by offering higher rates,” one banker said.
The rate on savings accounts on the other hand declined to 2.56 percent in February from 3.37 percent in the same month last year.
Cash-rich companies and individuals dominate the fixed deposit market where most accounts have millions of shillings locked up for months to one year.
Banks don’t pay interest on most savings accounts, with those that do earning substantially lower rates than those available on fixed deposit accounts.
The jump in deposit rates is a signal that banks are ready to raise funds to lend more amid increased economic optimism as the impact of the Covid-19 pandemic eases.
Banks rely on multiple sources of funds to fuel their lending business. These include retained profits and borrowed money including fixed deposits.
The Central Bank of Kenya (CBK) said that growth in private sector credit increased to 9.1 percent in February, up from 8.6 percent in December 2021.
“The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities,” the regulator said, noting that transport and communication led in the credit growth at 24.1 percent.
Others were consumer durables (14 percent), business services (11.6 percent), trade (8.9 percent), and manufacturing (7.6 percent).
CBK’s approval of risk-based loan pricing for more banks is expected to drive demand for fixed deposits as higher lending rates will leave the institutions with a significant margin on the rates paid to the savers.
