Banks have raised their share of cash and near cash assets, increasing the buffer to meet financial liabilities as they occur.
The banking sector’s liquid assets which include Treasury bills, cash on tills and deposits with other local and foreign banks, reached Sh3.3 trillion in June from a lower Sh2.9 trillion at the same time last year, according to data from the Central Bank of Kenya (CBK).
The liquid assets cover 59.5 percent of the banking industry’s net deposit liabilities of Sh5.5 trillion as of June 2024.
The liquidity ratio marks a rise from 56.4 percent at the same time last year, mirroring the increase in the accumulation of liquid assets by banks.
Commercial banks are obligated to hold at least 20 percent of their deposit liabilities in cash or near cash assets, allowing them to meet short-term demands including customer withdrawals.
The CBK required that banks hold at least Sh1.1 trillion in liquid assets as of June, implying that banks had more than Sh2.1 trillion in excess liquidity or 40 percent.
CBK observed that banks have been increasing their cash and placements to meet liquidity needs even as the industry witnesses a slowdown in the purchase of government securities including Treasury bills which form part of the lenders’ liquid assets.
“The share of tradeable treasury bonds and bills in liquid assets held by banks, declined to 63.8 percent in June 2024 from 76.2 percent in June 2023 and 81 percent in December 2022. This was driven by reduction in investment in government securities on the secondary and increase in yields. Banks also increased cash, placement and foreign liquid assets to cater for their liquidity needs, especially with increase in domestic interest rate and tightening of liquidity,” CBK stated.
CBK is now seeking to raise the threshold for banking liquid assets by transitioning the industry to the global benchmark known as the liquidity coverage ratio (LCR).
Under the LCR rules, commercial banks will be required to raise their share of cash or liquid assets to enable them to respond to mass and panic withdrawals by customers for at least 30 days.
The objective of the liquidity coverage ratio, is to promote the short-term resilience of banks by ensuring the entities have an adequate stock of high-value assets easily convertible into cash.
Commercial banks currently meet CBK’s latest liquidity stress test which assumes a reduction of balances, due to the CBK and the faster implementation of the single treasury account.
“The stress test results indicate that overall, the banking sector has adequate capital and liquidity buffers to mitigate credit, interest rate and liquidity risks while continuing to lend by December 2024, under the baseline scenario,” CBK notes in its latest financial sector stability report.
Commercial banks also hold excess reserves above the 4.25 percent cash reserves requirement by the CBK, a further marker of ample liquidity for the banking industry.
Banks held a high Sh48.4 billion in excess cash reserves as of November 21, according to additional disclosures by CBK.
