Commercial banks have raised their reliance on the Central Bank of Kenya (CBK) for liquidity support this year as the sector pays the price for reduced government payments and high interest rates that have made it expensive to mobilise deposits from customers.
Lenders have cumulatively tapped Sh4 trillion from the CBK through the reverse repurchase agreements (repo) since the beginning of this year, and another Sh81 billion through the CBK’s daily lending facility, which is known as a discount window.
The amount tapped by banks in the review period has been revealed by market sources.
The liquidity injection in the form of reverse repos has already surpassed the total for the whole of 2023 (Sh2.93 trillion), with skewed distribution of liquidity also a factor behind the increased reliance on CBK.
Repos, the discount window and term auction deposits (TADs) form the CBK’s revolving credit facilities, used to either inject or mop up liquidity from the money markets.
Reverse repos are a form of securitised borrowing by banks from the regulator, using their holdings of Treasury bills and bonds as collateral. These securities are also used as collateral in the discount window.
“Fund manager call deposits have averaged up to 17.5 percent this year, leaving reverse repos as the only reliable source of liquidity for banks at good yields,” said a banker yesterday.
“Government payments to the private sector and its agencies have always been a good source of liquidity for banks, but we have seen more money going to debt repayments, leaving a gap there.”
The higher spend by the government in debt service has had the consequence of restricting the cash available to make payments on pending bills, starving businesses of capital that would eventually find its way into bank accounts.
In the 2023-24 fiscal year, counties also received Sh30.8 billion less than the Sh385.4 billion due to them in equitable share of revenue from the national government, affecting their ability to settle their own dues to creditors.
The reliance of banks on the repo market is also indicative of skewed distribution of deposits in the banking sector, where a few large banks hold the bulk of the sector’s liquidity.
Latest CBK data shows that the sector remains well funded overall with a liquidity ratio of about 50 percent compared to the statutory minimum of 20 percent, but some smaller lenders have had to turn to the regulator for support in meeting their daily cash requirements due to the uneven distribution of these funds.
The spike in demand for these facilities, however, shows that there may be some larger lenders tapping into the support.
Last year, the CBK took measures to address the issue of liquidity in the banking sector by restarting the horizontal repo market (where banks borrow from each other using their Treasury bonds and bills as collateral) and lowering the cost of accessing support from the reverse repos and discount window.
The introduction of the DhowCSD bonds trading platform in July 2023 was key in the revival of the horizontal repo market, which had been inactive since 2014.
Since the reopening of the horizontal repo market in August 2023, banks have lent a total of Sh101.4 billion to each other through the facility, with Sh67.8 billion out of this total having been transacted between January and July 2024.
The CBK also issued a circular on August 19, 2023 lowering the applicable interest on the discount window from 600 basis points above the prevailing Central Bank Rate (CBR) to 400 basis points, making it cheaper for banks to seek emergency support.
Another circular issue on August 29 cut the haircuts on securities put up as collateral on repos and discount window, meaning that borrowers would have more funds available to them against their bonds.
The circular reduced the haircut on Treasury bills and bonds of less than one-year tenor from 10 percent to two percent. For bonds of between one and 10 years, the haircut was reduced from 20 percent to five percent, while the applicable rate on bonds of more than 10 years’ tenor was halved from 20 percent to 10 percent.
The haircut is the percentage difference between the securities’ market value and the value that is used as collateral. For instance, a bond worth Sh1 million would be eligible to cover collateral of Sh900,000 if a haircut of 10 percent were to be applied.
