Commercial banks have raised interest on deposits for the ninth straight month to an average rate last seen 25 years ago in bid to entice savers in the wake of attractive returns from other asset classes including government paper.
Central Bank of Kenya (CBK) data shows banks closed May with an average deposit rate of 11.13 percent from the previous month’s 10.77 percent, increasing returns on deposits for savers.
The rise in interest on deposits has been accompanied with a jump in the cost of loans, allowing banks to maintain or raise their lending margins.
Banks have increased the indicative interest rate to 16.6 percent —the highest in eight years, only beaten by 17.91 percent in February 2016.
The rise in deposit rate has forced banks to keep increasing rates on loans to maintain their margins above five percent amidst a pile up in the stock of non-performing loans.
The continued rise in deposit and lending rates means the central bank rate (CBR), which CBK has kept unchanged at 13 percent since February 6 this year, is still transmitting into the economy. CBK’s monetary policy committee (MPC) will on Tuesday next week meet to decide whether to change the rate.
Kenya Bankers Association (KBA), in a pre-MPC note, asked CBK to keep CBR unchanged, citing the cooling inflation, relatively stable shilling and the decelerating pace of growth in private sector credit.
“In view of these developments, and the balance of risks, we argue that maintaining the current monetary policy stance – in keeping the CBR unchanged at 13 percent - would be appropriate,” said KBA.
The rising returns on deposits have come in the period that returns on Treasury bills and Treasury bonds have been rising, giving savers an option to invest in such asset classes and better their returns.
The return on 91-day, 182-day and 364-day Treasury bills averaged 15.98 percent, 16.85 percent and 16.92 percent respectively in the auction held on August 1. The same papers fetched 15.98 percent, 15.97 percent and 16.1 percent in the first auction of the year in January.
CBK data shows non-fixed deposit savers however saw their return rise to a five-year high of 4.45 percent in May.
Commercial banks usually offer higher returns to those who lock their money for a relatively longer period as opposed to those who save on a short-term basis.
The regulator in 2023 raised the CBR rate thrice —in March, June and December— adding 3.75 percentage points to 12.5 percent from 8.75 percent at the start of the year. CBK has only added 0.5 percentage points so far this year.
The increased interest rates have been a setback to borrowers through increased monthly deductions to service their loans. Those not willing to pay more per month have had to renegotiate their loans into longer repayment periods.
