Why big deep-pocketed banks sought rescue loans from CBK

The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya in Nairobi. 

Photo credit: File | Nation Media Group

What you need to know:

  • Regulatory disclosures by Kenya’s nine top-tier banks show that balances in the year to December jumped nearly three times.
  • Banks faced increased demand for cash from high-net-worth investors.
  • Interbank market rates have been inching up.

Large banks, including those with deep-pocketed multinational parents, were last year forced to seek rescue loans from the Central Bank of Kenya (CBK), pointing to a major liquidity crisis that roiled the financial sector.

Regulatory disclosures by Kenya’s nine top-tier banks show that balances in the year to December jumped nearly three times to Sh126.5 billion as financiers like Absa and Stanbic that earlier avoided the emergency loans rushed to the lender of last resort.

Banks borrow from the CBK window against securities like the Treasury bonds and bills to meet short-term liquidity crunch due to increased demand for cash from savers.

In 2022, the nine large banks together tapped Sh44.2 billion from the CBK with the financial regulator’s rescue loans being absorbed mainly by medium and small banks, who struggled with liquidity in the wake of an inactive interbank market.

Last year, tier-one South African banks such as Stanbic and Absa Kenya, which had stayed away from CBK loans in the previous year, contracted fresh emergency loans amounting to Sh13 billion each.

Stanbic is owned by South Africa’s Standard Bank, Africa’s largest bank by asset. Absa is owned by banking behemoth Absa Group.

NCBA, which had also not tapped emergency loans from the CBK, recorded a fresh liability of Sh19 billion as balances due to the financial regulator on its balance sheet.

Diamond Trust Bank (DTB) borrowed a fresh Sh13 billion from the central bank.

KCB increased its holdings of loans from the lender of last resort by Sh20.1 billion in the review period to Sh57.4 billion from Sh37.2 billion in 2022. 

Last year, banks continued to approach CBK for emergency loans, including from the highly discouraged discount window, in a period that saw President William Ruto lead the push to revive the interbank market to allow for increased overnight borrowing among lenders.

Bad loans

Banks faced increased demand for cash from high-net-worth investors seeking to meet obligations such as tax payments and purchases of items like bonds.

The liquidity problem was aggravated by a surge in bad loans with lenders increasing their insurance buffers against possible defaults by customers, who struggled to service their loans in a soft economy marked by sky-high inflation and the devaluation of the shilling.

Gross non-performing loans (NPLs) —loans which have not been serviced for more than 90 days— increased to Sh621.3 billion by the end of last year, an increase of 27.4 percent from Sh487.7 billion in 2022.

Stacy Makau, an analyst at AIB-AXYS Africa, an investment bank, said the increase in balances due to CBK was due to liquidity problems that were being faced by the banks.

“And you know banks are the ones that basically move the economy. And so if banks are struggling that is why CBK was able to provide those funds,” explained Ms Makau.

Wesley Manambo, a senior research analyst at Standard Investment Bank (SIB) noted that most of the borrowed funds from the CBK were for liquidity support.

 “More of their capital was deployed to interest-earning revenues over the period on the back of attractive rates,” said Mr Manambo.

“There was also a general rise in the gross NPL stock, so they had to do something,” he added.

The surge in NPLs saw banks set aside huge amounts of money to provision for these bad loans, with KCB Group and Equity posting a reduction in profitability due to increased provisioning.

Equity Bank, despite increasing its provisions by 128.9 percent to Sh35.2 billion, did not record an increase in loans from the CBK.

Banks borrow from the CBK either through the discount window or the open market operations (OMO) through the repurchase agreements.

Data from the CBK shows that banks tapped Sh33 billion through the discount window in the first two months of 2023, a contrast from January and February 2022 when banks never took up these rescue loans.

The CBK says on its website that banks making use of this facility more than twice a week are scrutinised closely and supervisory action is taken.

Open market operations are conducted by the CBK to either increase or reduce money in the financial system.

Through the open market operations, achieved through the repurchase agreements of Treasury bills and bonds, the CBK provides liquidity by temporarily holding a security on behalf of the commercial bank for cash with an agreement to buy it back in the future at a pre-determined price.

Because the CBK is a lender of last resort, banks have to first get such short-term cash from other banks in what is known as the interbank market.

Habil Olaka, the outgoing chief executive officer of Kenya Bankers Association (KBA), said in an earlier interview that the increased use of emergency loans is due to the lack of adequate liquidity in the interbank markets where rates have been inching up.

“When the interbank rates are moving towards the upper end of the interest corridor, it means that the market is tight and thereby CBK needs to introduce liquidity in the market. When liquidity is not introduced, banks have to seek alternatives and you see a number of banks falling back to the window,” said Mr Olaka.

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