CBK main lender as the inter-bank market contracts

Central Bank of Kenya (CBK) has been the main lender to banks in the last six months as jittery lenders shun lending each other in the bank-to-bank market following instability.

A market survey by HTMCapital shows liquidity has become increasingly concentrated across major banks with heightened risk aversion leading to low inter-bank volumes for the last two quarters.

The CBK usually buys back securities from banks to inject money into the banking system through reverse repurchase orders (repos).

The report says December, January and February witnessed oversubscription of reverse repos.

The regulator uses the reverse repos as a monetary policy tool to provide liquidity to any lender that might be struggling with liquidity in the interbank market.

“CBK retained its 2015 fourth quarter hat of liquidity re-distributor. Through repos and Term Auction Deposits CBK moped-up Sh177 billion, only to turnaround and inject Sh123 billion of liquidity via reverse repos,” the report says.

CBK extended the window tenor from one week to a month after Chase Bank became the third bank to close in just nine months. According to the CBK data for last week, the number of deals between banks fell to an average of eight in the wake of the collapse of Chase Bank from an average of 22 the previous week.

The money exchanged between banks fell from Sh19 billion in the week ending March 30, to Sh9 billion in the week ending April 6 and only Sh5 billion last week, indicating aversion to risk.

“Notwithstanding CBK’s intervention, 92 per cent of the respondents see skewed market liquidity as a key risk,” HTMCapital say.

CBK has since set up a new framework to cushion banks facing liquidity problems by offering unlimited funds in a push to calm the market.