The cost at which banks borrow from each other on an emergency basis has dropped from the double-digit levels seen at the beginning of the month on improved liquidity in the market supported by exchequer disbursements.
The interbank rate stood at 8.62 percent on Wednesday, falling from a near five-year high of 10.1 percent seen on July 3, data from the Central Bank of Kenya (CBK) shows.
The improved liquidity has been attributed to government spending at the start of the new financial year through payments to contractors and disbursements to counties and ministries.
This has been coupled with the CBK slowing down on liquidity-mopping activities in the market.
“Early fiscal year government spending and muted open market operations by the CBK could be some of the drivers of improved liquidity,” said Solomon Kariuki, an analyst at AIB-AXYS Africa.
In its bulletin at the end of last week, the CBK said liquidity in the money market increased, supported by government payments, with commercial banks holding an excess reserve of Sh37.4 billion in relation to the 4.25 percent cash reserves requirement (CRR).
Mr Kariuki added that there could be renewed upward pressure on the rate due to the mop-up of July’s bond sale, which raised Sh38.6 billion.
The interbank rate had been rising steadily since the start of the year, coinciding with delays by the government to pay arrears to contractors and counties.
The State’s payments and borrowing are key to supplying or withdrawing liquidity from the money market.
Although banks do not borrow from the interbank market for onward lending to customers, an increase in the emergency rate factors into their overall cost of funds, translating to expensive borrowing.
Skewed distribution of liquidity in the banking sector has been a recurring problem since the collapse of three lenders in 2015 and 2016, with some of the larger lenders becoming more cautious when advancing cash to smaller peers.
