Interbank rate at 8-month high on squeezed liquidity

Banks closed the year lending to each other at an average interest rate of 6.19 per cent last Friday, the highest in eight months, on scramble to secure cash to tide them over festivities and New Year spending.

Data from the Central Bank of Kenya (CBK) covering the lead up to Friday showed that daily interbank rate was on a rising trend, sending the average near the 6.29 per cent that was last seen in April 2020.

Government payments during the week helped soften the rise in the lending rate in period that is characterised by high demand for cash withdrawals as customers spend on festivities and school reopening expenses.

Commercial banks’ excess reserves stood at Sh16.8 billion at the end of last week — a 35.9 per cent drop from Sh26.2 billion two weeks earlier — in relation to the 4.25 per cent cash reserves requirement.

Small banks were paying as high as seven per cent to access the overnight facility compared to 5.5 per cent for larger banks.

Banks borrow and lend money in the interbank lending market to manage liquidity and satisfy regulations such as the cash reserve requirements.

The interest rate charged depends on the availability of money in the market, on the prevailing rates and on the specific terms of the contract, such as term length.

Borrowing from the CBK has also become more expensive with the repurchase agreements (repos) rate hitting 6.56 per cent mid-December in contrast with 3.29 per cent in mid-October.