Short-term inter-bank lending falls after Chase Bank debacle

Short-term lending from one commercial bank to the other has slumped following the collapse of Chase Bank in April, wiping out gains that had earlier been made in the redistribution of deposits among the lenders.

The value of transacted amounts in the three months between April and June stood at Sh6 billion, said a market player who declined to be quoted as he was not authorised to release the information. The amount was a sharp drop compared to the period before Chase Bank’s closure.

The cash was advanced in the form of horizontal repurchase agreements, commonly referred to as horizontal repos, in which banks lend each other cash with the Treasury bonds or bills as collateral.

The facility allows commercial banks that do not have existing credit lines with other lenders to access credit from the interbank market.

The CBK has long wanted banks to use horizontal repos to redistribute cash which tends to be held by few large banks.

Data from the Central Bank of Kenya (CBK) shows the value of horizontal repos transacted in the six months to April was Sh70.6 billion compared to Sh4.5 billion in the six months to October last year.

“Interbank, which does not require collateral, collapsed and horizontal repo transactions — which needs collateral — came in but when Chase Bank went down, people lost confidence and shut it down. That is why only Sh6 billion was transacted between April and June,” said the market source.

The CBK said there had been an increasing number of transactions in the six months to the end of April. The regulator, however is yet to publish updated data to June.

“The CBK continued to explore strategies for enhancing the use of horizontal repos towards redistributing liquidity in the interbank market. The number of transactions increased to 213 in the six months to April from 25 in the six months to October 2015,” said the CBK.

The sharp increase had given the impression that large banks were finally warming up to the scarcely used horizontal repo market.

Market players informed the Business Daily that the sharp rise in use of the horizontal repo was due to collapse of interbank market following the sudden closure of Imperial Bank. Collapse of Imperial Bank had forced banks to turn to the repo market where a collateral is made available.

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The closure of Chase Bank in April burst this confidence bubble as the ownership of the collateral used is not transferred to the lending bank exposing it in the same way that it is in the interbank market.

Large banks are usually selective on the small banks they lend due to fears of a lender collapsing and failing to repay.

Further the large banks charge the small rivals they choose to lend to expensively compared to what they charge each other creating two prices in the same market.

During the global financial crisis of 2011, bank representatives from Family Bank had complained to Parliament on how large banks were hoarding liquidity forcing other lenders to seek expensive deposits which hurt their profitability.

The Kenya Bankers Association have been lobbying for change of regulations to allow for actual ownership of transfer of collateral so as to protect the lending banks.

Analysts have previously stated the interbank market will not pick till the issue of security is resolved.

Banks will be looking at how Kenya Deposit Insurance Corporation handle cash lent to the collapsed banks in the interbank market.