The interbank rate eased further this week, hitting 4.97 per cent on Thursday on the back of increased borrowing by the larger financiers, forcing rates to come down further.
This was about the same level as at the end of last week.
Latest Central Bank of Kenya (CBK) data shows that the weighted average rate at which banks borrow from each other on emergency basis stood at 4.95 per cent at the close of business last Wednesday (February 28), down from 5.4 per cent between Mid-February and February 22.
“The weighted average interbank rate… decreased to 4.95 per cent from 5.14 per cent in the previous week, largely reflective of large banks dominating borrowing at lower rates,” said the CBK.
The volumes traded in the interbank market increased to an average of Sh13.8 billion during the week ending February 28, 2018 from Sh10.6 billion the previous week, (week ended February 21) with the CBK saying this partly reflected spillover of VAT tax remittances by banks.
Similarly, the number of deals in the interbank market increased to an average of 32 from the previous average of 24.
Banks borrow and lend money to each other in the interbank market in order to manage liquidity and meet the reserve requirements placed on them by regulators.
The rate depends on maturity, market conditions and credit ratings.
Tier-one banks have been on the spot for hoarding cash and failing to lend to their small counterparts forcing them to resort to the CBK facilities.
But in proposed reforms small lenders could soon be allowed to pool collateral in the interbank money market in a bid to cushion them from discrimination and unfair competition from their bigger rivals.
CBK governor Patrick Njoroge said last September the shared security facility would be run centrally and help improve liquidity in the interbank market.