An increase in government payments to departments, agencies and suppliers has raised liquidity in the money market, pushing up the cash in the hands of banks and leading to heavy oversubscription of government securities.
Central Bank of Kenya (CBK) said in its weekly bulletin that the interbank market — an indicator of the liquidity situation in the banking industry—saw both a fall in rates and volumes transacted, meaning lenders were holding ample cash.
The interbank rate is at an 11-month low of 2.33 percent.
“The money market was liquid during the week, supported by government payments.
“Commercial banks’ excess reserves stood at Sh32.8 billion in relation to the 4.25 per cent cash reserves requirement (CRR),” said CBK.
“The average number of interbank deals per day decreased to 10 from 21 in the previous week, while the value traded decreased to Sh4 billion from Sh12.3 billion in the previous week.”
The excess funds in banks point to increased room for lending, in an economy which has been starved of credit in recent years as lenders instead pumped funds into government securities.
The banks have also benefited from the CBK move to lower of the cash reserve ratio from 5.25 per cent to 4.25 per cent in March, which was meant to give them additional liquidity to support borrowers who are negatively affected by the Covid-19 outbreak.
Some of the excess liquidity in the market is also being pushed into government securities.
In last week’s Treasury bill auction, investors bid a total of Sh69.7 billion cumulatively in the three tenors, against the government’s target of Sh24 billion.
However, with the Treasury having all but met its domestic borrowing target for the current fiscal year, the CBK was content to take up only Sh22.85 billion from thee bids, leaving the remainder of the liquidity untapped.
June normally sees a tapering down of government borrowing from the domestic market if the target for the year is achieved.