The bank-to-bank lending rate has fallen to the lowest level in 13 months following improvement in market liquidity only days after experiencing a major tightness.
Data from the Central Bank of Kenya (CBK) showed that the rate has come down to 2.78 per cent as liquidity increased with, for example, the subscription of Treasury bills being more than double the offered amount.
The drastic fall came shortly after the money market tightened with the highest daily amount transacted in eight months caused by the ramping up of end-year government spending.
Commercial banks borrowed Sh31.94 billion on June 29, the highest amount since October 30 last year when Sh37.87 billion was lent within the interbank market. The average interest rate charged among the banks also rose during the week to June 29, hitting an average of 6.39 per cent compared to 6.17 per cent in the previous week. On June 29, the rate was 6.53 per cent, lower than that of 8.73 per cent last October 30.
“The fixed-income market has been tight because the government increased its spending towards the end of June as it normally does during that time. So the market was starved of liquidity and this is what pushed up the volumes and the rate,” said Kenneth Minjire, a fixed-income analyst with Genghis Capital.
In the final week of last month, the government also more than doubled its borrowing from the CBK to Sh56.85 billion from Sh24.55 billion in the previous week.
Mr Minjire noted that this time the tightness was made worse because it was happening around the time of tax payments, which falls from the 20th of every month.
“This tightness related to the budget cycle also happened when tax payments were being made or had just been made, so cash was being pulled out of the market,” said Mr Minjire.
However, the biggest problem is that the distribution of cash in the market was skewed towards the bigger commercial banks, he said, leaving the mid-tier and third-tier institutions lacking adequate liquidity, and thereby sparking an uptick in overnight rates and volumes.
Big commercial banks have tended to be reluctant to lend to their smaller counterparts, fearing the potential risk of inability to settle the amounts when they fall due – more so after three banks collapsed within a short span two years ago in the wake of liquidity and governance constraints.