Liquidity squeeze that hit banks in December eases

The rate at which banks borrow from each other has nearly halved since the beginning of the year, signalling that the liquidity squeeze that hit the lenders in the last week of December has eased.

The inter-bank rate now stands at 5.1 per cent, down from eight per cent in the last week of December. This is a near four-month low for a rate which has in the past one year risen as high as 10.8 per cent.

Analysts say that banks have stopped building up cash as the Central Bank of Kenya (CBK) injects liquidity in the market through the reverse repo market, which has provided small banks starved of liquidity with an avenue to cash.

“The elevated inter-bank rate at the close of 2017 was on account of year-end tax payments coupled with long shilling positions held by banks.

The drop in the inter-bank rate has been due to an improvement in market liquidity due to CBK intervention via reverse repos,” said Genghis Capital fixed income analyst Churchill Ogutu.

“In addition, we are of the view that banks are in a gradual unwinding of their long shilling positions as short-term deposits booked close to year-end begin maturing.”

READ: Small banks take up costly credit as liquidity tightens

In the reverse repo market, the CBK temporarily buys government securities from banks, helping improve cash positions. The average daily volumes being transacted between banks in the inter-bank market have fallen in January to Sh17.7 billion compared Sh21.3 billion in December.

Market liquidity has also continued to benefit from domestic debt redemption and government payments to its agencies and other contractors.

Last week, government payments totalled Sh30.7 billion, with redemptions of domestic debt hitting Sh14.3 billion.

These are expected to remain high in coming weeks as government activity picks up after the conclusion of the elections and county administrations roll out projects.