Small lenders dash for expensive cash in interbank market

Small- and medium-sized banks paid nearly double to borrow from the big banks toward month-end, in a trend amplifying segmentation of the credit market.

Tier two and three banks paid an average of nine per cent during the week compared to 4.90 per cent paid by the big banks, an analysis by Standard Investment Bank (SIB) showed.

The segmentation indicated the price that the smaller banks have to pay to access cash in a situation that is low on trust especially since the fall of three smaller financial institutions about two years ago.

Despite the high price of money for the small banks, most of the cash was actually borrowed by the big institutions showing the reason that the average rate for the entire industry declined by 0.23 percentage points to 5.84 per cent.

“The average inter-bank rate for the week under review further decreased by 23 basis points week-on-week to 5.84 per cent due to Tier 1 banks trading at much lower interest rates averaging 4.90 per cent vis-à-vis Tier 2 and Tier 3 banks which traded at an average of 9.00 per cent,” said SIB.

During the week ending August 29, the interbank money market activity increased with the total volume traded amounting to Sh112.39 billion (a daily average of Sh22.48 billion), an increase of 25.57 per cent from the previous week.

Moreover, the number of deals increased by seven to 35 week on week.

To deal with the problem of small banks being charged premium rates by the cash-rich big banks, one of the proposals put forward by the International Monetary Fund is the establishment of an eastern African regional interbank market that allows physical surrender of the collateral, as compared to the present practice where the collateral is not surrendered but is pledged to the lender.