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Securities-backed interbank lending plan to cut high rate

Central Bank of Kenya governor Patrick Njoroge. FILE PHOTO | NMG
Central Bank of Kenya governor Patrick Njoroge. FILE PHOTO | NMG 

The plan to introduce collateralised lending in the interbank market will help rope in larger lenders and ease high interest crippling smaller banks, I&M Bank chief executive Maina Kihara has said.

The use of treasuries will help banks perceived as riskier by larger peers access cash at relatively lower rates in the market where banks borrow from each, largely to manage withdrawals and payments to clients.

This will also reduce skewed distribution and pricing of the short-term loans amongst banks. The borrowing is repayable within a week but mostly is cleared in a day.

Smaller lenders have struggled to access cash in the window due to perceived risk, more so since the surprise collapse of three banks between August 2015 and April 2016.

“We were forced into unsecured lending when participating in the interbank market (after the bank failures) but you will certainly have seen fewer participation in interbank market as a result. We have seen skewed pricing emerge in the interbank market because players can’t quite access the interbank market on an unsecured basis,” Mr Kihara told an annual banking symposium in Nairobi Friday.

“If they do access it on a secured basis, then you will still get a price discovery mechanism. That will then help what the Central Bank looks to do in monetary policy; it will help strengthen the framework of transmission of the monetary policy.”

Central Bank of Kenya governor Patrick Njoroge said, in a memorandum to the Treasury secretary Henry Rotich earlier in the year, the regulator was mulling allowing smaller lenders to pool collateral in the inter-bank market.