Small lenders to pool collateral in interbank money market plan

Small lenders could soon be allowed to pool collateral in the interbank money market in a bid to cushion them from discrimination and unfair competition from their bigger rivals.

Central Bank of Kenya (CBK) governor Patrick Njoroge said the shared security facility would be run centrally and help improve liquidity in the interbank market.

“The bank (CBK) is exploring the use of pooled securities under the control of a central counterparty as collateral for interbank money market transactions” he said in a monetary policy statement to the Treasury secretary Henry Rotich, but did not provide details on how the facility would operate.

“This is expected to address the problem of market segmentation and eliminate the credit risk premiums that small banks pay whenever they borrow from the interbank market” Dr Njoroge added.

Banks borrow and lend money between each other in the interbank market in order to manage liquidity and meet the reserve requirements placed on them by regulators. The rate depends on maturity, market conditions and credit ratings.

Hoarding cash

Tier one banks have been on the spot for hoarding cash and failing to lend to small lenders forcing CBK to dig deeper into its coffers.

Banks are required to hold an adequate amount of liquid assets to accommodate withdrawals and payments by clients.

Day-to-day liquidity needs are generally managed by borrowing to cover any shortfall and lending any excess liquid assets.

Analysts said the CBK plan could help tame the big banks that are usually reluctant to lend to small banks.

“The idea is to have a facility that distributes liquidity but commercial banks contribute to it.

Cash crunch

Small banks can borrow from this facility and not depend on the generosity of big banks to lend to them whenever they have a cash crunch,” said an analyst who declined to be named.

“There is a risk that commercial banks who have the cash might still decline to lend to certain institutions unless the structure of the fund is such that the securities become owned by the central counterparty itself which will repay any loaned funds automatically regardless of liquidity status of the borrower.”

He added: “So how exactly is the CBK planning to ensure that this really works and does not become like many other (failed) efforts of resolving the standoff in the interbank market?,”

Data by the CBK showed that the weighted average interbank rate decreased to 4.84 per cent in the week ending September 13, 2017 from 5.27 per cent recorded in the previous week.

The volumes transacted ranged from Sh 11.10 billion to Sh 13.25 billion during the week, giving an average of Sh10.2 billion compared to an average of Sh 17.1 billion the previous week.