Cash crunch hits banks as Treasury sucks liquidity

A shopper looks at shoes in a Nairobi shop. CBK was forced to inject cash into the economy to ease the crunch which was made worse by a rise in cash withdrawals associated with the
December holiday season. FILE

By GEOFFREY IRUNGU,


IN SUMMARY
Central bank forced to inject up to Sh20 billion into economy to ease shortage.


A severe liquidity crunch caused by Treasury borrowing and payment of taxes by big companies saw commercial banks breach the cash reserve requirement (CRR) in the week ending December 24, a Central Bank report has revealed.

The regulator was as a result forced to inject cash into the economy to ease the crunch which was made worse by a rise in cash withdrawals associated with the December holiday season.

Commercial banks are required to deposit at least 5.25 per cent of their total deposits at the Central Bank of Kenya (CBK) to guarantee customers ready access to their cash whenever needed.

“Commercial banks recorded a deficit of Sh2.9 billion in their settlement accounts in relation to the monthly average cash reserve requirement of 5.25 per cent or Sh97.1 billion at the central bank in the week to December 24, 2013,” said the latest CBK weekly report.

“The money market liquidity tightened during the week ending December 24, 2013 on account of investment in government securities and payment of taxes to the government.”

Banks that breach the CRR ratio ordinarily face regulatory action, such as cash fines. The banks had recorded a surplus of Sh8.6 billion of the CRR ratio in the previous week, according to the regulator’s data.

CBK had to inject nearly Sh3 billion a day up to a total of Sh20 billion in the week just before Christmas to ease the cash shortage.

“The Central Bank open liquidity management resulted in a net liquidity injection of Sh20.0 billion through repo securities (for the week that ended on December 24),” said the CBK.

Commercial bank dealers said the CBK injected a further Sh10 billion into the market on Monday, but was not active on Tuesday’s New Year eve.

Being big buyers of Treasury bills and bonds, commercial banks overstretched their cash reserves at a time when big companies were also paying their tax bills, including valued added tax which falls due on 20th every month and instalment tax paid to the Kenya Revenue Authority (KRA) through its CBK accounts.

As companies paid the taxes, money was drained from commercial banks into CBK, yet on the other hand customers were withdrawing to spend during the festive season.

The difficulties experienced by the banks were also reflected in the interbank markets where the cost of money rose by 2.09 percentage points to 10.27 per cent for the week that ended on December 24. In the previous week when the lenders had excess supply of cash, the interbank rate stood at 8.18 per cent.

Head of trading at Bank of Africa Peter Mutuku said he expected some tightness to remain because the CBK would not want it to affect the exchange rates even as it tries to ease liquidity.

“I expect interbank rates to be at between 11 and 13 per cent. We also expect the central bank will try to stop the rates from spiralling by injecting liquidity whenever it is required,” said Mr Mutuku.

A dealer at a top commercial bank said better liquidity management by the government would have saved the lenders money spent on paying punitive rates at the inter-bank market or penalties for breaching the CRR ratio.