Interbank lending surges as firms pay income tax

Money Markets

Income tax is the single-largest type of revenue the State receives every year with the amount expected in the 2014-15 financial year. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• Interbank rates rose to 8.17 per cent from 7.66 per cent of the previous week.

The financial markets were tight last week with banks forced to raise their borrowing from each other by 20 per cent to Sh15.7 billion.

The Central Bank of Kenya (CBK) said in its weekly update that interest rate banks charge each other went up as there was a lot of cash diverted into government accounts through tax payments.

Interbank rates rose to 8.17 per cent from 7.66 per cent of the previous week.

The final instalment for income taxes after the end of 2014 fell due by the end of March, forcing commercial banks to transfer large amounts of cash from company accounts into government coffers.

Income tax is the single-largest type of revenue the State receives every year with the amount expected in the 2014-15 financial year, for example, being more than half (at Sh541.9 billion) of the total taxes (Sh1.007 trillion) expected.

The auction of government securities and the sale of the repurchasing agreements (repos) —which are intended to regulate market liquidity as well as the value of the shilling —also contributed to the tightness in the market, according to the CBK.

“The money market was relatively tight during the week ending April 1, 2015 largely on account of net receipts to Government through taxes and auction of Treasury Securities, and repo sales,” said the CBK in the update.

Besides the rise in the rate and the amount transacted among banks, the number of deals made in relation to the interbank market also rose.

“The volume transacted increased significantly to Sh15.56 billion from Sh13 billion traded in the previous week,” said the CBK.