Interbank rate now hits 27pc on tea bonus circulation

Money Markets

People walk past CBK head office. The regulator’s report shows that the interbank rate rose from 17.9pc. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

Posted  Tuesday, September 29   2015 at  18:43

In Summary

• The interbank average lending rate stood at 13.44 per cent on September 10, but scarcity of liquidity has been pushing up the short-term price of money among banks.

The rate at which commercial banks lend to each other overnight has doubled in three weeks reaching an average of 26.75 per cent as at 2.45pm Tuesday, thanks to the concentration of tea bonus cash in a few banks.

According to the Central Bank of Kenya (CBK) data, the interbank average lending rate stood at 13.44 per cent on September 10, but scarcity of liquidity has been pushing up the short-term price of money among banks.

The concentration of liquidity in a few banks has left many others starved of cash. The CBK did not reveal the financial institutions in which the money was locked, but market insiders said the payment of the tea bonus by a few banks was a critical factor.

“With distribution of excess liquidity skewed to a few banks the interbank rate increased to 24.9 percent in the week ending September 23 from 17.9 percent in the previous week,” said the CBK in its weekly report.

The volume transacted during the week increased by Sh6 billion to Sh28.9 billion, while the number of deals increase to 73 from 67 in the previous week.

The tea bonus is usually paid through a few banks for distribution to other lenders, where outstanding loan or overdraft facilities are settled before eventually reaching farmers.

Tea farmers have earned over Sh60 billion in the tea bonus. “We have seen the interbank rate rise in just a few days yet it had begun to fall in the second week of this month. There is the tea bonus factor with money locked in a few banks,” said a dealer who chose anonymity to speak candidly.

READ: Strong dollar earns tea farmers Sh64 billion

The dealer said that Tuesday’s rise in the interbank rate coupled with the previous day’s was a continuation of a trend witnessed from the past week.

Another market insider said the higher rate that banks are charging each other for overnight cash was also one of the major factors giving support to the shilling.

This is because it has made shilling-denominated liquidity scarce in the market relative to the dollar.

The CBK has also been using the liquidity-mopping instruments such as the repurchasing agreements and term auction deposits in a bid to contain further weakening of the shilling.

Whereas there were maturities of term auction deposits that should have made the market liquid, the monetary authority said mop-up and tax remittances to the government “sterilised” (or removed) the liquidity.