Small lenders feel pinch as interbank rate rises to 5.2pc

Central Bank of Kenya. FILE PHOTO | NMG 

By CHARLES MWANIKI

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Summary

• Analysts at Genghis capital said that some of the tier three banks were accessing the interbank funds at highs of 10 per cent.
• The skewed distribution of liquidity has led to efforts to reform the interbank market, with the likeliest solution being the introduction of an interest rate corridor, which involves setting the upper and lower limits of interbank rate in alignment with the prevailing Central Bank Rate (CBR).
• In March, CBK told the International Monetary Fund (IMF) that it would introduce the rate corridor as part of reforms meant to strengthen the country’s monetary policy framework.

The overnight lending rate between banks has gone up in the past week-and-a-half with smaller peers forced to pay higher rates to access cash in an increasingly tight market.

Central Bank of Kenya’s (CBK) latest data shows that the rate had climbed to 5.17 per cent by yesterday—having gone as high as 5.7 per cent last Friday—from 4.3 per cent at the beginning of last week.

An illiquid market’s first casualties are usually the smaller banks, given that the large lenders control up to 80 per cent of the markets liquidity at any given time.

Banks use the interbank as a liquidity management tool to meet cash reserve requirements set by the regulator.

“Activity in the interbank market was subdued during the week largely on account of reduced participation by large banks in the interbank market. The weighted average interbank rate increased to 5.7 per cent from 4.38 per cent the previous week as small and medium banks concluded transactions at higher rates,” said CBK in the bulletin.

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Analysts at Genghis capital said that some of the tier three banks were accessing the interbank funds at highs of 10 per cent.

The skewed distribution of liquidity has led to efforts to reform the interbank market, with the likeliest solution being the introduction of an interest rate corridor, which involves setting the upper and lower limits of interbank rate in alignment with the prevailing Central Bank Rate (CBR).

In March, CBK told the International Monetary Fund (IMF) that it would introduce the rate corridor as part of reforms meant to strengthen the country’s monetary policy framework.

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