Sunday, April 28, 2019

Rate cap pushes banks liquidity to Sh4.6 trillion

Treasury secretary Henry Rotich Treasury secretary Henry Rotich. FILE PHOTO | NMG 
Commercial banks liquidity rose by 10.9 percent to Sh4.6 trillion last year, sending liquidity ratio to three-year high of 50.6 percent as lenders slowed their pace of lending.
Fresh data from Kenya National Bureau of Statistics (KNBS) show that the liquidity ratio grew from 46.4 percent in December 2017, with lending appetite being constrained by the interest rate cap.
National Treasury Cabinet Secretary Henry Rotich renewed calls for removal of rate caps, saying that this phenomenon will distort redistribution of growth in the economy.
“The financial sector still holds huge liquidity and lending to private sector has slowed down. That tells us we need to continue dealing with rates caps,” said Mr Rotich.
Liquidity ratio measures how much high-quality assets a financial institution is holding to fund cash outflows for at least 30 days.
It is usually used as an indicator of whether a company's current assets are sufficient to meet its debts or obligations when they become due.
At 50.5 percent, the liquidity ratio of local banks is 2.5 times higher than the minimum 20 percent prescribed by Central Bank of Kenya.
Slowed lending saw advances to deposits ratio decline to 78.4 percent in December 2018 from 83.5 percent in previous year.
“This was due to commercial banks opting for less risky lending in the form of government securities,” KNBS noted.
The latest rise in liquidity ratio marked the third rise in a row since 2015 when it was at 43.7 percent.
When amended banking laws in 2016 that took away banks’ power to freely price loans, many have opted to cut lending, leading to a rise in liquidity.
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