Bank depositors earnings up as interest rates hit 11-year high

The Central Bank of Kenya. FILE PHOTO | NMG  

By KEPHA MUIRURI

More by this Author  

Interest earned by bank customers from term deposits has risen to an 11-year high of 8.39 percent as commercial banks fight to match interest rates offered by rival asset

classes.

According to data from the Central Bank of Kenya (CBK), the deposit rate has climbed by 12.3 percent as of August from 7.47 percent at the start of the year mirroring commercial bank efforts to attract long-term deposits from customers.

Commercial banks usually offer a premium to customers locking in deposits for a specified period with the deposits serving to form the lenders’ funding base which is then primarily deployed in lending activities.

Read: Banks give best returns on deposits in 5 years

While deposit rates on regular current and savings accounts have risen by a similar margin since the start of the year, the non-fixed-deposit savers earned a lower return of 4.05 percent in August revealing the difference in returns.

The deposit rate is the highest since May 2012 and mimics the general rise in interest rates all year, which has resulted from a cocktail of factors including inflationary pressures, the tightening of monetary policy and macroeconomic and external shocks.

RELATED STORIES

• 

  Bank deposit compensation scheme grows 16.7 percent to Sh179.8 billion

• 

  Deposits cross Sh5trn as banks offer five-year high rates

In the rising interest rates environment, commercial banks have been battling rival asset classes including government securities and money market funds to attract customer funds.

The return from the 364-day/ one-year Treasury bill, which, for instance, averaged 12.46 percent in July has since soared past 15 percent as of last week presenting local retail and institutional investors with comparatively higher returns.

At the same time, money market funds that mainly invest in T-bills and fixed deposits have upped their attraction by offering annualised returns of between eight to 13 percent as of last Thursday.

Shorter-dated Treasury bills- the 91 and 182-day papers also offer returns upwards of 15 percent at present.

This has meant banks offering a matching attractive return to customers to keep term deposits flowing.

“Banks have to be competitive to keep the fixed deposits sticky. They are competing with peers within the sector for these deposits and also with money market funds and government,” Wesley Manambo, a research analyst noted in an earlier interview.

Commercial banks have raised interest payouts to fixed depositors at a faster rate than the charge on loans, serving to trim interest rate margins represented by the difference between the lending and the deposit rate.

While the average commercial bank lending rate surged to an 81-month high of 13.83 percent in August, the interest spread was unchanged at 5.4 percent in the same month from July.

Read: Household deposits in banks hit record Sh2trn

This means that commercial banks were as of July earning less from interest on advanced credit facilities after the interest cost offset on term deposits.

Through the eight months to August, the lending rate had increased by a lower 8.3 percent on a year-to-date perspective.

→ kmuiruri@ke.nationmedia.com