Banks liquidity improves as high returns attract deposits

The Central Bank of Kenya in Nairobi. PHOTO | FILE | NMG    

By VINCENT OWINO More by this Author

Money available to banks for investments and lending has increased as deposits rise on improved interest rates, coming after the

Central Bank of Kenya (CBK) rate hikes that drove up returns on fixed savings.

The CBK’s Credit Officer Survey done in December last year and published Thursday last week, which polled the 39 commercial banks in the country, reveals that liquidity has generally improved for 62 percent of banks, making available to them more cash for their activities.

Read: CBK loans to banks up on liquidity crunch

The rise in liquidity was primarily attributed to increased deposits, which accounted for 65 percent of the improvement, according to the survey. Other factors that drove it include a step-up of loan recovery efforts, maturity of government securities and capital injections.

CBK data indicates that money held by Kenyans in commercial banks rose 2.6 percent in December to Sh5.8 trillion, the highest ever, coming on the back of increased deposit interest rates.

The savings have been on an upward trajectory for the last 24 months, from Sh4.7 trillion in December 2022 to cross the Sh5 trillion mark for the first time in June last year.

In December, average returns offered by banks on such deposits hit a new record high of 10.1 percent, the first time fixed savings offered a double-digit yield in Kenya, coming after the CBK made the largest policy rate hike in over 12 years.

This came after the 200-basis-point central bank rate hike by the CBK in December, which saw the interest rates on both loans and deposits soar to the highest levels in years.

The rise in liquidity could translate to higher profits for the lenders, as they plan to increase their loaning to the private sector and invest more in treasury securities, both of which now have higher returns.

“With the improved liquidity, it is expected that in the first quarter of 2024, credit to the private sector will increase as several banks intend to deploy the additional liquidity towards lending to the private sector (30 percent),” the CBK survey says.

Private sector credit increased by Sh51.9 billion in December, although loans to some sectors, like private households, dropped. This is projected to rise this quarter, handing banks even more profits from lending.

Read: Small banks hit by liquidity crisis turn to CBK for rescue

Banks plan to deploy the extra cash from the rise in liquidity in investments in treasury bills (26 percent), interbank lending (23 percent), treasury bonds (13 percent), and the rest will be used to take advantage of CBK liquidity through repos, increasing cash holdings, and investing in offshore opportunities.

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