Tough cash crunch pushes interbank rate to 53-month high
The Central Bank of Kenya, Nairobi. Borrowers paying more for loans as lenders have less money to advance.
The cost of borrowing between commercial banks has hit a high of close to four-and-a-half years amid deeper tightening of cash supply in the banking system, pointing to surges in the prices of loans disbursed by the lenders.
The interbank rate, the interest charged on short-term loans between banks, stood at 9.28 percent on April 27, 2023, data from the Central Bank of Kenya (CBK) shows, the highest since 10.16 percent on December 17, 2018.
An upsurge in interbank rate is attributable to a decline in liquidity in the banking sector due to strong loan growth which means lenders have less liquidity on their balance sheets, resulting in higher rates.
Conventionally, an increase in interbank rates leads to higher funding costs for banks, which in turn leads to higher lending rates for borrowers.
This comes as data showed that an interbank liquidity crunch pushed banks to borrow a record Sh40 billion from the CBK in six months to December last year.
A CBK report showed that advances to commercial banks rose from Sh71.8 billion in June last year to a record high of Sh111.7 billion by the end of December. The interbank liquidity crunch partly triggered a biting dollar shortage, with the CBK forced to intervene to stabilise the market.
The CBK traditionally provides temporary liquidity by temporarily holding a security on behalf of the commercial bank for cash with an agreement to buy it back in the future at a pre-determined price.
The CBK runs a “discount window” from which banks can tap funds as a last resort after exhausting all other avenues, including borrowing from one another.
Transactions here occur through reverse repos, which are commonly used by the CBK to advance short-term capital to other businesses during cash-flow challenges. They involve the purchase of government securities by the Central Bank from commercial banks.
But to guard against abuse of its lending to banks, the regulator sets high-interest charges on such loans. For instance, the latest data shows the CBK discount window rate increased to 15.5 percent on March 29—the highest since March 19, 2018, and an increase from 13 percent at the start of the year--- pointing to an effort by the regulator to discourage lenders from taking excessive risk in the hope that it would come to their assistance with emergency credit.
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The tight liquidity is on the back of a hike in the base lending rate to the highest level in five years to curb inflation. The central bank rate (CBR) increased to 9.50 percent in March from 8.75 percent.
High returns on short-term government securities signal a preference for lending to the State even by large corporations and high-net-worth individuals, which would attract higher yields than the banks’ deposit rates.
