CBK deal offers reprieve for cash strapped banks

CBK Governor Patrick Njoroge says reduction in the discount window from 14.25 per cent to 13.25 per cent is the lowest in nine years. [David Gichuru]

Central Bank of Kenya (CBK) has moved to avail more cash to Kenyans distressed by the Coronavirus pandemic after it lowered discount window rate by one percentage points.

Cash strapped lenders can now borrow from CBK to meet temporary liquidity shortages after the apex bank on Monday reduced the rate to 13.25 per cent from 14.25 per cent - the lowest in nine years.

This comes days after CBK slashed its benchmark lending rate and Cash Reserve Ratio also by 100 basis points.

CBK’s discount window has oscillated at 15 per cent since July 2018 before it was cut to 14.25 per cent in September last year.

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This was the prevailing rate until CBK slashed it five days ago to deal with the economic effects of the global pandemic.

The adjustment on the discount window was made on the same day CBK’s Monetary Policy Committee (MPC) slashed its benchmark lending rate, the Central Bank Rate (CBR) and Cash Reserve Ratio (CRR), as the financial regulator went all out to pump more cash into an economy that has been ravaged by the coronavirus.

MPC cut both of these tools by a percentage point, as the lender of last resort signaled to commercial banks to lend to consumers at a lower rate.

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CRR is the fraction of cash deposits that banks are required to maintain with CBK daily.

Dr Njoroge said the sharp reduction in CRR would release Sh35.2 billion in additional liquidity, which would be made available directly to banks.

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However, CBK insisted that only banks that show willingness to lend to customers will access the pool.

“CBK will avail this liquidity to banks based on their demonstrated requirement to directly support borrowers that are distressed as a result of Covid-19,” read part of the statement from the regulator.

The cash will support borrowers distressed as a result of Covid-19. About 31 Kenyans have so far been confirmed to have been infected with the disease brought on by the novel coronavirus

Dr Njoroge projected that the virus would devastate the economy this year, slowing it down from growth of 6.2 per cent to 3.4 per cent.

The pandemic, which analysts have said will plunge the global economy into a recession, will also have a huge impact on Kenya’s economy this year.

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“As a result of the pandemic, economic growth is expected to decline significantly in 2020 from a baseline estimate of 6.2 per cent to possibly 3.4 per cent, arising from reduced demand by Kenya’s main trading partners, disruption of supply chains and domestic production,” said Njoroge in a statement.

Some of the sectors that have been hit hard include tourism, aviation and export markets, which rely heavily on the European market.

The reduced inflow of foreign exchange reserves has seen the shilling touched a low of 106.5 against the dollar.

“The foreign exchange market has recently experienced some volatility largely due to uncertainties concerning the impact of Covid-19 and a significant strengthening of the dollar in the global markets,” said Njoroge on Friday.

He estimated the deficit at the end of the year to be between four and 4.6 per cent of gross domestic product.

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