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Banks starved of liquidity as lending rate up

BUSINESS
By Dominic Omondi | April 21st 2020

The interbank money market has begun to experience tight liquidity with the rate at which financial institutions lend to each other rising to six per cent by end of Friday.

Banks with insufficient cash reserves are thus borrowing expensively from those with surplus funds to meet the regulatory cash reserve for their day-to-day lending.

This was the highest interbank rate since December 11 last year, but is still far lower than a high of 30 per cent seen in 2011.

The liquidity comes at a time when the Central Bank of Kenya (CBK) has instituted various measures to ensure banks have adequate cash to help stimulate an economy that has been battered by the coronavirus pandemic.

While slashing its benchmark lending rate - Central Bank Rate (CBR) - and cash reserve ratio last month, CBK said it would also monitor the interbank rate to ensure that banks are liquid enough to keep lending to the public.

“Additionally, CBK will ensure that the interbank market and liquidity management across the sector continue to function smoothly,” said the industry regulator in a statement.

Most interbank loans are for maturities of one week or less, the majority being overnight.

Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential runs by clients. If a bank cannot meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall.

In case of repurchase agreements (Repo), where a bank sells government securities to investors and buys them back after a short period, CBK extended the tenor for paying back from 28 to 91 days. This was also meant to help banks with their liquidity when they run short of cash.

Additionally, CBK moved to provide more cash to Kenyans distressed by the coronavirus pandemic after it lowered the discount window rate by one percentage points.

As a result, cash-strapped lenders can now borrow from CBK to meet temporary liquidity shortages after the apex bank reduced the discount window rate to 13.25 per cent from 14.25 per cent - the lowest in nine years.

Meanwhile, the Shilling continues to come under pressure, trading at a low of 106.79 against the dollar as foreign exchange inflows continue to lag behind outflows.

It was another record low for the country’s currency, which has been hit by the pandemic with export and tourism earnings not coming in as Europe remains under lockdown.

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