Kenyan shilling weakens as liquidity improves

NAIROBI: The Kenyan shilling weakened on Monday as liquidity increased in domestic money markets after a new monthly liquidity requirement cycle kicked in.

The main share index eked out slight gains. At the 1300 GMT close of trade, commercial banks posted the shilling at 102.75/85 per dollar, compared with Friday's close of 102.15/25.

"Liquidity is back," said a trader at one commercial bank.  The weighted average lending rates on the overnight interbank market dropped to 20.9107 percent on Friday from 24.0373 percent previously, indicating liquidity had improved.

 An acute liquidity crunch in the market, caused by banks meeting minimum liquidity ratios for the monthly cycle, had offered support to the shilling by making it more expensive to bet against the currency.

Banks are required to maintain a cash reserve ratio (CRR) of 5.25 percent of their deposits on average for a month starting on the 14th of every month but have the leeway of going down to 3 percent.

Short-term rates jumped higher after the central bank adopted a monetary tightening stance to curb volatility in the foreign exchange market.

Policymakers raised the rate by a total of 300 basis points in June and July after the shilling weakened sharply against the dollar.

The shilling has weakened 11.72 percent this year mainly due to expectations of a US interest rate hike, a slump in tourism caused by militant attacks, lower export earnings and a surge in imports.

In the stock exchange, the benchmark NSE-20 share index edged up 0.3 percent to close at 4,509.84 points, supported by gains in banking shares.