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Tough going for small banks in Kenya as CBK steps up liquidity mop-up

By Otiato Guguyu | January 17th 2017

Central Bank of Kenya (CBK) has continued to drain excess liquidity from the market for the second week running, signalling tough times for banks that rely on the regulator for survival.

In just two weeks, CBK has withdrawn Sh55 billion from matured reverse repurchase agreements (reverse repos), a departure from last year’s strategy where it was rolling over matured instruments to keep money in the market.

The sustained liquidity mop-up has been necessitated by the need to prop up the shilling following its free fall in recent weeks.

The regulator uses reverse repos as a monetary policy tool to provide liquidity to any lender that might be struggling with liquidity in the inter-bank market. The latest move may hit unstable banks that have relied on the regulator’s life support facility to allow them to operate amidst turmoil in the market that has seen them lose customer deposits.

“The money market was relatively tight during the week ending January 11 on account of maturing securities under Central Bank of Kenya short-term liquidity support to banks (reverse repo maturities),” said CBK in its latest statistical bulletin.

Head, banking research at Ecobank George Bodo in a commentary last week pointed out that in December, CBK’s liquidity assistance to banks hit a staggering Sh91.8 billion, compared to Sh69 billion in the preceding month.

He said in the fourth quarter, total liquidity injections into the banking sector amounted to Sh212 billion compared with just Sh92 billion in the third quarter and up from Sh191 billion recorded in 2015 and Sh551 billion last year.

This was precipitated by the collapse of Dubai, Imperial and Chase banks as well as a jittery market after malicious rumours against Prime Bank and Family Bank towards the end of the year.

Data compiled from financial statements by The Standard shows eight out of 27 banks polled lost billions of shillings in customer deposits between September 2015 and September last year.

These included UBA Bank, Middle East Bank, Family bank, M-Oriental, Bank of Africa, Gulf African Bank, Jamii Bora Bank and First Community Bank. An analyst who did not want to be named said if CBK continues withdrawing liquidity support, affected banks will have to raise capital from elsewhere to survive.

“The facilities were not meant to last forever. If they cannot stand on their own after the CBK withdraws, then they would need a capital injection or would be insolvent,” the source said.

In December, SME-focused lender Jamii Bora Bank managed to raise a Sh600 million capital injection from Chicago-based private equity fund Equator Capital Partners LLC, under its ShoreCap II Fund.

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