Central Bank of Kenya says it injected Sh45b to rescue troubled banks in 2016

Central Bank of Kenya (CBK) loaned banks billions of shillings to remain afloat between June 2015 and 2016.

CBK lent over Sh44.6 billion to banks as it moved to restore confidence in the market during a banking crisis that saw Dubai Bank, Imperial Bank and Chase Bank shut down. Chase bank was later reopened.

The measure saw CBK give small lenders 600 times more loans than in 2015 to stem heavy withdrawals witnessed during the crisis period that was followed by the collapse of three mid-tier banks.

Latest data shows the regulator stepped in to save banks facing liquidity issues after their peers denied them money through inter-bank lending fearing exposure.

This saw CBK make a killing, pocketing a net interest income of Sh11.9 billion, up from Sh4.2 billion in 2015.

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CBK, the lender of last resort, loaned the banks the billions through reverse repurchase agreements (reverse repos) and the discounting window.

The regulator uses the reverse repos as a monetary policy tool to provide liquidity to a lender by buying their securities which they can get back at a later date at a higher price.

CBK also uses the discounting window, a tool where a bank can call back money it invested in a security before it matures, usually at a haircut.

Central Bank might make even better returns in the current financial year as it continues to lend to troubled banks.

Data compiled from financial statements by The Standard shows that 8 out of 27 banks polled lost billions in customer deposits between September 2015 and September 2016.

Head of Banking Research at Ecobank George Bodo, in a commentary, pointed out that in the month of December alone, CBK's liquidity assistance to banks hit Sh91.8 billion, compared to Sh69 billion in November.

Evidence however shows CBK has reduced its lending to banks to mop up cash from the market. However, the reduction has been gradual.