The interbank money market is already experiencing tight liquidity with the rate at which financial institutions lend to one another rising to 6% of Friday. Banks that lack sufficient cash in their reserves are now forced to borrow expensively from those with excess funds to meet the regulatory cash reserve to do their daily lending.
This is the highest interbank rate since December 11 last year and way lower than a high of 30% that was experienced in the year 2011.
This is happening at the time when Central Bank of Kenya (CBK) has instituted several measures to ensure that banks have sufficient cash to aide stimulating an economy that has been severely affected by the coronavirus pandemic.
CBK said that it would monitor interbank rate and ensure that banks are liquid enough to continue lending to the members of the public. In addition to that, CBK would also ensure that the interbank market and liquidity management across the sector runs smooth.
Most interbank loans are designed to mature in a week or less with the majority being overnight. Banks are therefore required to hold an adequate amount of liquid cash, to manage any potential runs by customers.
A bank that can not meet this requirement will therefore be pushed to borrow money in the interbank market to cover that shortfall.
In a scenario of repurchase agreements (Repo), in which a bank sells government securities to investors and buys them back after a short period, CBK pushed the tenor for paying back from 28 to 91 days.
The move was meant to assist banks with liquidity in case they run short of cash. CBK also moved to give more cash to Kenyans distressed by the coronavirus pandemic when it lowered the discount window rate by one percentage points.
That means 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% from 14.25% – the lowest since 2011.
Mean while with banks denied liquidity with the lending rate up, the shilling still remains under pressure and still trading at a low of 106.79 against the dollar as foreign exchange inflows continue to drag.
The shilling has been hit by the COVID-19 pandemic which has hit export and earnings from tourism hard due to lockdowns in source markets as Europe.