Small lenders feel pinch in 9-month high interbank rate

Small banks are paying as high as 10 percent to access overnight loans from larger peers as the interbank rate hit its highest level in nine months due to attractive mop-up rates offered by the regulator.

The interbank rate — at which banks borrow from each other on emergency basis — hit an average of 7.45 percent last week, with smaller banks accessing funds at a high of 10 percent despite the excess liquidity in the market.

Investment bank Genghis Capital analyst Churchill Ogutu said the Central Bank of Kenya (CBK) offering an attractive rate of about 8.9 percent on repurchase agreements (repos) is posing stiff competition for smaller banks who are also chasing the excess liquidity.

“CBK has been coming in the market at rates touching as high as nine per cent for 7-day repo. It makes more sense for banks with excess liquidity to lend to CBK than lend to tier II or III players,” said Mr Ogutu.

“At 8.98 percent, the rate is more attractive than the 91-day and 182-day Treasury bill, making it easier for those with excess liquidity to favour CBK.”

Nearly 80 percent of industry liquidity sits with a few large banks.

CBK data shows the value traded on the interbank market last week decreased by 15.2 percent to Sh7.8 billion from Sh9.2 billion in the previous week.

Mr Ogutu said the Treasury has been issuing long term papers which have done little to reduce banks’ excess liquidity given they favour short-tenor papers.

“There has not been much appetite to pick up whatever the government is offering the market. The low yields on T-bills have not been making much sense either, leaving many banks awash with cash,” he said.

The mop-up process has also affected uptake of short term papers. The CBK has mopped up an excess of Sh100 billion in the past two weeks, buffering the shilling against volatility during the demonetisation of Sh1,000 old note that closed on Tuesday.