Rate of emergency loans at a 5-year high

Given the large number of excess reserves that lenders held at the end of last week, the rate at which banks borrow from one another in an emergency has increased to a nearly five-year high of 10.02 percent.

For the first time since December 2018, the increase to double digits demonstrates that banks were more willing to pay for funds from other lenders through the window that is primarily used to help meet regulatory daily cash requirements.

The cost of emergency funds is included in the total cost of funds, which is then passed on to borrowers; banks do not borrow from the window for the purpose of further lending to customers.

The Central Bank of Kenya (CBK) reported adequate liquidity at the end of last week in its bulletin, noting that commercial banks had an excess reserve of Sh92 billion relative to the CRR of 4.25 percent, which was supported by government payments.

However, analysts predict that this week will see a tightening of the money supply, which will further pressure the interbank rate.

“We expect the interbank rate to remain above eight percent levels in the coming week, mainly driven by the remittance monthly obligations, delayed government payments and CBK’s open market operations,” said AIB AXYS Africa in a fixed income note on Monday.

Since the failure of three lenders in 2015 and 2016, there has been a persistent issue with the skewed distribution of liquidity in the banking industry, with some of the larger lenders becoming more cautious when advancing cash to smaller peers.

Given that the larger lenders control up to 80% of liquidity at any given time, smaller banks are typically the first to suffer losses in an unstable or skewed market.

The uneven distribution of liquidity has prompted calls for reforming the interbank market; the introduction of an interest rate corridor, which entails setting the interbank rate’s upper and lower limits in line with the current Central Bank Rate, is the most likely remedy.