Commercial banks have increased their reliance on the Central Bank of Kenya (CBK) for liquidity support this year as the sector pays the price for reduced government payments and high interest rates that make it expensive to mobilize deposits from customers.
Lenders have cumulatively tapped Sh4 trillion from CBK through reverse repurchase agreements (repo) since the beginning of this year, and another Sh81 billion through CBK’s daily lending facility, known as the discount window.
The amount received by banks in the review period has been revealed by market sources.
The injection of liquidity in the form of reverse repos has exceeded the total for the whole of 2023 (Sh2.93 trillion), with a skewed liquidity distribution as well as a factor behind the increased dependence on the CBK.
Repos, discount windows and term auction deposits (TADs) form CBK’s revolving credit facilities, which are used to inject or remove liquidity from the money market.
Reverse repos are a form of bank-guaranteed borrowing from regulators, using ownership of Treasury bills and bonds as collateral. These securities are also used as collateral in the discount window.
“Fund managers’ call deposits have averaged 17.5 percent this year, leaving reverse repos as the only reliable source of liquidity for banks with good yields,” bankers said yesterday.
“Government payments to the private sector and these institutions have always been a good source of liquidity for banks, but we’ve seen more money go into debt service, leaving a gap there.”
Higher government debt service has the consequence of limiting the cash available to pay outstanding bills, starving businesses of capital that will eventually end up in their bank accounts.
In the fiscal year 2023-24, the districts also received Sh30.8 billion less than Sh385.4 billion because they were in the same share of revenue from the national government, affecting their ability to assess their own dues to creditors.
The reliance of banks on the repo market also reflects the distribution of deposits in the banking sector, where a few large banks hold the sector’s liquidity.
The latest CBK data shows that the sector remains well funded with a liquidity ratio of around 50 percent compared to the statutory minimum of 20 percent, but some smaller lenders need to seek support from the regulator to meet their daily cash needs as the distribution of funds is uneven.
The surge in demand for these facilities suggests that some of the larger lenders are tapping into the support.
Last year, the CBK took steps to solve the liquidity problem in the banking sector by restarting the horizontal repo market (where banks lend to each other using bonds and Treasury bills as collateral) and reducing the cost of accessing support from reverse repos. and discount window.
The introduction of the DhowCSD bond trading platform in July 2023 is key to the revival of the horizontal repo market, which has been inactive since 2014.
Since the reopening of the horizontal repo market in August 2023, banks have lent a total of Sh101.4 billion to each other through the facility, with Sh67.8 billion of this total having been transacted between January and July 2024.
CBK also issued a circular on August 19, 2023 lowering the interest applied in the discount window from 600 basis points above the Central Bank Rate (CBR) to 400 basis points, making it cheaper for banks to request emergency support.
Another circular issue on August 29 cut haircuts on securities as collateral in repo and discount windows, meaning borrowers will have more funds for bonds.
The circular reduced the haircut on Treasury bills and bonds of less than one year from 10 percent to two percent. For bonds between one and 10 years, the haircut was reduced from 20 percent to five percent, while the rate applicable to bonds with a tenor of more than 10 years was halved from 20 percent to 10 percent.
The haircut is the percentage difference between the market value of the security and the value used as collateral. For example, a Sh1 million bond is eligible to cover a Sh900,000 bond if a 10 per cent haircut is applied.
