Banks are lending each other at the highest rate in nearly two years, making it costly for small lenders struggling for liquidity to raise funds for plugging shortfalls.
The emergency borrowing rate hit a 21-month high of 10.8 per cent last week, pushed up by a tight money market which has seen larger lenders keep a tighter grip on their cash.
The rate eased back on Monday to 8.9 per cent, but is expected to remain high, with Central Bank wary of setting off exchange volatility by allowing excess shilling liquidity to build up.
“In the interbank markets, tight liquidity persisted during the week, keeping the interbank rate in double-digit territory for the first time in almost two years,” said Britam Asset Managers in its latest weekly money market report.
“Liquidity conditions are expected to remain generally tight during the coming week with disciplined government borrowing supporting stable yields.”
The rise in the interbank rate effectively means that the options for cheap money for cash-strapped banks have reduced, given that the other alternatives such as the CBK discount window carry more punitive rates.
The discount window refers to the facilities that CBK, acting as lender of last resort, uses to provide liquidity to banks, and is currently priced at 16 per cent.
The lenders can also access funds through the reverse repo market, whose minimum interest rate is pegged at the Central Bank Rate, currently at 10.5 per cent.
Industry insiders say large banks, which hold a large percentage of the liquidity, have in recent months been wary of lending smaller counterparts.
This aversion started when three small lenders collapsed in quick succession two years ago.
It means that when the smaller lenders are able to access cash through the interbank market, they are forced to pay a premium.
CBK’s latest data shows that there were banks paying as high as 12.5 per cent on the interbank market in the past one week.