Local banks turn to Central Bank as distrust grips sector

Commercial Banks have turned to the Central Bank of Kenya as the lender of last resort to meet cash reserve ratios as they become increasingly suspicious of one another.

According data from CBK, the regulator pumped Sh27.4 billion into the market between October 23 and 28 by buying short-term Treasury bills from banks which it will sell at a later date for profit.

When Imperial Bank was put under receivership, several banks that had lent it money were left exposed when part of their funds was locked in the troubled bank.

INTERBANK TRANSACTIONS PLUMMET

The rising distrust among commercial banks and fears of exposures has seen interbank transaction deals plummet from highs of 80 on October 8 to lows of 21 on October 21.

According to data compiled by SmartCompany, the value of the transactions have also sunk to below Sh20 billion per day for most of the days last month.

“One of the tools used by CBK in monetary policy is management of interbank liquidity. This entails injecting liquidity when there is shortfall or mopping liquidity from the banking system when there is excess. Therefore the lending by CBK to the banks should be seen in that light,” CBK told SmartCompany.

Some of Kenya’s big banks, however, say they had limited exposure to Imperial Bank and had avoided putting money in the lender whose receivership locked Sh58 billion from circulation.

The Kenya Commercial Bank (KCB), however, says it had exposure of less than Sh200 million in the fallen financial institution.

“Imperial’s local interbank borrowings stood at Sh1.3 billion which equates to two per cent of system-wide interbank assets while exposures through letters of credit and guarantees totalled Sh7.4 billion or just one per cent of the total system’s off-balance sheet commitments,” Standard Bank Group (SBG) analysts said in a note to investors.

SBG said the risks will also be spread to banks outside Kenya given the nature of the products.

EXCESS LIQUIDITY

CBK last week reported an improvement in liquidity supported mainly by reverse repos (repurchase agreements) and government payments.

Banks with excess liquidity use the reverse repos to sell to banks that are unable to meet the cash reserve ratios (CRR) required by the regulator.

CBK said it has availed avenues where banks can lend to each other using government securities as collateral.

“In 2011 when the shilling went down, CBK increased CRR from 3.5 to 5.25 to ensure liquidity in banks. During the month you can operate below the rate but your average must be at 5.2 so banks borrow to meet the rate,” Sterling Capital analyst Eric Munywoki said.

According to CBK’s weekly data, commercial banks’ clearing account recorded a surplus of Sh56.35 billion in relation to the cash reserve requirement of 5.25 per cent (Sh130.9 billion) in the week ending October 28, compared to a surplus of Sh25.97 billion in the previous week.

The drop in value of transactions between banks has caused the rate at which banks lend each other to drop to 9.38 per cent according to CFC economist Jibran Qurdeshi.

“The interbank rate has come down to a single digit as banks are hesitant to lend to small banks so CBK has resorted to reverse repos to pump money into the market,” Mr Qurdeshi said.

Availability of money in the market went down as banks rushed to buy government securities and CBK sucked money to stabilise the shilling.