Pressure on banks to lend to the private sector in the form of liquidity


Capital markets

Pressure on banks to lend to the private sector in the form of liquidity


Central Bank of Kenya. PHOTO FILE | NMG

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summary

  • The amount of liquidity in the banking sector has increased as the government continues to make payments to contractors and its agencies, its eyes now on lenders to see if they will increase their lending to the private sector.
  • The interbank rate – at which banks lend each other in an emergency – has fallen to its lowest level in two months of 3.33%, indicating that banks are under less pressure to meet their cash flow needs daily.

The amount of liquidity in the banking sector has increased as the government continues to make payments to contractors and its agencies, its eyes now on lenders to see if they will increase their lending to the private sector.

The interbank rate – at which banks lend each other in an emergency – has fallen to its lowest level in two months of 3.33%, indicating that banks are under less pressure to meet their cash flow needs daily.

The liquid market is also the result of a reduced government appetite for local borrowing in the first few weeks of the new fiscal year, largely due to the receipt of over 230 billion shillings in foreign loans from the International Monetary Fund, from the World Bank and a Eurobond issue in the past month.

“The decline in local borrowing towards the end of the budget cycle continues to trickle down to markets. In addition, government spending, particularly on settling outstanding bills, has improved overall market liquidity, ”NCBA analysts said in a weekly fixed income report.

July was also characterized by treasury bills and bond maturities valued at 123.8 billion shillings, which also fueled the money market.

The Central Bank of Kenya (CBK) has, in the last four treasury bill auctions, barely accepted enough bids to match maturities, leaving investors in the short-term securities market to hold onto excess funds that would otherwise have been invested in new loans.

CBK data shows that the last four auctions generated consumption of 88.5 billion shillings against maturities of 93.7 billion shillings, meaning there was a net repayment of 5.2 billion shillings. of shillings during the period. Investors had offered the government a total of 111.1 billion shillings in the four auctions.

The July bond also left investors with 37 billion shillings of rejected offers, after the government took 79.9 billion shillings of the 116.9 billion shillings offered.

With banks holding onto excess liquidity, private sector borrowers are now waiting to see if any of that funds will be spent on their credit needs, which are growing as the economy continues to recover from the downturn caused by Covid-19.

Annualized growth in credit to the private sector fell to 6.7% in April from 9.3% in January, hampering efforts to recover the economy.

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