Business News

CBK lends Sh54 billion to cash-strapped banks and microfinance institutions

The Central Bank of Kenya (CBK) has increased its liquidity support to the banking sector by 6.3 percent in the financial year ended June 2023, according to its annual report. The regulator advanced Sh54.2 billion in loans to banks and microfinance institutions that faced liquidity challenges amid the Covid-19 pandemic and rising interest rates.

Liquidity ratio drops below 50 percent

The CBK’s liquidity support framework is a facility that allows commercial and microfinance banks to borrow from the central bank at a concessional rate when they face temporary liquidity shortages not caused by mismanagement. The facility was introduced in April 2016 after three banks – Dubai, Imperial and Chase – collapsed due to governance issues and fraud.

The CBK’s annual report shows that the banking sector’s overall liquidity ratio dropped from 52.5 percent to 49.7 percent at the end of June 2023, indicating a tightening of liquidity conditions in the market. The liquidity ratio measures the ability of banks to meet their short-term obligations without difficulties. The minimum statutory level is 20 percent.

The CBK said that three commercial banks violated the minimum liquidity ratio requirement in the year to December 2022, without naming them. The regulator said it took corrective measures against the non-compliant banks, including imposing penalties and requiring them to submit remedial plans.

CBK lends Sh54 billion to cash-strapped banks and microfinance institutions

Interbank and discount window rates rise

The CBK’s enhanced liquidity support to the banking sector came at a time when other sources of liquidity were becoming more expensive and scarce. The interbank market, where banks lend and borrow from each other, saw its average rate nearly double from 5.3 percent in June 2022 to 10.2 percent in June 2023. The rate is currently at 12.3 percent.

The discount window, another facility that allows banks to borrow from the CBK using government securities as collateral, also saw its rate increase from 13.5 percent to 14.5 percent in the same period. The discount window is usually used as a last resort by banks that cannot access funds from other sources.

The CBK attributed the rise in interbank and discount window rates to several factors, including increased government borrowing, higher inflation expectations, reduced foreign exchange inflows and uncertainty over the Covid-19 situation.

Refinancing risk increases

The CBK also noted that the Treasury faced medium to long-term refinancing risk as it shortened the maturity profile of its domestic debt. The average time to maturity for government bonds declined from 9.1 years in November 2022 to 8.5 years in June 2023, as the Treasury avoided issuing long-dated bonds that demanded higher interest rates from investors.

The CBK said that the Treasury had previously taken advantage of ample liquidity in the money market to issue longer-dated bonds as a buffer against refinancing risk. The average time to maturity for government bonds increased from 6.2 years in June 2018 to 9.1 years in June 2022.

However, the CBK said that the refinancing risk may not materialize as it expected the Treasury to resume issuing long-dated bonds once the market conditions improve. The CBK also said that it would continue to support the Treasury’s debt management strategy by conducting open market operations and providing liquidity support to banks.

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