Daily lending by the Central Bank of Kenya (CBK) remains crucial to cushioning funding to banks despite reforms that brought control to the interbank lending rates.
Banks unable to access funding from peers continue to turn to the CBK facility which is currently priced at 14.5 percent.
This is despite the introduction of an interest rate corridor- a cap of 2.5 percent – around the Central Bank Rate (CBR) for interbank lending rates.
Read: CBK loans to banks up on liquidity crunch
Data from the CBK shows that banks have cumulatively accessed Sh13.13 billion from their daily lending facility since August 10 when reforms, including the introduction of the interest rate corridor took effect.
Over the same period, however, interest rates of interbank lending have dropped to as low as 8.79 percent and opened at 12.49 percent in September to mirror the successful transmission of CBK’s mediated interest rate corridor.
The attraction of the CBK daily lending facility whose rate was revised downwards from 16.5 percent to 14.5 percent (four percent above the CBR) has increased among lenders who cannot access the interbank lending market.
This means that despite the CBK discount window being a premium to lower interbank lending rates, cash-strapped lenders with no other alternative have been leveraging the lender of last resort for support.
“The discount window, having been reduced, became more attractive than before. Even though interbank rates are lower, some (banks) do not have access to the interbank liquidity and so they resort to the window,” Kenya Bankers Association CEO Habil Olaka told the Business Daily on Monday.
Last month, the CBK Monetary Policy Committee introduced an interbank interest rate window around the Central Bank Rate (currently at 10.5 percent) set at 2.5 percent.
The move was aimed at pushing interbank lending rates downwards, after they spiked beyond the CBK discount window rate as some banks, largely in the mid to small tier level, came under liquidity pressures resulting largely from sizable payments including taxes.
Moreover, the introduction of the interest corridor was aimed at enhancing the efficiency of monetary policy transmission by ensuring interbank lending rates closely track the CBR which is loosely defined as the lowest cost of money in the economy.
“Henceforth, the monetary policy operations will be aimed at ensuring that the interbank rate, as an operating target, closely tracks the CBR. The framework allows the CBK’s open market operations to be conducted on the basis of a flexible rate fixed quantity as is currently the case. This implies that the CBK will determine the amount of liquidity to inject or withdraw from the banking system and banks will be free to bid for the amount of liquidity they need/offer at their bid/offer price,” the CBK stated.
Read: CBK holds the benchmark lending rate on inflation ease
Banks with funding constraints can borrow from fellow lenders through the interbank market to supplement their liquidity needs.
The market is nevertheless highly structured where banks in one peer group are more likely to only lend to equal peers effectively locking out funding to smaller banks. BY BUSINESS DAILY