The Central Bank has cut sharply the rate at which it gives overnight loans to commercial banks, easing a cash shortage that had raised fears of a fresh surge in the cost of loans.
The regulator quoted the discount window rate at 17.87 per cent yesterday, putting it below the interbank lending rate of 19.25 per cent.
The discount window rate is ordinarily supposed to be punitive and higher than the inter-bank rate, and CBK’s action signalled a resolve to ease the biting cash crunch in the banking system.
“Money has found its way to banks,” said head of markets at Citi Bank, Ignatius Chicha.
Banks had found it increasingly hard to maintain minimum cash balance requirements by CBK as the discount window rate shot to 31.4 per cent from 6.25 per cent on August 12 while the interbank rate peaked at 27.72 per cent.
Barclays Bank on Wednesday announced a one percentage increase in lending rates to 14.75 per cent, raising fears that it would set off another wave of increases similar to another one in July.
Bankers said the easing of the two rates was being helped by new CBK guidelines issued on Friday relaxing the rules on cash reserves that the lenders are supposed to maintain as a ratio of deposits.
Mr Chicha said the government has also increased its spending, injecting money into the banking system.
He said the rates are expected to continue declining.
He said the rates are expected to continue declining.
CBK restricted commercial banks from borrowing at the discount window mid last month, accusing them of using the money to speculate on the shilling. According to CBK it led to depreciation and banks were lending the money to other banks at higher rates.
Commercial banks also used the funds to invest in Treasury bills which pay higher returns than the cost at which they were borrowing from the CBK.
The regulator introduced a new formula for calculating the discount window rate, which included 3 per cent penalty on the previous day’s average interbank rate.
The banking sector regulator also said that it would consider an individual bank’s foreign currency trading behavior over the previous four trading days to determine whether it would allow it to access funds at the discount window.
On Friday the regulator said the bank’s cash reserves will now be based on a monthly average and commercial banks were allowed to deviate from the 4.75 per cent rate requirement on a given day but not fall below 3 per cent- provided that the overall average for the month will be at least 4.75 per cent.
Commercial banks quoted the shilling at 93.95/94.05 to the dollar yesterday morning, a weakening from Tuesday’s close of 93.65/75.
The move by the banking regulator to restrict commercial banks from borrowing using CBK overnight lending rate was also supposed to force them to lend to each through the horizontal repurchase agreements.
The move by the banking regulator to restrict commercial banks from borrowing using CBK overnight lending rate was also supposed to force them to lend to each through the horizontal repurchase agreements.
Tight liquidity
The Central Bank, which had also stopped publishing the overnight lending rate a week-and-a-half ago, started publishing it again on Thursday.
Bankers said that failure to publish this information led to a widening differential between the rates at which the commercial banks were lending to each other.
On Tuesday for instance, some banks were lending to each other at 10 per cent while others were borrowing at 29.5 per cent, a differential of 19.5 percentage points.
“We are coming from a period when there was very tight liquidity and I also think that there was some information asymmetry,” said Mr Kinuthia.
He said there would be a “natural correction” of the interbank lending rate.
