Banks lure rich clients with higher returns
Lenders are now going for the rich with better returns on deposits.
Commercial banks have raised interest rates on savings and deposits to pre-pandemic levels in a bid to lock in wealthy savers who have an option of moving their cash to higher-yielding Treasuries and money-market funds.
Data by the Central Bank of Kenya (CBK) shows that the rates on savings accounts have been rising to the three per cent mark in the three months to October, an indication that lenders are now under pressure to pick up money for onward lending.
The rate hit 3.47 per cent last August, the highest level since 3.48 per cent in March 2021 and from 2.94 per cent in the previous month, but slowed down to 3.44 per cent last September.
It picked up again in October last year to 3.46 per cent.
The rate is payable to checking accounts, which allow depositors to add funds, withdraw and transfer occasionally unlike the fixed deposit accounts, which have higher and attractive interest rates and are preferred by individual savers for long-term investments.
Interest rates on fixed deposit accounts rose to a 30-months high of 7.01 per cent in October, the highest since the pre-pandemic era since April 2020.
Conventionally cash-rich firms and individuals dominate the fixed deposit market where most accounts have millions of shillings locked up for months to one year.
Savings account
Banks don’t pay interest on most savings accounts, with those that do earning substantially lower rates than those available on fixed deposit accounts.
The jump in both the savings and deposit rates is a signal that banks are ready to raise funds to lend more amid the implementation of risk-based lending.
The rise also comes at a time when Treasury bonds and bills yields have been rising in the past year amid aggressive bidding by investors to cover for high inflation, which has also wiped out households’ disposable incomes, meaning lenders would be competing with the government for the funds in the economy.
Interest rates on the 91-day Treasury bills have increased to 9.19 per cent as of last November, from 7.10 per cent in November 2021.
Rates for 182-day papers have also increased to 9.71 per cent from 7.66 per cent over the same period while one-year bills’ yields increased to 10.17 per cent from 8.73 per cent.
The government has also been accepting bids higher at an average above 14 per cent in recent bond sales.
This has seen the banks raise their rates to attract and retain funds from wealthy investors and depositors - who would be seeking government securities - to also lend to the government and the private economy including businesses and individuals upon the implementation of the risk-based lending model to price their loans.
Commercial banks remain the top holders of the government’s domestic debt having extended more than Sh2.07 trillion as of January 13 representing 46.61 per cent, ahead of the pension funds which held Sh1.48 trillion representing 33.37 per cent while insurance companies held Sh328.2 billion on the domestic debt.
Banks have, however, cut their lending to the government through risk-free securities, signalling a reallocation of cash to businesses and households.
Commercial bank rates’ rise follows a period of soaring inflation that has strained businesses' and individuals' budgets and wiped out purchasing power.
The increase in inflation has been caused by a spike in prices of food and fuel caused by drought, the war in Ukraine, and the lingering effects of the Covid-19 pandemic.
Investors
Fearing further losses, investors have been forced to slash their cash holdings while others have converted their savings into foreign currencies, especially US dollars, to hedge their wealth against the spike in prices of goods and services, also known as inflation.
Data shows demand deposits – money held in checking and savings accounts – dropped by Sh32.30 billion in November last year from October while foreign currency deposits rose by Sh23.1 billion over the period.
Rising inflation has the effect of eroding the value of cash holdings especially when they do not earn lucrative interest and is a big concern in a market such as Kenya where the rate on a bank savings account has been at the two per cent market against an inflation rate of above CBK’s upper limit of 7.5 per cent.
This has seen Kenyans grow their money held in collective investment schemes by 6.38 per cent in the quarter to September to Sh1555.07 billion from Sh145.77 billion as Kenyans seek to protect their savings from inflation.
The funds such as money market funds allow ease of entry and withdrawals with as little as Sh1,000, in the investments overseen by a licensed fund manager and custodian as well as a trustee.
