Central Bank puts off lenders with 32-month high emergency loan rate


The Central Bank of Kenya head office in Nairobi. 

Photo credit: Pool I Nation Media Group

The interest rate at  which commercial banks borrow from the Central Bank of Kenya (CBK) discount window has hit a 32-month high, signalling an effort by the regulator to discourage lenders from taking excessive risk in the hope that it would come to their assistance with emergency credit.

The latest data by the financial sector regulator shows that the interest rate on the discount window has been raised to 14.25 percent—the highest since January 2020 when it stood at the same level.

The rate was cut to 13.25 percent in March 2020 and further to 13 percent in April of the same year—a level it maintained until March this year.

The CBK runs a “discount window” from, which banks can tap funds as a last resort after exhausting all other avenues, including borrowing from one another.

Transactions here occur through reverse repos, which are commonly used by the CBK to advance short-term capital to other businesses during cash-flow challenges. They involve purchase of government securities by the Central Bank from commercial banks.

Banks also have the option to borrow from one another in the inter-bank market.

Analysts said the hike in the discount window could reflect effects to discourage banks from risky borrowing in a tough economy.

Struggling lenders

“It is largely an indication that the regulator is deterring banks from using the facility unless they can’t avoid it,” a financial analyst George Bodo told Smart Business.

The CBK has in the past provided emergency loans to struggling lenders to prevent their collapse including the teachers’ owned Spire Bank, which was last month bought by rival Equity Bank.

A report by the Finance Committee of the National Assembly revealed that Spire Bank had largely relied on support from the CBK through the reverse repo facility to keep its operations going.

Mauritian bank group SBM Holdings in its financial statement for the half year to June this year also revealed that it owes the CBK Sh11.3 billion offered to keep its troubled business afloat. The debt stems from liquidity support and repos from the CBK.

SBM Bank Kenya’s annual profits dropped 46.9 percent to Sh346.7 million in December 2021 in a period that saw most banks report double-digit earnings growth.

It has relied on the CBK to meet short-term liquidity needs. The bank did not provide a breakdown of the Sh11.3 billion CBK lifeline support.

But in the period to December last year, SBM Bank Kenya revealed that the CBK offered it Sh2.5 billion as liquidity support and Sh6.6 billion in short-term repo facilities secured by land parcels, and Sh8.5 billion in government securities.

"The bank assumed Sh2.8 billion from Fidelity Commercial Bank being an amount borrowed from Central Bank of Kenya under liquidity support framework granted prior to 2017. The amount was partly secured by two properties belonging to the group," SBM’s annual report said.

The CBK extends loans to banks through the repo (repurchase agreement) market where banks sell short-term papers to the regulator with a promise to buy them back later or discounted Treasury bills.

However, banks are never too eager to take money from the central bank, preferring other channels like taking deposits from each other.

The money market remains uncertain as banks deployed a raft of strategies including holding back dividend payouts and raising interest rates on fixed deposits to attract cash from long-term depositors.

Data by the CBK for example shows that the interest rates on fixed deposit accounts rose to a 27-month high of 6.93 percent in August, signifying increased demand by cash-hungry commercial banks seeking to grow their lending activities. The deposit rate is the highest since the 6.96 percent recorded in May 2020.

Cash-rich firms and individuals traditionally dominate the fixed deposit market where most accounts have millions of shillings locked up for months to one year.

Banks don’t pay interest on most savings accounts, with those that do earning substantially lower rates than those on fixed deposit accounts—a position that makes fixed-deposit accounts a preferred option for savers.

The rise in the deposit rate for the 15th consecutive month since July 2021 is an indication that commercial banks are willing to raise funds to lend more amid increased economic resurgence as the country continues to recover from the aftershocks of the Covid-19 pandemic.

Lending business

Banks rely on several sources of funds to support their lending business. These include retained profits and borrowed money, including fixed deposits.

In the first half of this year to June, scores of banks opted to withhold interim dividend payments to shareholders amid caution to preserve capital cushions.

Equity Bank, Stanbic Bank, and Standard Chartered Bank are among tier-I lenders that didn’t pay an interim dividend despite posting considerable net profit increases during the half-year.

The lenders listed on the Nairobi Securities Exchange made about Sh90 billion in net profits in the six months to June but withheld dividends to preserve work capital amid economic uncertainty. The performance of the nine lenders, including Equity, KCB, Co-op Bank surpassed the profits they reported over a similar period (January-June 2021) by more than Sh21 billion.

Filings show that the banks grew their profits by an average 34 percent to hit Sh85.4 billion cumulative profits between January and June 2022, up from cumulative profits worth Sh63.86 billion in the first half of 2021.

The effects of tight liquidity are already playing out in the market on tightening lending rates by the CBK. Data from the CBK shows the cost of loans from commercial banks hit 12.38 percent in August which is the highest rate since November 2019