Fixed deposit rates hit 27 month-high on cash thirst

CBK

The Central Bank of Kenya head office in Nairobi. Fresh data from the CBK shows that the deposit rate is the highest since the 6.96 per cent recorded in May 2020.

Photo credit: Pool I Nation Media Group

What you need to know:

  • Central Bank data shows this is the highest figure since 6.96 recorded in May 2020.
  • Cash-flush companies 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. 

Interest rates on fixed deposit accounts rose to a 27-month high of 6.93 per cent in August, signifying increased demand by cash-hungry commercial banks seeking to grow their lending activities.

Fresh data from the Central Bank of Kenya shows that the deposit rate is the highest since the 6.96 per cent recorded in May 2020.

Cash-flush companies 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. This makes fixed-deposit accounts a preferred option for savers.

The rise in the deposit rate for the 15 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 Covid-19.

Interim dividends

Banks rely on several sources of funds to support their lending business including retained profits and borrowed money.

In the first half of this year to June, various banks opted to withhold paying interim dividends to shareholders amid caution to preserve capital buffers.

Equity Bank, Stanbic Bank, and Standard Chartered Bank are among tier-1 lenders, which did not 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 and 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 of 34 per cent 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.

Effects of tight liquidity are already playing out in the market on tightening lending rates by the CBK.

Data from the regulator shows the cost of loans from commercial banks hit 12.38 per cent in August, which is the highest rate since November 2019.

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