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The Central Bank of Kenya

Interbank rate shoots to a three-year high

The interbank rate hit 11.34 percent on December 14, underlining the tightness in the market as the year came to a close and commercial banks held on to their liquidity. The CBK said the tightness was triggered by the need to meet some tax payments that fall on the 10th as well as the cash reserve ratio of 5.25 percent while analysts pointed to market skewness against small banks and the tendency to hold onto liquidity to post impressive regulatory ratios.

Bank-to-bank lending rate hit a three-year high last Friday as the money market tightened due to tax payments and lenders’ meeting of regulatory ratios. The interbank rate hit 11.34 percent on December 14, underlining the tightness in the market as the year came to a close and commercial banks held on to their liquidity.The Central Bank of Kenya (CBK) said the tightness was triggered by the need to meet some tax payments that fall on the 10th as well as the cash reserve ratio of 5.25 percent while analysts pointed to market skewness against small banks and the tendency to hold onto liquidity to post impressive regulatory ratios.during the week ending, partly due to banks’ remittance of PAYE taxes by December 10 and end of CRR cycle on December 14. Commercial banks’ excess reserves recorded a shortfall of Sh0.3 billion as at December 13 in relation to the 5.25 percent cash reserves requirement (CRR),” said the CBKThe regulator’s data shows the last time that the rate exceeded last Friday’s rate was on October 30, 2015 when it was at 12.79 percent. It has since mostly been at below 10 percent.For this year, the rates have between three and five percent with the increase only happening in the past few weeks.December has seen the biggest jump in tightness, coming from just below four percent to the current level.

“Commercial banks are holding on to their deposits, so they are only lending to each other in a restricted manner; they normally hold on to deposits at this time; they want to have the liquidity as the year closes; but you are likely to see a change as soon as the year closes,” said Edwin Chui, research analyst with Dyer and Blair Investment Bank.Banks are normally required to have certain ratios at the time of reporting their end-year financial results, which relate to their liquidity and capital-to-deposit ratios.They also should have at least 5.25 percent of their deposits at the CBK, even though this can fluctuate on a daily basis as long as it remains at a minimum of three per cent.

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