Interest rates on fixed deposit accounts rose to 6.61 per cent in February, the highest rate since 6.64% recorded in August 2020, indicating increased demand by commercial banks for funds to expand their lending activities.
The rise in fixed deposits follows a drop in the growth rate of the deposits in the three months to December compared to the previous quarter, forcing banks to increase rates to attract cash.
“The rise may not be significant at least when you compare it with 2020, but it is possibly a case of banks seeking to attract more deposits by offering higher rates.”
On the other hand, the rate on savings accounts declined to 2.56 per cent in February from 3.37 per cent in the same month last year.
The jump in fixed deposit rates is a signal that banks are ready to raise funds to lend more amid increased economic optimism as the impact of the Covid-19 pandemic eases. Banks rely on multiple sources of funds to fuel their lending businesses such as retained profits and borrowed money including fixed deposits.
The Central Bank of Kenya (CBK) also said growth in private sector credit increased to 9.1 per cent in February, up from 8.6 per cent in December 2021.
“The number of loan applications and approvals remained strong, reflecting improved demand with increased economic activities. Transport and communication led to the credit growth of 24.1 per cent.” CBK
CBK’s approval of risk-based loan pricing for more banks is expected to drive demand for fixed deposits as higher lending rates will leave the institutions with a significant margin on the rates paid to the savers.
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