The chatter in the money and capital markets is that banks in this segment of the market are beginning to feel the impact of the recent collapse of Chase Bank, Imperial Bank and Dubai Bank. Some are finding it difficult to redeem matured deposits.
Flight to quality is real. Worse, banks of the same size are also not lending to each other and therefore not spreading surplus funds with their peers. Horizontal liquidity is not happening; clear sign inter-bank system is not working. It means that lending rates to consumers will keep rising higher and higher. It also means that the small banks will not have enough liquidity to lend to businesses.
Indeed, an inefficient inter-bank market is why monetary policy does not transmit. It is why banks routinely ignore both the signaling rates- the CBR and the KBRR- as the reference for pricing their lending.
In Kenya, high interest rates and spreads will persist even where the MPC is signaling an easing of rates. Lending rates don’t come down quickly because the channel for transmitting monetary policy is more or less broken.
While it is true that the main contributory factor to the tight liquidity situation prevailing among small banks is the impact of the tribulations of CBL, IBL and DBL, it is also true that the troubles of the three banks have merely worsened a situation that already existed, confidence crisis in each other’s financial soundness.
Investors are rediscounting their Treasury bills worth billions to the CBK an indicator that those facing low liquidity are unable to borrow from the market hence the move to liquidate income generating securities.
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The high T-bill rediscount that we saw shows that there must have been investors with a significant liquidity crunch. Usually the T-bill rediscounting rate is punitive to investors as it is calculated at three per cent higher than the prevailing interest rate.
Banks can also raise cash by selling their holdings of Treasury bonds on the NSE, but this can take time as a willing buyer has to be found to take the securities off their hands. The problem is compounded by the fact that the (OMO) window system does not function efficiently. In the developed West, banks routinely go to the Lender of Last Resort window for liquidity. They go to the window several times – even within one day.
READ; Kenyan Banks Lending Rates Rise as at June 2016…
In our case, going to the window is traditionally viewed as a sign of weakness. Reluctance to lend to smaller rivals therefore places the smaller banks under pressure to meet the daily CBK cash requirements. Their other option, borrowing through the CBK discount window, is also expensive, with the rate currently standing at 16.5 per cent. Worse, going to borrow from the window comes with enhanced supervision by the CBK.
The regulator will immediately isolate you for more scrutiny. The Central Bank of Kenya must re orient the operations of the OMO window by turning it into an integral tool of liquidity management – a place where banks with liquidity problems can routinely resort to for cash. You shouldn’t feel that you are likely to be punished when you tap liquidity from the OMO window.
@paultheuriKE
