Small banks are paying steep interest rates on fixed deposits following tightening of the monetary policy a few months ago and recent collapse of Imperial Bank.
New Central Bank of Kenya (CBK) numbers show the lenders in October paid an average of 9.1 per cent compared to 6.5 and 8.0 per cent by large and medium-sized banks respectively.
The data was presented to the House Committee on Finance by CBK governor Patrick Njoroge. Earlier on the CBK boss had acknowledged that there had been some movement of deposits from small banks following the collapse of Imperial Bank, but he added that it would only be for a short while.
A senior Treasury dealer at a commercial bank told the Business Daily that some large customers were being offered as much as 27 per cent to keep their deposits in some cash-starved institutions.
“Although many people just saw the lending rates rising, the fact is that some of the banks were suffering too because there was a shortage of funds. Some corporate entities were asking for 20 to 27 per cent to put fixed deposits in some of the banks,” said the treasury dealer.
The banker explained the funding crisis escalated after the CBK locked the discount window between July and the day that Imperial Bank fell. The bank was closed after its directors alerted the regulator about irregular lending.
“When Imperial Bank fell, the fear of a crisis of confidence in small banks forced the CBK to open the discount window.
“The situation would have been terrible had the CBK insisted on keeping the window closed,” said the banker who chose anonymity to avoid conflict with the regulator.
The struggle by small banks to get deposits from customers came against the background of rising interest rates with the 91-day Treasury bill at 22.5 per cent and some of the banks were said to have raised their fixed deposit rates dramatically for large clients.
Two days ago, Equity Bank chief executive James Mwangi disclosed that his institution had received an extra S0 billion as the flight to safety accelerated following the collapse of Imperial Bank.
READ: Equity gains S0bn in a month as small banks lose deposits
Analysts say customers are often quick and comfortable to take loans from the small banks but when there is fear about the institutions’ stability, they are quick to remove their deposits and put them in safe havens.
The CBK governor’s report said that companies suddenly had to pay more for overdraft and other short-term loans while the rate on long-term loans fell.
The average overdraft rate rose to 16.8 per cent from 16.4 while that of longer-term loans fell to 16.7 per cent from 17.2 per cent. This reflected what was happening in the market for government securities where Treasury bonds with long maturities were at a lower yield than that on Treasury bills.
SOURCE: BUSINESS DAILY