CBK tightens noose on overnight lending

August 12, 2011

, NAIROBI, Kenya, Aug 12 – As the Central Bank of Kenya (CBK) continues to grapple with the best way to contain the runaway inflation, it has once again decided to review the rate at which commercial banks borrow from it to meet temporary shortages of liquidity.

In a circular released on Friday, Director of Banking Services Jackson Kitili informed all Chief Executive Officers that the overnight lending rate will from August 15, increase by an average of three percent which effectively makes it hard for banks to borrow from the CBK.

“The interest rate that will be charged at the CBK Discount Overnight Window will be the Central Bank Rate (CBR) which is currently at 6.25 percent plus the previous day’s average interbank rate minus the CBR plus a penalty of three percentage points,” explained the director.

Using this formula and last week’s average interbank rate which was around 7.31 percent, the overnight rate would then be 10.31 percent.

Where the interbank rate is equal or below the CBR, the applicable rate will be 9.25 percent, which is the CBR plus three percent.

Besides making it expensive for the banks to borrow from this facility, the CBK’s guidelines are also punitive as the regulator seeks to tighten liquidity in the market.

A bank that is lending in the interbank market for instance, will be barred from accessing funds through the Discount Window, which is a facility of last resort on the same day.

“Furthermore, any bank borrowing from the CBK Discount Window cannot lend in the interbank market either on the day of accessing the Window or on the following day,” Mr Kitili said.

The Central Bank is further tightening the noose on the banks by limiting the period to which a bank can borrow from the window to one day.

In addition, it will be reviewing their forex exchange trading activities for four days before determining whether they are eligible to access the Discount Window.

This means that if the bank was involved in too much currency speculation that reduced or affected its liquidity, then CBK might ignore its offer.

Hopefully, this will make most banks reduce speculation on the shilling and hence stabilise the currency which has been on a downward spiral in recent months.

The shilling gained marginally since Wednesday when the Central Bank announced that it would not be using its reverse repo in order to give commercial banks enough time to realign their liquidity requirements.

On Friday, the currency closed at Sh93.23 against the dollar up from the low of Sh95.10 that it had hit on Wednesday.

The firming up of the shilling has been attributed to the CBK’s action which was interpreted by the market as a sign that it was clear on the actions it intends to take to reduce the exchange rate volatility.

“Consequently, commercial banks are advised to consider increased use of the horizontal Repo which permits diverse tenors which are negotiated bilaterally between banks,” the director advised.

It remains to be seen whether the shilling will continue with its rally in coming days.

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