The inter-bank lending rate has jumped to hit a three-year high of 8.46 per cent, highlighting the rise in borrowing demands between banks amid a liquidity crunch in the money market.

Commercial banks always borrow from each other to meet regulatory daily cash requirements. The rate, which represents the interest charges loaded by banks on short-term loans, stood at 6 per cent when the year began and has been increasing on a weekly basis.

The last time the interbank rate reached this high level was in the last week of October 2019 when it climbed to 8.5 per cent. The high shift in the rate is linked to liquidity constraints which generally triggered high demand.

Market operations

Last Thursday, the average number of interbank deals remained at 28 while the average value traded increased to Sh29.7 billion from Sh23.8 billion in the previous week that ended on April 14. “Open market operations remained active. The average interbank rate was 8.73 per cent on April 19 compared to 8.46 per cent on April 13,” Central Bank of Kenya (CBK) said in its weekly bulletin.

Liquidity in the money market decreased during the week ending April 19 as tax remittances more than offset government debt payments, most of which have been maturing since the first quarter of 2023. The decline in liquidity is set to pose a challenge to the government in its plans to source more money from the domestic market to support budgetary pressures amid struggles in revenue collection.

This has already caused a drop in the short-term treasury bill auctions, which have been attractive to many investors in the few months. The one-year treasury bill that targeted raising Sh10 billion last week only received bids worth Sh2.07 billion despite the rise in interest rates demanded by investors like banks and insurance firms.

A similar undersubscription trend is also evident with long-term government paper which saw the re-opened three-year fixed-rate Treasury bond receiving bids totalling Sh7.3 billion in last week’s sale against an advertised amount of Sh30 billion. This represents a meagre performance of 24.4 per cent.

Owed to the huge loan repayment, currently consuming about 70 per cent of tax revenues, investors are wary to lend to the government over fears of defaults, something that has equally forced them to expensively price their loans to the government.

Liquidity constraints

“We believe aggressive bidding in the T-Bill segment will continue to see an overall rise in rates across the board against the back of liquidity constraints and evolving macroeconomic risks.  Overall, T-Bill yields moved up an average of 0.088 per cent w/w across all papers,” Investment Analysts firm Genghis Capital said in its weekly review. The struggles to borrow domestically point to the possibility of the government returning to the international capital market to bridge the budget gaps.