Banks raise deposit rates to fight off T-Bill

The Standard:

Fearing a flight of capital to Treasury Bills, commercial banks are set to increase their interest rates on deposits to lock in funds.

This means that depositors will gain from the higher rates, as banks struggle to state within Central Bank of Kenya limits on cash ratios.

This follows a decision by CBK lowering the minimum amount for investments in T-Bills to Sh100,000 from Sh1 million.

"One of the effects this is likely to have on banks is to drive interest rates up from the bottom," said John Wanyela Executive Director, Kenya Bankers Association (KBA).

"The deposit rates are likely to go up to lock in funds."

While the T-Bill rates have typically been higher than the deposit rates offered by banks, small savers were locked out of the lucrative and relatively risk-free Government papers, by the previous minimum threshold.

"You have to retain your deposits to maintain liquidity ratios, and avoid Central Bank’s penalty," says Wanyela.

"So it is better to pay higher interest rates (on deposits) than breach the cash ratio regulations," he said.

According to CBK, performance of the banking sector in the period to June was strong, as institutions achieved satisfactory financial conditions, and improved operations results.

Liquid assets, as a proportion of total deposit liabilities, were 42.4 per cent, well above the statutory minimum requirement of 20 per cent.

Banks, however, contend that CBK’s action would generate stiff competition for funds (from retail investors) between the Government, commercial banks, fund managers and insurance companies.

"We are going to see severe competition for funds," says Wanyela.

According to CBK data, average lending and deposit rates are currently fixed at 14.06 per cent, and 4.48 per cent respectively. This compares unfavourably with 91-days T-Bill rate and 182-days T-Bill rates that stood at an 8.557 per cent and nine per cent respectively during the last week’s auction.

Last week, CBK cut the minimum investment threshold for T-Bills to Sh100,000, and reduced its reserve ratio from six to five per cent, to free liquidity in the economy, reduce interest rates and spur consumer spending.

Analysts contend that long-term interest rates will remain volatile.

due to uncertainties in the inflation rates that grow to 29.4 per cent in November from 28.43 per cent in October.

The accelerated erosion of purchasing power among the lower and middle income groups mainly due to high food, transport and energy costs coupled with evidence of high inflation in spending is expected to lead to higher inflation rate premiums pushing the long term interest rates higher and at the same time discouraging investment in long-term instruments.

"Given the historical performance of the stock market in the last two to three months, it is highly unlikely that the index will register dramatic gains as we count down to the end of the year as a result there have been shifts in trading activity due to lower return in the equity market."" says Justus Agoti, head of Research, Sterling Investment Bank.

The level of savings among Kenyans have declined over the last one year putting commercial banks that have been fighting to attract customer deposits under pressure.

According to CBK’s 2007/08 annual report, Gross National Savings (Gross national disposable income less total consumption) declined to 13.6 per cent of the GDP from 16 per cent in 2006.

Gross domestic savings (Gross domestic product less domestic consumption) fall to 5.6 per cent of GDP from 8 per cent in a similar period.

And with Government securities becoming a cheaper and safer investment product for retail investors, competition for investors’ money is set to heat up in 2009 as investors venture into Government securities on their own.