Kenya: CBK Discount Window Rises On Back of Cash Crunch

A cash crunch in financial markets last week made worse by valued added tax (VAT) payments saw the Central Bank discount window rise to nearly 20 per cent. The tax payments, which fall due on or before 20th of every month, worsened an already biting cash shortage driving the discount window rate to 19.9 per cent on Friday after the interbank rate --on which the CBK emergency lending rate is based - rose to 16.9 per cent.


Treasury bills also suffered a low uptake, recording a 68 per cent subscription rate. The 91-day T-Bill saw a higher rate of 9.26 per cent compared to 9.15 per cent the previous week.
"I don't know for sure, but I want to imagine that banks have protested because overnight cash is becoming too expensive," said Robert Ndua, a treasury dealer at Diamond Trust Bank.
He said there was a wait-and-see attitude in the financial markets last Friday as uncertainty over interest rates mounted.

The Central Bank of Kenya (CBK) said it would no longer display the discount window rate. Analysts said that the regulator was trying to force banks to release dollars into the market because liquidity from the regulator was very expensive.

Reduce uncertainty
However, the average for the shilling remained subdued at above Sh93 to the dollar on Friday, pointing to the scarcity of foreign exchange.
"Some banks have liquidity, other don't. We are at the mercy of the central bank. Perhaps they will issue another circular as we progress to reduce the uncertainty," said Mr Ndua.

The focus being placed by the media on the market was causing the central bank to become less transparent, said John Kamunya, a senior research analyst at Dyer and Blair Investment Bank.
"It seems the Central Bank is stopping displaying the discount window rate because it believes that some issues are not being captured properly in the media. The discount rate has gone up but we haven't seen substantial increase in the value of the shilling," said Mr Kamunya.
A bond dealer who declined to be named to protect his business dealings with CBK said the regulator was "in a wrestling match with the financial markets."
The discount window rate has surged by more than nine percentage points since Monday when a new formula for calculating the cost of overnight lending to commercial banks became effective.