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Cost of borrowing between banks drops to six-month low on CBK’s reforms

The Central Bank of Kenya. (Photo: File)

By Alfred Onyango | Wednesday, June 19, 2024

Early this month, the CBK made some adjustments to the framework, tightening the gap between the interbank rates and the CBR.

The interbank borrowing rates have dropped to a six-month low of 12.9 per cent, thanks to the strategic approach by the Central Bank of Kenya aimed at easing credit costs in the country.

The prevailing rate is at the level last witnessed on December 21, last year. Further, it's a drop from the highs of 13 per cent that has prevailed for the most part of last year and this year.

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The rates had even hit a high of 14 per cent sometime in February.

Interbank rate refers to the interest charged on short-term loans between banks to manage liquidity and satisfy regulations such as reserve requirements.

With the rate easing to lows of 12, it ideally means that the apex bank could be realising its ambition to bring the rate closer to its benchmark interest, the Central Bank Rate (CBR).

New policy framework

In August last year, CBK's Monetary Policy Committee approved a new policy framework that would ensure lenders passed on the benefits of low rates to consumers.

The framework is based on inflation targeting and is anchored on an interest rate corridor around the CBR first established at 2.5 per cent.

Early this month, the CBK made some adjustments to the framework, tightening the gap between the interbank rates and the CBR.

The changes involved controlling an interest corridor by setting the upper and lower limits of interbank and CBK emergency loan rates in alignment with the prevailing CBR.

As part of the reforms, the Central Bank of Kenya said the interbank lending rates are expected to stay under 1.5 per cent of the current CBR, up from 2.5 per cent.

This means the interbank rate now hovers between 11.5 and 14.5 per cent with the guidance of the CBK.

Further, the discount window rate, the rate at which banks can borrow from CBK as a last resort after exhausting all the other avenues, including borrowing from different banks, has been lowered to three per cent above the CBR, from four per cent.

This means banks borrowing from the CBK overnight facility will see an interest charge of up to 16 per cent. Previously, it was up to 17 per cent.

"This measure aims to see the interbank lending rates closely tracking the CBR, ensuring any adjustments in the latter have an impact on borrowing costs between banks," CBK noted.