Kenya seeks credit guarantees to boost cash flow among banks
Tuesday October 17 2017
According to the World Bank, counterparty credit risk is a challenge in the interbank market. FOTOSEARCH
When Kenyan banks (Dubai, Chase and Imperial) collapsed over the past three years in quick succession with depositors’ money, market confidence was shaken and big banks refused to extend credit to small banks in the overnight lending market.
As a result, the small banks did not have money to lend or meet their day-to-day obligations at the clearing house.
Interbank rates also shot up to a high of 24 per cent in August 2015 compared to 0.3 per cent in 2003, meaning that illiquid banks could only access cash by paying through the nose. This was aggravated by depositors shifting money from small banks to large banks in a flight to safety.
The resultant distortions in the interbank market have prompted Kenya Bankers Association (KBA), the industry’s umbrella body to propose reforms in the overnight lending market to restore stability in the financial system.
KBA has recommended the introduction of a credit guarantee scheme that will see international financial institutions such as Frontclear Management of Netherlands, to insure against counterparty credit risk in the overnight lending market.
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Presently, the interbank market is unsecured and there are proposals that borrowers underwrite it using government securities once the register for Treasury papers is established.
The new arrangement would also see the introduction of market makers whose sole mandate would be lending cash to other banks.
“Because of lack of trust among the players in the interbank market lending among banks has not picked up. Large banks are unwilling to lend to small banks because of perceived risks. This arrangement will be such that a third party would provide credit guarantee and then we shall have market makers to provide liquidity to the system,” Habil Olaka, KBA’s chief executive told The EastAfrican.
“The bottom line is to address market limitations that are existing in the interbank market and build confidence in the financial system,” added Olaka.
Under the proposed arrangement all banks will have to sign memorandum of understanding (MOU) with KBA to participate in the credit guarantee system.
“We are working with parties to ensure that this model is working. We are currently sensitizing banks on the new model,” said Olaka.
The proposed lending scheme in the interbank market was initially expected to go live before the end of this year but has been pushed forward to next year due to the prevailing political temperatures.
“I was hoping that you we could have it in place before the end of this year,” said Olaka.
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Tight liquidity
Data from the Central bank of Kenya showed that liquidity remained tight in the interbank during the week ending October 4, 2017, causing interbank rates to rise to 8.13 per cent from 7.16 per cent in the previous week.
The volumes transacted ranged from Ksh14.5 billion ($145 million) to Ksh27.8 billion ($278 million) during the week, giving an average of Ksh19.9 billion ($199 million).
Analysts at Renaissance Capital say liquidity pressure on the smaller and mid-sized banks has been a concern in Kenya over the past few months.
“We understand that a number of the banks are still reliant on the CBK and interbank funding,” said to Renaissance Capital.
They added that, Sidian Bank, Development Bank of Kenya and Jamii Bora Bank breached the minimum liquidity ratio requirement of 20 per cent during the six months to June 30 2017. Last year, Development Bank of Kenya, Family Bank and Jamii Bora Bank also breached the liquidity requirement.
The interbank money market is a key source of liquidity for the operation of payment and settlement systems.
Lack of a well- functioning interbank market is a serious impediment to local banks servicing their clients which impacts in particular less established and growing businesses and SMEs.
According to the World Bank, counterparty credit risk is a challenge in the interbank market since a bank can become insolvent between the time a payment is made and the time it is settled and the risk is borne by other market participants.
Failure of one or more banks to settle their exposures in the interbank market could lead to liquidity problems for other players in the industry and pose systemic risk to the financial system.
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