Kenya’s Central Bank has injected Ksh16 billion ($153.98 million) into the economy in a bid to lower the cost of borrowing that has left the banking industry facing mass defaults.

The money was injected through reverse repurchase agreements (repos) on November 5, as the industry regulator bought securities from commercial banks with an undertaking to sell them back.

Market analysts said the move is meant to cautiously improve cash flow in the banking industry in a bid to influence interest rates without hurting the exchange rate and inflation.

“CBK has actually been buying instruments from banks in order to inject liquidity.  What they are trying to do is a clear signal that they are trying to  influence the interest rates to a reasonable level without destabilising the forex market and reviving inflationary pressures,” said Francis Mwangi, head of research at Standard Investment Bank.

“Ideally, CBK is supposed to be in the repo market when the market is dry with no liquidity, but they could be doing this now because of the small banks that are facing liquidity challenges,” said Eric Munywoki, research analyst at Old Mutual Securities Ltd. “Small banks may be having challenges to borrow from the interbank market because of what happened with Imperial Bank and because some banks don’t have confidence in them.”

Kenya’s central bank recently placed Imperial Bank under receivership over “unsound business conditions.”

Interest rates in Kenya had risen to worrying levels leaving commercial banks counting paper losses on their bond holdings, and borrowers struggling to service their loans.

READ: Anguish as Kenya banks raise interest rates

The equity market has seen investors dump shares in favour of the Treasury bond market.

The government’s increased borrowing from the domestic market through issuance of Treasury-bills and bonds pushed short-term interests beyond 22 per cent, encouraged lenders to put money in government securities while starving each other of overnight cash in the interbank market.

Last week, interbank overnight rates declined slightly to 9.28 per cent from 10.19 per cent, as CBK promised to guide the market into a gradual interest rate decline.
The interest rates on government securities also fell.

CBK offered 91 day T-Bills for a total of Ksh4 billion ($38.49 million)  but received Ksh44.6 billion ($429.23 million)  worth of bids of which Ksh7 billion ($67.36 million) was accepted at an average of  13.73 per cent, down from 19.47 per cent in the previous auction.

It is, however, feared that the shilling exchange rate will come under pressure as yields on government T-bills continue to decline.

According to the global rating agency Moody’s, Kenya and Uganda have been running large current account deficits that are not fully financed by a combination of aid and FDI flows and  large fiscal deficits that are partly reliant on external financing.

Capital outflows

An increase in capital outflows is expected to put pressure on foreign exchange reserves and further weaken their currencies.

According to Mr Munywoki there has been an increased amount of foreign inflows into government securities mainly because of high returns on Treasury bills and bonds.

“There is a lot of capital flows into the country. We have also seen some redemption on Treasury bill and bonds in the market, leading to increased liquidity,” he said.

According to Johnson Nderi, a corporate finance manager at ABC Capital Ltd, liquidity is improving in the banking system buoyed by CBK’s actions and foreign inflows into the country which are likely to bring down interest rates to as low as 11 per cent to 12 per cent.

“We expect rates to go down in the short term,” said Mr Nderi.