The Central Bank of Kenya (CBK) has stepped up its mop-up of excess liquidity from the money market this year, exposing the increased cash reserves held by lenders amid slowed lending to the private sector.
The CBK has cumulatively pulled out Sh1.83 trillion in liquidity through repurchase agreements (repo) since January, reversing the trend seen last year when it injected cash into the market.
Repos are a form of short-term borrowing used in the money markets, which involve the purchase of securities with the agreement to sell them back at a specific date, usually for a higher price.
Data shows that in April, the regulator has been mopping up an average of Sh32.6 billion per day in the seven days it has been active in the repo market.
The CBK utilises several open market operation tools to regulate the liquidity in the market, including the repos and reverse repos, and term auction deposits (TADS). The TADS are used when the securities held by the CBK for repo purposes are exhausted or when the CBK considers it desirable to offer longer tenors.
Repos entail a sale of government securities held by the CBK to banks, reducing the level of deposits the lenders hold with the regulator and thus cutting their ability to make new loans. The CBK then repurchases the securities after three to seven days.
Reverse repos work the other way, injecting liquidity into the banking system by allowing banks to borrow from the CBK using their holdings of bonds as collateral. Reverse repos run for periods of between seven and 14 days
TADS are similar in structure to repos, but without the use of collateral, and are typically available for longer durations of between 14 and 28 days.
The liquidity mop-up by the CBK has come in a period when banks have been cautious about lending to the private sector amid rising default rates.
The ratio of non-performing loans to total loan book for the banking sector rose to 17.2 percent in February 2025 from 16.4 percent in December 2024, as per the latest CBK data.
Annualised growth in banks’ lending to the private sector meanwhile stood at a modest 0.2 percent in March 2025, although this was an improvement from a contraction of 1.3 percent in February as lending rates continued to fall in line with the CBK’s recent cuts of its base rate from 13 to 10 percent.
As a result of the reduced growth in lending in recent months, the share of bank assets held as cash or near cash has gone up—with their liquidity ratio rising to 58.3 percent in February 2025 from 55.8 percent in December 2024.
To encourage growth in lending to the private sector, the CBK last week cut its base lending rate by 0.75 percentage points to 10 percent, and also reduced the width of the interest rate corridor from 1.5 percentage points to 0.75 percentage points, effectively aligning the interbank rate closer to the Central Bank Rate.
The CBK also cut the interest rate on the discount window—an emergency window for banks to borrow from the CBK— from three percentage points above CBR to 0.75 percentage points.
These measures are meant to reduce the cost of funding for banks, thus allowing them to lower their cost of loans as well. They are also meant to make it easier for banks to access liquidity, although the market remains highly liquid at the moment.
