The rate of interest charged on short-term loans made between banks has slumped to a 20-month low, mirroring the impact of Central Bank of Kenya (CBK) actions to bring down credit costs and improve liquidity in the money markets.
Records showed that the interbank lending rate fell to 9.986 percent as of last Frida—the lowest level since August 15, 2023— in a week that saw the CBK trim its benchmark lending rate and reduce the interest rate range for cross-bank lending.
Banks may borrow from other banks to ensure they have enough liquidity for their immediate needs or lend money when they have excess cash. The interbank lending system is short-term, typically overnight, and rarely more than a week.
On Tuesday, the apex bank trimmed the Central Bank Rate (CBR) from 10.75 percent to 10 percent while the interest rate corridor for interbank lending was narrowed to no more than 0.75 percentage points from the CBR from 1.5 percent, previously.
This means that the interbank lending rate is restricted to no more than 10.75 percent and a minimum of 9.25 percent.
A lower interbank lending rate means that banks have relatively lower costs in managing their liquidity and meeting regulatory requirements.
The interbank lending rate also has an influence on the cost of borrowing for consumers as it determines part of a lender’s funding expenses.
The recent easing of the CBK policy stance has complemented other previous actions, including the lowering of the cash reserve ratio (CRR) for commercial banks last February from 4.25 percent to 3.25 percent.
The lowering of the CRR released nearly Sh60 billion in additional liquidity to banks, improving the availability of funds to lenders in an attempt by the apex bank to spur lending to households and businesses.
The money markets have remained liquid with the number of interbank deals increasing while lenders have consistently held more reserves at the CBK than the 3.25 percent statutory requirement.
“The money market remained liquid during the week ending April 10.
“Commercial banks’ excess reserves stood at Sh18.2 billion in relation to the 3.25 percent cash reserves requirements,” CBK said in its weekly bulletin published on Friday.
“During the week, the average number of interbank deals increased to 33 from 14 in the previous week, while the average value traded increased to Sh18 billion from Sh6.8 billion in the previous week.”
Ample liquidity among banks has also been demonstrated by their rare access to emergency funding from the CBK discount window—a facility where commercial banks can borrow money from the CBK on an overnight basis. The discount window has so far just recorded two deals in the calendar year—on January 13, 2025, and March 11, 2025.
Policy decisions
The CBK also trimmed the rate it charges banks for overnight borrowing from the facility from three percentage points above the CBR to 0.75 percentage points.
The banking regulator said the narrowing of the interest corridor for the interbank market would help enhance the transmission of its policy decisions by ensuring that the cost of borrowing between banks closely tracks the CBR.
“This will enhance the stability of the interbank rate and align the rate close to the Central Bank Rate. In line with this review, the committee also approved the adjustment of the applicable interest rate on the discount window from the current 300 basis points above CBR to 75 basis points, which will be the upper bound of the interest rate corridor,” said the CBK.
The fall in the interbank rates comes amid banks’ push to have a new industry benchmark rate for loans to borrowers based on the average interbank lending rate for the prior 60-day cycle.
