Kenyan banks listed on the Nairobi Securities Exchange (NSE) paid depositors Sh117.1 billion in the six months ended June 2024, marking a 54.5 percent rise as interest rate on deposits soared to levels last seen 26 years ago.
The rise in interest expense on deposits from Sh75.8 billion highlights the price banks have had to pay as they compete with the government for depositors in an environment where returns on Treasury bills and Treasury bonds have been rising, hitting as high as 18 percent.
Latest Central Bank of Kenya (CBK) data shows banks raised interest rates on deposits to 11.48 percent by end of June, a level only dwarfed by the 17.85 percent that banks were offering customers in May 1998.
The 26-year high rates in a bid to avoid loss of deposits have seen commercial banks end up with a higher interest expense, slowing the pace of growth in net interest income in an environment where high interest rates on loans clipped the appetite for loans.
“The biggest driver in our market today is sovereign, not clients. So even with few thousand [of shillings], my customers are saying ‘I want to buy a bond’ and now we have a decision to make between keeping the deposits and allowing them to buy the bond,” said Joshua Oigara, Stanbic Bank Kenya and South Sudan chief executive officer, in a recent interview.
Financial results for the half-year ended June 2024 shows the increased deposit rate has seen banks’ interest expense on customer deposits rise at a faster pace than that of accumulating additional deposits.
Data on the nine Kenyan banks listed on the NSE shows the 54 percent rise in expense on deposits in the half-year period ended June 2024 came in the period the stock of deposits rose by 6.7 percent to Sh5.65 trillion from Sh5.29.
The faster pace in interest expense compared with that of deposits means much of the rise in expenses was to do with a higher deposit rate than increased customer deposits.
Banks have had to compete with the government for deposits. For instance, the reopened 6.5-year infrastructure bond (IFB) that closed mid-August had a weighted average rate of 18.3 percent while that on 17-year IFB came in at 17.73 percent.
“Nobody wants to leave idle money anymore. Everybody, even the government, is coming for depositors. That gives you the context of the shift towards term deposits, fixed deposits and other higher rate earning deposits,” said David Abwoga, NCBA director of finance.
The return from 91-day, 182-day and 364-day Treasury bills averaged 15.79 percent, 16.67 percent and 16.86 percent respectively in the auction held on August 29. The same papers fetched 9.39 percent, 9.85 percent and 10.37 percent respectively on January 5.
The increased interest expense pushed banks to react by increasing interest rates on loans, with the average lending rate, before factoring in customer risk and their margin, hitting 16.85 percent in June—the highest since April 2006 when the rate was 18.04 percent.
