The Central Bank of Kenya (CBK) mopped up a cumulative Sh3.78 trillion in liquidity from the banking sector in the first half of the year, highlighting the disruptive effect of reduced lending to the private sector by commercial banks flush with cash.
The mop-up through repurchase agreements (repos) marked a turnaround following last year’s aggressive liquidity injections to commercial banks through reverse repos, which at the time showed skewed liquidity distribution in the sector favouring large lenders.
The CBK injected a cumulative Sh5.6 trillion into banks through reverse repos last year, while mop-ups stood at zero. This year, the CBK has injected Sh70 billion via repos, while mopping up Sh3.68 trillion.
Repos entail a sale of government securities held by the CBK to banks on a short-term basis, thus reducing the level of deposits the lenders hold with the regulator and cutting their ability to make new loans. The repos available in Kenya have durations of one, seven, and 14 days.
Reverse repos work the other way, injecting liquidity into the banking sector by allowing banks to borrow from the CBK using their holdings of bonds as collateral.
In addition to the repos, the government also uses Term Auction Deposits (TADs) as an open market tool to manage liquidity.
TADs are similar in structure to repos, but they do not require collateral and are typically available for longer tenors of between 14 and 28 days. They are usually deployed when the securities held by the CBK for repo purposes are exhausted, or when the CBK considers it desirable to offer longer tenors.
Traders said that in addition to banks holding excess liquidity due to reduced lending, the CBK has also contributed to the growing shilling pile because of its dollar buying activities in the market since June 2024— effectively injecting shillings into the banking system in exchange for hard currency.
The CBK’s official forex reserves stood at a record high of $11.03 billion (Sh1.43 trillion) at the end of last week, compared to $9.19 billion (Sh1.19 trillion) at the end of December 2024 and $7.8 billion (Sh961.2 billion) in June 2024.
Not all the additional $3.29 billion (Sh405 billion) worth of reserves since June 2024 are from open market purchases however, with the CBK also adding to its pile by purchasing the proceeds of the government’s foreign loans from the National Treasury.
The CBK has also been making regular external payments on behalf of the Treasury from the reserves in the period, meaning that the increase over the one year represents a net of the hard currency purchases and outflows.
By mopping up excess liquidity, the CBK has also helped keep the shilling’s exchange rate stable over the past six months despite the continued dollar purchases by the regulator.
The shilling has traded within a flat level of Sh129 to the dollar since August last year, defying a number of global shocks including war in the Middle East and the prospect of tough trade tariffs by the US on all its trading partners.
In a market where there is excess liquidity, the shilling would be expected to weaken as too many shillings chase a few dollars, with the opposite being the case when there is lower liquidity in the market.
