Commercial banks in Kenya turned to the Central Bank of Kenya (CBK) for an unprecedented liquidity injection of nearly Ksh100 billion ($668 million) on Monday. This signaled a short-term cash shortage, partly attributed to the Sh44.15 billion tea bonus payments to farmers.
While the CBK initially offered to inject Ksh50 billion ($334 million) via seven-day reverse repurchase agreements (repos) to address the skewed liquidity situation, banks submitted bids totaling Ksh99.87 billion ($667.13 million). The CBK accepted all bids at an average interest rate of 12.87 percent.
Reverse repos involve banks borrowing from the regulator, using their holdings of Treasury bills and bonds as collateral.
The amount injected on Monday exceeded the previous high of Ksh87 billion ($581.16 million) lent to banks by the CBK on June 19, 2023. Notably, the CBK’s decision to accept bids exceeding the initial Ksh50 billion target deviated from its usual practice of sticking to the injection target.
The demand for liquidity, mainly from tier one lenders, was driven by the tea bonus payments, coupled with existing tight liquidity conditions in the market.
The Kenya Tea Development Agency (Holdings) Limited (KTDA) began disbursing tea bonuses to approximately 600,000 affiliated farmers from its 54 factories on October 2, in relation to their supplies for the financial year ending June 30. These lump sum payments strained the liquidity of the paying banks, a situation similar to the strain experienced when processing large dividend payments by listed firms running into tens of billions.
Throughout October, the CBK injected a total of Ksh191 billion ($1.28 billion) in liquidity through reverse repos. This comprised two portions of Ksh40 billion ($267.2 million) each on October 2 and 9, an injection of Ksh11.18 billion ($74.7 million) on October 3, and Monday’s Ksh99.86 billion ($667.1 million). In September, total repo sales (three and seven-day) reached Ksh249.5 billion ($1.7 billion).
Additionally, the interbank market saw heightened activity over the past week, confirming the cash shortage facing lenders.
Between October 9 and 16, banks borrowed a total of Ksh140.7 billion ($939.9 million) from each other in the overnight market, averaging Ksh28.1 billion ($187.7 million) per day.
The overnight lending rate also increased during this period, reaching 12.34 percent on October 16, up from 11.98 percent on October 9, with some transactions nearing the upper limit of 13 percent set by the CBK’s interest rate corridor introduced in August.