Central Bank of Kenya (CBK) building, Nairobi [Courtesy]
Money that banks sets aside to cushion themselves against a run by depositors rose to a record Sh268.1 billion in December last year.
This was a jump of 13.5 per cent compared to Sh236.2 billion in December 2020, according to data from the Central Bank of Kenya (CBK).
A big chunk of this money is statutory reserves that is not available for trading, says Samuel Tiriongo, the director in charge of research and policy at the Kenya Bankers Association (KBA), a lobby for commercial banks.
The statutory reserve, known as the cash reserve ratio (CRR), is the percentage of cash required to be kept at the apex banks against the bank’s total deposits.
CBK slashed the ratio from 5.25 per cent to 4.25 per cent as part of the emergency measures aimed at cushioning the economy against the adverse effects of the Covid-19 pandemic.
Going by banks’ gross deposits of Sh4.44 trillion by end of December last year, it means the CRR stood at Sh187 billion.
The rest, which includes money that commercial banks keep at CBK for such purposes as clearing interbank payments, stood at around Sh81 billion.
“A large amount is not available for trading,” said Dr Tiriongo in a telephone interview.
Banks are required to keep a fraction of their assets with CBK as an antidote to panic.
By end of Friday, commercial banks’ excess reserves stood at Sh16.8 billion in relation to the statutory requirement of 4.25 per cent cash reserves requirement.
This reflected high liquidity in the market as this money is available for trading. The increased liquidity was largely due to government payments, which offset tax remittances, said the CBK in its Weekly Bulletin.
Banks have until recently been reporting high profits owing to an improvement in economic conditions after the government lifted the social distancing rules imposed to contain Covid-19, including the dusk-to-dawn curfew.
Banks have started releasing their results for the financial year ending December 2021, and most of the profits have surpassed the pre-pandemic levels.
High liquidity is a buffer against a bank run, giving room for most of the lenders to share their profits with shareholders through dividends.
Almost all banks have indicated that they will pay dividends for the 2021 financial year. They include Equity, Absa Kenya and NCBA.
KCB has already issued an interim dividend while Stanbic Bank has more than doubled its payment compared to 2020. Bank deposits rose to Sh4.44 trillion last year, an increase of over a tenth compared to Sh4.02 trillion in 2020.