Quarterly tax obligations by commercial banks triggered a liquidity crunch last week, prompting a Sh44.6 billion cash injection by the Central Bank of Kenya (CBK) to stabilise the money market.
A total of Sh89.6 billion was withdrawn from the money markets against an injection of Sh87.3 billion during the week ended September 27, data by the industry regulator showed, causing a negative net liquidity position to the tune of Sh2.3 billion.
The tightening of liquidity was largely due to Sh51.1 billion that commercial banks transferred to the taxman for the quarter ended September.
“To cushion the market, the Central Bank injected liquidity to the tune of Sh44.6 billion through reverse repo (repurchase agreements) purchases,” the CBK said in this week’s bulletin.
In a reverse repo, the CBK borrows cash from commercial banks by buying back government securities for a short time before selling them back, a transaction referred to as repo.
The tightness was also reflected in the interbank market where cost of borrowing money among commercial banks in the overnight window shot up to an average of 7.16 per cent in the week ended September 27 from 4.21 per cent the previous week.
The daily amount transacted by commercial banks ranged from Sh13.8 billion to Sh21.2 billion during the week, to average Sh17.9 billion compared to an average of Sh23.6 billion a week earlier, the CBK said.
The number of deals rose to 43 from 36. The CBK said the sharp drop underscored “the tight liquidity conditions in the money markets”.