Bank fixed deposit rates rise to 6.6%


Capital markets

Bank fixed deposit rates rise to 6.6%


Customers in a banking hall on February 10, 2021. PHOTO | DIANA NGILA | NMG

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Summary

  • The rise follows a decline in the growth rate of deposits in the three months to December from the previous quarter, forcing banks to raise rates to attract liquidity.
  • The rate on savings accounts, on the other hand, fell to 2.56% in February, from 3.37% in the same month last year.
  • Cash-rich businesses and individuals dominate the fixed deposit market where most accounts have millions of shillings tied up for months to a year.

Interest rates on term deposit accounts hit an 18-month high of 6.61% in February, indicating increased demand from commercial banks for funds to expand their lending activities.

Data from the Central Bank of Kenya (CBK) shows that the deposit rate fell from 6.47% in February 2021.

This is the highest since the 6.64% recorded in August 2020.

The rise follows a decline in the growth rate of deposits in the three months to December from the previous quarter, forcing banks to raise rates to attract liquidity.

“The upside may not be significant at least compared to 2020, but it may be for banks looking to attract more deposits by offering higher rates,” one banker said.

The rate on savings accounts, on the other hand, fell to 2.56% in February, from 3.37% in the same month last year.

Cash-rich businesses and individuals dominate the fixed deposit market where most accounts have millions of shillings tied up for months to a year.

Banks do not pay interest on most savings accounts, those that do get rates significantly lower than those available on term deposit accounts.

Rising deposit rates are a signal that banks are ready to raise funds to lend more amid heightened economic optimism as the impact of the Covid-19 pandemic wanes.

Banks rely on multiple sources of funding to fuel their lending activities. These include retained earnings and borrowed money, including term deposits.

The Central Bank of Kenya (CBK) said private sector credit growth increased to 9.1% in February from 8.6% in December 2021.

“The number of loan applications and approvals remained high, reflecting an improvement in demand with increased economic activity,” the regulator said, noting that transport and communications led credit growth in 24.1%.

The others were durable consumer goods (14%), business services (11.6%), trade (8.9%) and manufacturing (7.6%).

The CBK’s approval of risk-based loan pricing for more banks is expected to boost demand for fixed deposits, as higher lending rates will leave institutions with a significant margin on the rates paid to savers. .

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