Recent months have been characterised by a severe cash crunch, which has seen businesses close down and scores lose their jobs. These are extraordinary times, and they call for extra-ordinary measures. Measures such as the recent one by National Treasury to compel State corporations and county governments to release close to Sh165 billion to suppliers are welcome. For a while, a lot of businesses have been choking for lack of cash. The repeal of the provision that capped interest rate was a good move as banks had scaled down lending to small businesses, contributing to the current unemployment crisis. It is even better that Central Bank of Kenya (CBK) has lowered its lending rate to 8.5 per cent, setting the stage for cheaper loans to businesses. But more needs to be done if cheap loans are to be made available to businesses.
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It might be time for CBK to consider releasing some of the cash it holds for the commercial banks. A plain look at the amount held in cash reserves held by the CBK, estimated at Sh180 billion, points to a potential partial solution to our problems. CBK requires banks to keep aside 5.25 per cent of all customer deposits to serve as cushion in case of any risks.
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In simpler terms, for every Sh100 deposited, a bank can only lend Sh94.75. Slashing the requirement to a lower ratio would free more money for banks to lend out. The rate has been at this level for the past seven years when it was raised to address the then perceived excess liquidity. Credit to the private sector had grown by double digits to more than 25 per cent. Inflation – increase in prices of goods and services as a result of too much money in circulation – had shot to over 25 per cent. Currently, it is growing by 6.6 per cent. Today, the inflation rate has fallen to below 4 per cent. Total customer deposits in the banking sector have crossed Sh3.5 trillion today going by the trend, with official records putting it at Sh3.48 trillion as at August. While it is good to have the reserves which are intended to cushion depositors, the financial regulator now has in place a number of supervisory […]
