The interbank rate, the cost at which commercial banks lend money to one another, rose to 19.4223% yesterday. This is the highest the rate has reached since April 5^th when it was at 18.87%.

Last week activity by the Central Bank of Kenya’s (CBK) mopped up excess liquidity in the market and pushed the interbank rate to an average of about 16.5%. Liquidity may describe the ease with which an asset can be sold or bought or a business’ ability to meet its payment obligations. In our context liquidity refers to the amount of money commercial banks hold in their reserves to meet the depositor’s requirements of withdrawals on demand.

This significant increase in the interbank rate can be attributed to further tightening of liquidity in the money market as companies prepare to pay taxes as the month draws to an end. Companies whose financial year ends in December have until April 30 to pay corporate taxes. In addition to this Value added tax (VAT) and withholding taxes, which are paid every month, were due by last Thursday.

This means that companies who hold large cash balances in the commercial bank have tax payments due in the next few weeks and therefore these funds are not available for banks to lend them out as they would see fit. Consequently the cash reserves commercial banks have are not as high as they were in the previous weeks and so the cost of borrowing has shot up in response to reduced money supply.

To read more about liquidity, read this; What is Liquidity? Why is Excess Liquidity Undesirable?

To read on the trend the interbank rate has been following, read this; Interbank Rates Dip and Interbank Rate Rises.