In a move signaling a significant shift in the banking landscape, commercial banks have raised the returns offered to cash-rich firms and high-net-worth depositors to double-digit levels, reaching a new 24-year high record.
Data released by the Central Bank of Kenya (CBK) indicates that the average commercial bank deposit rate, which represents the yield offered on fixed deposit accounts, surged to 10.1 percent in December 2023. This marks the first time the rate has reached double digits since January 2000.
The decision to sweeten returns for cash-rich depositors comes amidst a backdrop of heightened interest rates across various investment classes, including Treasury bills and bonds. These elevated rates have compelled banks to enhance the attractiveness of their deposit accounts in order to retain high-value deposits.
Over the past year, the deposit rate has witnessed a steady climb, rising from a low of 7.17 percent in December 2022. Commercial banks typically offer premium returns to customers who lock in their funds for a specified period, utilizing these deposits in lending activities.
However, competition from alternative asset classes such as Treasury bills, which are currently offering returns approaching 17 percent, and collective investment schemes/unit trusts with recently reached double-digit rates, has forced commercial banks to increase their depositors’ returns.
Term depositors may anticipate an even more favorable deal in the coming months as banks adjust their rates in response to the recent increase in the CBK benchmark rate from 12.5 percent to 13 percent.
Following the record deposit rate, commercial banks’ lending margins—the difference between the lending rate and the deposit rate—have narrowed to a near three-decade low spread of 4.53 percent, indicating reduced net interest incomes for banks.
This reduction in margins implies diminished income from lending activities for banks, particularly amid concerns about asset quality as non-performing loans remain high.
Although most commercial banks have implemented risk-based pricing on loans to counteract some of the impact from increased fixed deposit rates, the average commercial bank lending rate climbed to a near seven-year high of 14.63 percent in December 2023, following a two-percent increase by the CBK in its monetary policy meeting for that month.
By Delino Gayweh
Serrari Financial Analyst
February 13, 2023
