Why banks are keeping a tight leash on your cash

A National Bank of Kenya banking hall. A recent study shows loan-to-deposit ratios for most banks are on the rise. [PHOTO: WILBERFORCE OKWIRI/standard]

If the majority of customers showed up on the doorsteps of their banks and demanded their deposits today, chances are most of them would be turned away empty-handed.

It has emerged that most commercial banks may not have enough liquidity to cover any unforeseen fund requirements as their deposits and loans almost tally and in some cases, the loans are more than the deposits.

Analysts say this means banks are experiencing tight liquidity as cash becomes more scarce in the economy after the introduction of the law capping interest rates at four per cent above the Central Bank Rate (CBR).

Loan-to-deposit (LTD) ratio is commonly used to assess a bank’s liquidity by dividing the bank’s total loans by total deposits.

When it is too high, it means the bank is running out of liquidity and when it’s too low, it means the bank may not be earning enough and it could be under-utilising deposits.

Banking tradition and prudence indicates that the ideal LTD ratio should be between 80 per cent and 90 per cent. NIC Bank, which released its financial report for the period ended December 2016 this week, has a ratio of 100 per cent while Stanbic Bank has an LTD ratio of 95 per cent.


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The country’s biggest lender by assets, Kenya Commercial Bank, has a ratio of 91 per cent.

A recent report by Cytonn Investments reviewing listed firms said LTD ratios have been on the rise, showing increased uptake of loans and more aggressive use of deposits by banks.

“Taking a preferred loan-to-deposit ratio of 85 per cent, we found that CFC Stanbic was the closest to the target at 85.7 per cent while Housing Finance was the furthest at 144.21 per cent,” said the Cytonn report.

However, banks have other sources of funds, including shareholder funds and reserves as well as loans, which they also use for onward lending.

Central Bank of Kenya (CBK), however, dismissed fears of a crisis, saying industry liquidity was not as bad as some analysts claimed, after the Government paid its suppliers to the tune of Sh38 billion last week.

“The money market liquidity improved by Sh8.5 billion in the week ending March 8, 2017, largely supported by net Government payments,” said the regulator in its weekly statistical bulletin.

Also, depositors should not be overly worried because lenders maintain mandatory deposits at CBK and most of them were insured.

However, insurance firms consider the LTD ratio important in determining the insurability of a bank while underwriting it. The ratio may also be important in assessing the state of small lenders that experienced a run on their deposits in 2015 and last year, after the collapse of three of them.

The run on deposits reduced their money, yet their loans are long-term assets that continue to be serviced over a long time, meaning they may have way more loans than deposits.

However, with declining credit take off in the wake of the rate cap law, the ratios have been tamed since banks are not lending as much, meaning loans may not push significantly beyond available deposits.

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