Kenyans have a huge opportunity to set the price of their savings as banks, desperate for cash, lure deposits in a market with very competitive options.
Deposit rates have jumped to 7.8 percent in June, a five year high as Banks scrambled for investors to deposit money in their accounts to facilitate their fractional lending.
Fractional Banking is a banking system that requires banks to hold only a portion of the money deposited with them as reserves. The banks then use the customer deposits to make new loans.
For a long time Banks have been holding the upper hand given the healthy supply of money and low returns of alternative investments that helped them suppress the cost at which they acquire deposits.
But as the Central Bank of Kenya began raising interest rates, investors realised they could make better money lending to the government at almost 18 percent than letting their money lie idle in banks for a paltry single digit return.
As interest rates rise, depositors get leverage
As interest rates rise, depositors will continue having an upper hand given the alternative investments at their disposal including high paying government securities.
While this is marking as a windfall for depositors Banks are finding themselves facing increased cost of business by paying higher for customer deposits.
A review of half year banking results by Maudhui House Indicate KCB customer deposits grew to Kes1.4 trillion from Kes908.5 billion in the first half, but came with additional costs as customer expenses jumped from Kes11.5 billion to Kes16.5 billion in the last financial year.
Equity bank paid Kes3.6 billion more for deposits in the half year compared to June 2022, NCBA paid Kes2.2 billion more while Cooperative Bank interest expenses on customer deposits rose from Kes6.7 billion to Kes8.3 billion by June this year.
“Profitability was under pressure in the first half from increased funding costs on higher market deposits rates, prudent provisioning on legacy credit facilities, and provisions for legacy legal claims at NBK,” said KCB Group CEO Paul Russo.
Even as banks suffer higher cost of acquiring deposits they have little alternative but to pay up given the flow of money in the economy has dipped placing demand higher than supply.
The latest data published by Kenya National Bureau of Statistics (KNBS) shows that M3 money supply, that measures of liquidity in the monetary system, fell 7.5 percent from Kes5.5 trillion in July last year to Kes5.1 trillion by the half of this year.
This has set banks up for competition of diminishing deposits that will see lenders launch deposit mobilization promotions, offers and cash prizes to lure your deposits.
The Standard Chartered Bank has already thrown its hat in the ring and launched a Kes15 million campaign dubbed ‘Switch your Salo Bank Better’ aimed at rewarding new account holders who transfer their salary accounts to the bank.
Banks trying to lure depositors will find a new phenomena of educated tech savvy depositors who understand they can get better bargains from unit trusts and saccos than what bankers have been offering over the years.
Kenyan small savers with small withdrawable deposits can currently earn just 3.4 per cent on their money in bank accounts.
Better margins from lenders
However over the last few years the small depositors have been pooling their funds in collective investment schemes that allows them to make better bargains from lenders.
Data from the Capital Markets Authority (CMA) shows the investment funds, which are also referred to as unit trusts are largely invested in banks with 44.4 percent of their assets or Kes78.1 billion locked in the term deposits accounts as of June this year.
The unit trusts are already voting with their money and have cut their holdings of fixed deposits, unlisted securities, other CIS funds and off-shore investments in favour of government paper, undervalued equity positions and immovable property.
CMA data shows CISs cash and demand deposits rose by 94.76 percent in the quarter ended March to Kes10.8 billion from Kes5.5 billion in the preceding three months to December 2022.