The Central Bank of Kenya, Nairobi. FILE PHOTO | NMG
Fund managers and large institutions holding bank deposits are set for better returns after the lenders raised payout for customer deposits in fixed accounts to a 30-month high, matching the trend of investor returns from other asset classes.
New data from the Central Bank of Kenya (CBK) shows the average commercial bank deposit rate hit a high of 7.01 percent in October last year, the highest rate of return from fixed deposits since April 2020.
The higher return on fixed deposits is set to be a windfall, particularly for fund managers and large institutions who are the majority investors in fixed deposits in sharp contrast to retail investors who largely hold short-term deposits.
Kenyan banks offer two types of fixed deposit accounts; call deposits and time deposits with each type differing from bank to bank.
Most banks, nevertheless, require a high minimum balance on the fixed deposit accounts, locking out a significant number of retail investors.
READ: Banks fixed deposit rates rise to 6.6pc
Diamond Trust Bank (DTB) offered a 10 percent return on fixed deposits for three months last year while requiring Sh50 million as the minimum amount.
The growth in the fixed deposit return is mainly premised on guidelines issued by the CBK and adjustments made for inflation and changes in the risk-free rate/Central Bank Rate (CBR).
Last year, however, analysts reckon that pressure on banks to remain competitive, not only among themselves but also with other asset classes, propped up the return on fixed deposits.
“There is an aspect of banks trying to remain competitive and retain customers by offering higher interest rates now that there is a rise in interest earnings. This is on the back of surging yields in bond auctions coupled with increased earnings from loans and advances to customers,” said Genghis Capital Research Analyst Wesley Manambo.
Across 2022, yields on the 91-day, 182-day and 364-day T-bills were higher by between 1.24 and 1.33 percent to close the year at 8.2, nine and 9.9 percent respectively.
Comparatively, banks have seen an increase in earnings from lending to customers as reflected in the rise of the average lending rate which stood at 12.39 percent at the end of October from 12.12 percent a year earlier.
The 364-day T-bill return was among the top earning asset class of 2022, beating both the average yield from real estate and the Nairobi Securities Exchange (NSE) that returned mean losses of 23.7 percent for the year.
Besides topping the return from other asset classes, banks through fixed deposit accounts have been under pressure to return a real yield to account holders with inflation having soared in the last 12 months.
Year-over-year inflation, for instance, set a new five-year high rate of 9.2 and 9.6 percent in September and October and remains above the government’s target spread of 2.5 to 7.5 percent.
Additional data from the CBK do not distinguish between deposits held in fixed and current accounts.
The data shows the total value of customer deposits held by banks stood at Sh4.56 trillion at the end of 2021 with deposit accounts at 66.32 percent.
KCB & Equity, which are the two largest banks in the country by asset base, held the largest share of customer deposits in the period at 13.9 and 14.3 percent.
Combined, Tier 1 banks hold the bulk of customer deposits at Sh3.39 trillion or an equivalent 74.24 percent of all commercial bank deposits.
Fixed deposit accounts earn a fixed return which does not rise or fall irrespective of fluctuations in other interest rate.
The return on fixed deposits is largely tied to the risk-free rate which is represented by both the CBR and interest rates on T-bills.
READ: Inflation wipes out returns on fixed deposit accounts
Fixed deposits typically have maturities of between one week and five years during which the deposits cannot be redeemed early.
Early withdrawals from fixed deposit accounts usually attract penalties or charges.
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