The interest on fixed deposits hit an eight-year low as a result of a reduced appetite for savings by bankers due to a slackening in the demand for loans.
Data retrieved from the Central Bank of Kenya (CBK) illustrated that the deposit rate plunged to 6.3 percent in December 2020 from 7.1 percent in December 2019.
Since 2013, this happens to be the lowest deposit rate.
The deposit rate drop is associated with the increase in fixed deposits from affluent investors and firms in a year when the curtailments imposed to control the spread of Covid-19 minimized investment opportunities that also reduced demand for loans.
The decreasing returns on savings are disappointing to high net worth investors and cash-rich companies that opted to clinch onto cash, resulting in a pile-up in bank accounts.
“Generally a decrease in the rate shows decreased appetite for the banks to mobilize funding for onward lending,” said Habil Olaka, the chief executive officer of Kenya Bankers Association.
“When demand for loans is not high, banks prefer not to keep deposits that they are not going to lend, but when loan uptake improves, the ripple effect is that banks will offer more returns for savings.”
The volume of savings accounts does not earn interest since the majority of the banks have set a gateway below which they take the deposits for free.
The interest rate on the savings decreased to a five-year low in December to 2.7 percent from 4.25 percent in January last year. This is contrary to 2018 when interest on savings accounts averaged 6.37 percent.
Banks have been careful when deciding to extend fresh credit in an environment where companies and individuals sought a moratorium on their loans in the wake of the public health crisis.
Many businesses reduced their activities in response to the pandemic, leading to job retrenchments and unpaid leave for staff as profitable companies record losses.
The job cuts led to a default on mortgages and unsecured loans taken.
Unsecured loans are normally offered on the strength of an individual’s salary. The firms that borrowed loans backed on the cashflows forecast have also grappled to repay their bank loans.
Due to this, banks have reduced lending and thus a decrease in the scramble for deposits.
This came as wealthy individuals and big firms, seeking a haven for their wealth.
CBK data illustrates that deposits escalated by Sh467.5 billion in 2020 while net lending rose to Sh223.4 billion.
Fixed deposits increased by Sh150 billion to a record Sh1.53 trillion.
This shows that the affluent are guarding their value rather than looking for new investment areas.
The escalation in deposits emerged after Kenya announced its first Covid-19 cases and put in place stringent restrictions, inclusive of a dusk-to-dawn curfew.
The demand at home and in export markets decreased as consumers stayed indoors to avoid contracting the virus and due to government containment measures, forcing investment plans to be put on hold.
The low returns from the stock market and a plunge in real estate have also made the wealthy choose to keep cash in banks and tap the interest returns.
“Most businesses are still operating at around 40 percent of their pre-Covid-19 levels. If the hospitality and transport industries get their vibe back, the demand for loans will increase and the ripple effect is an increase in the deposits and the savings rate offered by banks to entice the public for onward lending,” says Ken Gichinga, the chief economist at Mentoria Economics.