Banks offering high deposit rates to maintain liquidity

BANKING:Rate decided by demand and supply Commercial banks say they are offering high interest rate on deposits as their strategy to encourage savings and safeguard liquidity in the banking sector.For instance, to encourage clients open fixed deposit accounts, Bank of Kigali (BK) is offering 9.5 to 10 per cent on Rwf1 billion deposited for 9 to 12 months. While Kenya Commercial Bank, offers 6.8 per cent interest on short term deposits while long term deposits attract between 8 to 10.5 percent. “There is always a mismatch between liquidity and demand for deposits. Clients can decide to withdraw significant amounts of money at a certain period causing a shortage in deposits,” Januario Mucyo, Head of Corporate Banking in Bank of Kigali told The Business Times. “Rwf100 million per year is good business for someone who has kept Rwf1 billion and it also helps the bank finance long term projects.” Mucyo explained that the bank negotiates with clients and interest rate varies depending on amount and the period it will spend on the account.He, however, added that even with a common mismatch between liquidity and customer withdraws there had not been a problem on their liquidity.A fixed deposit account allows you to deposit your money for a set period of time, thereby earning you a higher rate of interest in return. Mucyo said that for short term deposits, the bank pays interest rates between 4.5 and 6 percent.However, the increase in deposit interest rate is far below 16 percent recorded in 2009. Carine Umutoni, Head of treasury at Kenya Commercial Bank, said: “Long term deposits in this market are usually from 1 to 2 years. Customers in this market are not keen on long term deposits despite the fact that they would earn highly.” She acknowledged that the increase of interest rates on deposits would have a negative impact on lending rates.“One of the factors affecting lending rates would be the cost of fund, therefore lending rate would increase/ decrease depending on the changes in cost of funds,” she emphasised. She however noted that a number of factors come into play when determining the cost of lending, including risk and operational margin. Asked if the need to maintain sufficient liquidity has prompted increase in deposit rates, she said; “Yes the law of demand and supply applies.”Banks have laid strategies to safeguard their liquidity.“Driving our liabilities is top on the list to safeguard our liquidity and also increasing the deposit base (number of depositors) in order to avoid concentration risks,” she explained.Commercial banks have resorted to large companies like MTN for bulk deposits, a move that pushed lending interest rates to skyrocket to 20 percent. To date interest rates on loans range between 15 to 17 percent.In an interview with The Business Times, the Governor of National Bank of Rwanda, Amb.Claver Gatete, said that banks are well capitalised and the increase is insignificant. “They (banks) have the highest capital ratio not only in the region but worldwide and ready to remunerate for longer term resources but it has nothing to do with liquidity problems,” Amb.Gatete assured. In 2011, deposits grew by 29 percent to Rwf716.4 billion while loans and equity rose by 28.4 and 38.4 percent, respectively.Gatete is convinced that the increase is also attributed to the raising competition in the market which will eventually bring the risks down and increase efficiency in the banking system.Last year, net profit of Rwanda’s banking sector shot up by 42.2 percent to Rwf22.8 billion in 2011 from Rwf15 billion the previous year, due to new entrants and improved risk management. Total assets for commercial banks and other specialised banks indicate that commercial banks recorded the largest share of 82 percent of the total banking sector assets which rose by 24.5 percent last year.