Commercial banks have more than doubled the volume of collateralised lending to each other in the first four months of the year, compared to the corresponding period in 2024, indicating skewed liquidity distribution in the sector.
This form of interbank lending known as horizontal repurchase agreement (repo), involves a bank borrowing from a peer on a short-term basis using its bond holdings as collateral.
Market data shows that the lenders tapped a cumulative Sh69.67 billion from the horizontal repos between January and April this year, compared to loans of Sh30.86 billion in the first four months of 2024.
Average rates on the facility dropped from 15.3 percent in January 2024, to about 10.1 percent in April 2025, reflecting the cuts in the Central Bank Rate from 13 percent to 10 percent over the last seven months.
While the borrowing in the early months of 2025 has risen sharply compared to the same period a year earlier, it has slowed down compared to the last quarter of 2024 when the lenders transacted Sh133.6 billion on the window.
Liquidity distribution in the banking sector has in recent years been skewed in favour of large lenders, partly reflecting their ability to gather cheaper deposits at scale, and the lingering effect of the flight to safety by customers of small banks who were spooked by the collapse of three smaller lenders in 2015 and 2016.
As a liquidity support facility, the horizontal repo supports other windows such as reverse repos and the discount window, which are used by the Central Bank of Kenya (CBK) to keep distressed lenders supplied with liquidity.
When mopping up liquidity from the market, the CBK normally uses repos and term auction deposits (TADS).
Repos entail a sale of government securities held by the CBK to banks, which effectively reduces the level of deposits the lenders hold with the regulator, thus cutting their ability to lend new loans onto the economy. TADs work in the same way as repos, but without the use of a collateral.
Banks also offer liquidity support to each other through the interbank or overnight market, which unlike the horizontal repos does not require collateral.
The horizontal repo facility was introduced into the Kenyan banking sector in September 2008, but utilisation remained low, eventually falling into dormancy in 2014.
This was largely due to the inability of the lenders to transfer the ownership of the collateral —Treasury bills and bonds— from borrowers, making it hard for creditors to recover their funds in case of default.
The horizontal repo market was however revived from late 2022 after the CBK rang in rule changes, allowing the borrowing bank to surrender ownership of collateral securities to the lender until the loan is settled.
The rules also allowed the borrower to continue enjoying the coupon payments for the pledged securities —the lender is supposed to pass back that coupon to the borrower.
The introduction of the DhowCSD bonds trading platform in July 2023, was also key in the revival of the horizontal repo market, by making it more efficient to exchange securities between banks.
