The overnight rate at which banks lend to each other on emergency basis has fallen two percentage points to 3.6 per cent in the past two weeks as more liquidity filters into the money market.
The fall has coincided with increased activity by big lenders in the interbank market, indicating they are now holding a larger volume of cash than they need to deploy at a time the government is only picking money in the securities auctions to roll over maturing debt.
"The volumes traded increased to an average of Sh21.8 billion from Sh16.2 billion in the previous week, partly reflecting higher participation of large banks in the interbank market...However, the weighted average interbank rate has decreased as large banks concluded transactions at lower rates," said CBK in the weekly bulletin.
Lenders ideally direct the excess cash to government securities.
However, the Treasury has exceeded its initial domestic borrowing target of Sh268.7 billion for the fiscal year, meaning that Central Bank of Kenya is under no pressure to accept bids at the weekly auctions.
Large banks have at times shown aversion to lending smaller peers.