The International Monetary Fund (IMF) has raised concerns over commercial banks in Kenya borrowing from the Central Bank of Kenya's (CBK) emergency discount window to fund purchases of government securities.
The IMF, flags the Commercial banks, for exploiting an arbitrage opportunity created by the lower interest rate on the discount window compared to the yields on treasuries.
The discount window, intended as a lender of last resort for temporary liquidity, has been used by some banks to fund short-term investment activities.
Reforms to monetary policy operations allowed banks to access the window at a lower cost while interest rates on T-bills and bonds soared.
In November, the 91-day T-bill yielded 15.32% versus a 14.5% discount window rate. The CBK scrutinizes banks using the facility more than twice a week and takes supervisory action.
The lowering of the discount window rate aimed to improve interbank market functioning and monetary policy transmission.
Banks have cumulatively tapped Sh81 billion from the discount window and Sh4 trillion from reverse repo agreements with the CBK in the past year.
The CBK is yet to comment on the issue, while the Kenya Bankers Association deferred to the central bank.
Elsewhere, Kenya's National Treasury has announced plans to reinstate a five percent withholding tax on interest earned from infrastructure bonds (IFBs) with maturities of at least three years, marking the first time since their launch in February 2009 that IFBs will be taxed.
This proposal, outlined in the Tax Laws (Amendment) Bill, 2024, awaits approval from Parliament and reverses the previously tax-free status that has made IFBs a popular investment vehicle for financing government infrastructure projects.
Currently, IFBs represent over 35 percent of net domestic debt, with significant holdings by commercial banks, nonbank investors, and a modest portion held by non-residents.