Impact of COVID-19 Pandemic on Bank Deposits in Kenya: Just How Liquid Is Your Bank?

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By Dr Irene Irungu

The World Bank estimates that about 9 out of every 10 Kenyans own an account with a bank. This rate of penetration of the banking industry can be attributed to the importance associated with having an account such as security for the money and as a way to accumulate savings and earn interest. In addition, bank account holders can also access credit to expand businesses, acquire property as well as for personal use.

The access to these services by a majority of Kenyans has been made even more convenient with the adoption of technological innovations such as mobile and online banking services. However, if banks do not have liquid cash, customers would not be guaranteed to get their money when they need to.

As the year 2020 progresses, Kenyans continue to grapple with the impact of the COVID-19 pandemic. A pertinent short-term economic effect has been the loss of wages and income, either partially and/or entirely. As such, most people have had to depend on their savings to meet their day to day needs as they look for alternative means to earn a living.

This article focuses on examining how easily bank account holders can access their savings during this pandemic period by analyzing banks’ liquidity positions.

While it is not uncommon for you to walk to a mobile money agent and request to make a withdrawal from your account only to be told ‘sina cash’ or ‘sina float’, implying that the agent does not have cash at hand to issue you with, it is quite unfathomable that the same would happen if you went to make the same withdrawal transaction from your bank. Is it a possibility, though?

A case in point is that of Chase Bank Kenya back in 2016 when it was declared illiquid by the Central Bank of Kenya.

Liquidity refers to the ability of a bank to meet its responsibilities as they fall due by having access to sufficient cash for that purpose. The importance of this to an account holder is that it demonstrates their banks’ ability to honour their deposit withdrawals. This is because without adequate cash resources a bank will find it impossible to continue its operations even if its capital remains acceptable. Lack of liquidity can actually be viewed as a proximate cause of bank failures.

With this significance noted, we can now examine the banks’ liquidity positions as well as the sources and adequacy of funds during this pandemic.

A bank’s liquidity can be sourced through its cash flow from operations such as the repayment of loans by borrowers as well as trading gains. A different source can be provided by cash reserves. This may take the form of cash kept in vaults or accounts with the Central Bank. In addition to these, a bank utilizes the excess of new deposits over withdrawals to fund inflows.

Banks’ liquidity in Kenya is assessed by analyzing the first quarter of 2019 to the second quarter of 2020 financial statements of three publicly listed banks with large customer bases, namely; KCB, Equity Bank Limited (EBL) and Co-operative Bank (Co-op).

Liquidity ratio

The liquidity position of these banks is measured by their Liquidity ratio.  It is the percentage of total assets that consist either of cash or assets that presumably can be sold in a time of crisis at a minimal cost to the bank.

Equity Bank is seen to have maintained a higher level of liquidity throughout the period. This position seems to be enhanced by their investment in money markets as it increases their liquid assets. On the other hand, Cooperative Bank and Kenya Commercial Bank have improved their liquidity position this year compared to the same period last year despite the pandemic.

In a press statement released on the 24th of March 2020, the CBK extended banks’ maximum short-term borrowing period from 28 to 90 days on loans secured on their holdings of government securities as one of the mitigation measures to cushion banks’ liquidity during the COVID-19 pandemic.

While these banks have demonstrated strong liquidity positions, it is important to measure the short-term bank funding used to fuel the liquidity. In general, this can be divided between deposits and money-market funding.

Customer Deposits to Total Deposits ratio versus Interbank Deposits

Customer deposits are assessed through the customer deposits to total deposits ratio.

Equity Bank and Kenya Commercial Bank experienced continued strong and stable customer deposits to total deposits ratio indicating customers’ deposits were still higher than the interbank deposits.

At the same time, Cooperative Bank experienced a less than 1% drop in customer deposits to total deposits ratio. This was due to growth in the bank’s reliance on interbank deposits as a source of funding.

In all three cases, customer deposits were seen to grow indicating that they were the major source of liquidity. While this depicts a positive outlook both to account holders and banks, concerns arise around banks’ ability to maintain their liquidity position in the long run when they heavily rely on their customer’s deposits amidst the uncertain effects of the COVID-19 pandemic. A major economic effect resulting from the pandemic is the loss of income as a result of job or business loss. Affected depositors in return could utilize their savings as they seek alternative sources of income and possibly exhausting their accounts.

Net-loans-to-customer-deposits ratio

We can evaluate the extent to which banks are vulnerable to facing liquidity problems by measuring the level of mismatch between their main illiquid asset which are loans and stable funding in form of deposits. Net-loans-to-customer-deposits ratio is used as a measure of relative funding stability.

KCB yields the highest net loans to customer deposits ratio at 79% whereas Equity Bank yields the lowest at 69%. A higher ratio indicates that a bank is depending on deposits other than customers’ and varied funding sources to fund its loan book. Conversely, a lower ratio suggests that the bank is funding its loan portfolio more from core deposits.

Interbank Ratio

The interbank market also provides a good source of funding. Interbank ratio helps us examine banks’ net position in relation to the interbank market, whether a bank is a net lender or a net borrower.

Equity bank did not record any interbank liabilities implying that it did not receive any deposits from other banks.

Kenya Commercial Bank interbank ratio remained relatively stable throughout the first and second quarter of 2020 as opposed to the same period last year.

Co-operative Bank, however, experienced a significant decline in the interbank ratio in 2020 while last year it was on the rise. This indicates that the bank relied more heavily on purchased funds in the second quarter of 2020 when the pandemic had hit. This not only means that they were paying more for funding than Kenya Commercial Bank but also that the bank is more susceptible to sudden withdrawals. The latter may arise since in difficult times a large net taker of funds is likely to impact the bank more than a customer.

Nonetheless, it is good to note that both banks yielded interbank ratios greater than 100% throughout the period under consideration. This means that their interbank assets are greater than the interbank liabilities implying that they are both net lenders. From a credit perspective, it is preferable that a bank is a net lender.

In summary, if banks continue to maintain these liquidity positions, account holders can rest assured of quick access to their deposits as soon as their needs arise. However, the long term economic challenges brought by the pandemic may affect this position if the liquidity parameters happen to change. It is therefore prudent for banks to consider alternative sources of liquidity funding such as the money market funds to reduce over-reliance on deposits.



Dr Irene Irungu is a lecturer of Actuarial Science in the Department of Mathematics, Statistics and Actuarial Science at Karatina University, Kenya. She holds a BSc Actuarial Science and MSc Applied Statistics from the Jomo Kenyatta University of Agriculture and Technology (JKUAT) and a PhD Financial Mathematics from the Pan African University Institute for Basic Sciences Technology and Innovation (PAUISTI). 

Additional contribution by Purity Mukami

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