Savers stockpiled Sh1.97 trillion in fixed deposit accounts in a record frenzy in the year to June 2024, encouraged by the prevailing high interest rates, new data shows.
The amount of cash deposited in fixed accounts in commercial banks rose by a record Sh224 billion between June last year and June 2024 to hit Sh1.97 trillion from Sh1.75 trillion, new data from the Central Bank of Kenya (CBK) shows.
The growth in fixed account deposits contrasts with an increase of just Sh11 billion in June last year, Sh46 billion and Sh64 billion in June 2022 and June 2021 respectively.
The fixed deposits balances soared by Sh166 billion in the 12 months to June 2020 during the pandemic, marking the last notable increase in the term savings.
The rise in time and savings deposits has coincided with an increase in the return paid out by commercial banks for long-term deposits as domestic interest rates soared.
The average commercial bank deposit rate rose from 7.8 percent in June 2023 to 11.48 percent in June 2024, encouraging depositors to hold cash in the term accounts.
Savings rate
Meanwhile, demand deposits at commercial banks fell by Sh107.8 billion over the same period to Sh1.57 trillion from Sh1.68 trillion over the same period.
The decline in the short-term deposits came even as the savings rate – the return paid to depositors in current and savings accounts (Casa) – rose to 5.11 percent in June 2024 from 3.92 percent at the same time last year.
The fall in savings account balances amid rising term deposits signals the likelihood that depositors are withdrawing funds from the lower-yielding savings account to take advantage of the high return offered by term deposits.
Banks usually pay a higher return on term deposits in contrast to savings accounts as an incentive to customers to hold funds with the institutions for longer.
Deposits are an important source of funding for commercial banks, providing liquidity to support their core lending activities.
Depositors in banks can choose to put their money in either savings or deposit accounts depending on their preferences and needs.
Casa accounts offer convenience and the flexibility to add or withdraw funds at any time, but offer a relatively lower return than deposit accounts.
Deposit accounts, on the other hand, have restrictions on additions and withdrawals, but offer customers a better return.
The return on both savings and deposit accounts has benefited from the elevation of domestic interest rates, which began with the CBK raising the benchmark lending rate to tackle persistent high inflation and exchange rate volatility.
The benchmark rate, for instance, rose from 9.5 percent in May last year to 13 percent in February 2024 before falling slightly to 12.5 percent last month.
Low inflation and reduced foreign exchange rate volatility have created a risk-off environment, which has initiated a downward trend in domestic interest rates in recent weeks, reducing the chance for higher returns from deposit accounts and other asset classes.
Interest rates appeared to have peaked in June, with the return on fixed deposit accounts falling for the first time in 16 months in July to 11.28 percent from 11.48 percent.
The savings rate also fell from 5.11 percent to 4.56 percent in the same period.
The possibility of further interest rate cuts by the CBK could see domestic interest rates fall further, eroding the returns offered to savers.
