The amount of savings held in fixed deposit accounts crossed the 2 trillion mark for the first time in July, due to a scramble by savers lured by commercial banks’ high interest offers.
According to the latest data from the Central Bank of Kenya (CBK), fixed deposit balances reached 2.02 trillion silicate for the first time in July, an increase of 13.6% from 1.76 trillion silicate in the same period last year.
Banks typically pay higher rates of return on term deposits as opposed to savings deposits as an incentive for customers to keep their funds with the financial institution for a longer period of time. Deposits form an important basis for commercial banks’ funding and support their core lending activities by providing liquidity.
Over the past year, bank term deposit accounts have come back into the spotlight after a high interest rate environment that sweetened returns for savers.
For example, the average deposit interest rate (earnings from fixed deposit accounts) of commercial banks was 11.28% in July, compared to 8.1% in the same period last year.
The high interest rate environment has been entrenched over the past year, mainly due to the CBK’s tight monetary policy or benchmark interest rates, in response to high inflation and foreign exchange volatility.
At the same time, competition is forcing banks to increase profits on term deposit accounts while other asset classes, including bonds and unit trusts, offer equally high returns for customers.
Meanwhile, bank savers are moving away from low-yielding savings accounts, with balances falling to Sh1.6 trillion in July 2024 from Sh1.7 trillion in the same period last year.
Despite this, returns from savings accounts have increased from 3.97 per cent to 4.56 per cent over the same period, although they fall short of the double-digit returns of other asset classes, including term deposits.
Commercial banks allocate a portion of their funds to loan assistance and offer the highest returns to term depositors as an incentive to keep their funds locked up for a long period of time.
Demand deposits, short-term savings, checking and savings accounts (Casa) offer lower returns because customers can make instant and unlimited withdrawals.
The decrease in savings account balances due to the increase in fixed deposits indicates that bank depositors may move funds from lower-yielding Casa accounts to fixed deposit accounts or savings accounts.
CBK raised its benchmark lending rate, the lowest in the market, from 9.5% in May last year to 13% in February this year, and then lowered the benchmark slightly to 12.75% in August, the first rate cut in four years.
The onset of interest rate cuts will set the stage for lower domestic interest rates, impacting the returns paid to commercial bank savers and creating opportunities to reallocate portfolios within asset classes.
