Savers piled a record Sh1.97 trillion into fixed deposit accounts in the year to June 2024, driven by prevailing high interest rates, new data has shown.
Cash held in fixed accounts at commercial banks rose by a record Sh224 billion between June last year and June 2024 to Sh1.97 trillion from Sh1.75 trillion, new data from the Central Bank of Kenya shows.
The growth in fixed account deposits contrasts with an increase of just Sh11 billion in June last year, and Sh46 billion and Sh64 billion in June 2022 and June 2021 respectively.
Fixed deposit balances rose by Sh166 billion in the 12 months to June 2020 during the pandemic, marking the latest notable increase in term savings.
The rise in time and savings deposits coincided with an increase in the return paid by commercial banks on long-term deposits as domestic interest rates rose.
The average interest rate on deposits at commercial banks increased from 7.8% in June 2023 to 11.48% in June 2024, encouraging depositors to keep cash in term accounts.
Savings rate
Meanwhile, demand deposits in commercial banks declined by Sh107.8 billion during the same period to Sh1.57 trillion from Sh1.68 trillion during the same period.
The decline in 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 in the same period last year.
The decline in savings account balances amid rising time deposits suggests that depositors may be withdrawing money from low-yielding savings accounts to take advantage of the higher returns offered by time deposits.
Banks typically pay a higher return on time deposits than on savings accounts as an incentive for customers to keep their money with the institutions for a longer period.
Deposits are an important source of funding for commercial banks, providing liquidity to support their core lending activities.
Bank depositors can choose to place their money in savings accounts or deposits depending on their preferences and needs.
Casa accounts offer the convenience and flexibility to add or withdraw funds at any time, but they offer a relatively lower return than deposit accounts.
On the other hand, deposit accounts are subject to restrictions on additions and withdrawals, but offer clients a better return.
Returns on savings and deposit accounts benefited from higher domestic interest rates, which began with the central bank raising its benchmark lending rate to address persistently high inflation and exchange rate volatility.
For example, the benchmark interest rate rose from 9.5% in May of last year to 13% in February 2024 before falling slightly to 12.5% last month.
Low inflation and low foreign exchange volatility have created a risk-free environment, which has led to a downward trend in domestic interest rates in recent weeks, reducing the opportunity for higher returns from deposit accounts and other asset classes.
Interest rates appear to have peaked in June, with the yield on fixed deposit accounts falling for the first time in 16 months in July to 11.28% from 11.48%.
The savings rate also declined from 5.11% to 4.56% during the same period.
The possibility of the central bank cutting interest rates again could push domestic interest rates lower even further, eroding the returns offered to savers.