The amount of money in savings held in fixed deposit accounts crossed the Sh2 trillion mark for the first time in July, underling the impact of a scramble by savers lured by high interest rate offers by commercial banks.
Fresh data by the Central Bank of Kenya (CBK) shows that the fixed deposit balances hit Sh2.02 trillion for the first time in July, representing a 13.6 percent growth from Sh1.76 trillion at the same time last year.
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. The deposits form a key base for commercial bank funding, supporting their core lending activities by providing liquidity.
Bank fixed deposit accounts have returned to prominence in the wake of prevailing high-interest rate environment which handed savers sweetened returns over the past year.
The average commercial bank deposit rate- the return from fixed deposit accounts- for instance, stood at 11.28 percent in July compared to 8.1 percent at the same time last year.
The high-interest rate environment has been primarily anchored on the tightening monetary policy or the benchmark interest rate by the CBK over the past year as a response to high inflation and foreign exchange volatility.
Banks have at the same time been forced to raise the return on fixed deposit accounts by the competition as other asset classes including fixed income and unit trusts deliver comparable higher returns to clients.
Savers in banks have, meanwhile moved away from the lower-yielding saving accounts with balances dipping to Sh1.6 trillion in July 2024 from Sh1.7 trillion at the same time last year.
Returns from savings accounts have, nevertheless, grown from 3.97 percent to 4.56 percent over the same time but trail the double-digit returns from other asset classes including fixed deposits.
Commercial banks offer the highest returns to term depositors as an incentive to keep their funds locked in for longer with the monies being partly deployed in supporting lending.
Demand deposits, or short-term savings, or current and savings accounts (Casa) attract lower returns as customers can make instant and unlimited withdrawals from them.
The drop in savings account balances amid rising fixed deposits points to the likelihood of bank savers moving their funds from the lower-yielding Casa accounts into the time and savings deposit accounts.
CBK lifted its benchmark lending rate- the minimum interest rate in the market- from 9.5 percent in May last year to a high 13 percent in February this year before a first rate cut in four years which lowered the benchmark slightly to 12.75 percent in August.
The start of interest rate cuts has set the stage for lower domestic interest rates which is set to affect the return paid to savers in commercial banks, setting up the chance for portfolio reallocations within asset classes.
