The attention of the Central Bank of Kenya has been drawn to an article in the Business Daily of Tuesday, April 22, 2008 entitled: "Banks rush to borrow from emergency window at CBK."

We would like to correct the impression created by this article, by underlining the fact that commercial banks borrow from the CBK overnight window to settle their short term obligations in order to cover their debit positions at CBK.

Such borrowing takes place as a last resort when the affected bank(s) cannot obtain funds through the inter-bank money market.

Under the overnight facility, a commercial bank is required to identify Government securities from its portfolio holdings for securing the overnight borrowing based on its liquidity shortfall that it is unable to source from the inter-bank money market.

The Central Bank of Kenya does not lend money to commercial banks without adequate securities.

With regard to the rapid expansion of the branch network by commercial banks, we would like to reiterate that, indeed, the banking sector has registered tremendous growth in the last few years both in terms of asset size and branch expansion.

The growth has been in tandem with the growth experienced in the other sectors of the economy, and in line with one of the key pillars of the financial sector reforms which is to increase access of financial services and products to the majority of the Kenyan population. Consequently, the banking sector branch network expanded by 26.4 per cent from 534 branches in December, 2006, to 675 branches in August, 2007.

As a result, the total number of accounts increased by 22 per cent during the last year, from 3.3 million to 4.1 million. Similarly, deposit liabilities in the banking system, increased by 20.4 per cent from Sh624.9 billion as at the end of December, 2006 to Sh752.3 billion as at December, 2007.

These developments have come about by the realisation that lowering barriers to entry and costs of opening and maintaining bank accounts can tap the un-banked and low income areas and encourage intermediation. The commercial banks seem also to have taken full benefit of economic vibrancy and this will continue in future.

Commercial banks are financing this expansion of the branch network by raising additional capital through rights issues, fresh injections, retention of profits and strategic investors- and NOT through funds borrowed from the overnight window.

The Central Bank would like to underline that the banking system remains stable and that banks are adequately capitalised, with the banking-sector capital-adequacy ratio remaining in excess of the minimum requirement of 12 per cent. To illustrate this, the capital to total risk weighted assets ratio increased from 17.2 per cent in December, 2006 to 19.3 per cent in December, 2007.

With respect to the funding crunch referred to in November and December, this is not supported by the data available as the banking sector liquidity for the industry was 40 per cent against the minimum liquidity requirement of 20 per cent.

It is, however, normal for the liquidity in the months of November and December to decline owing to the high demand for money during the festive season. A few banks had temporary liquidity constraint on singular days, a situation which was immediately rectified within a day.

Finally by summing the total amounts borrowed from the overnight window in a period of 21 months (Sh157 billion), the article is alarmist and misrepresents the operation of the CBK overnight window since one day's borrowings is repaid the following day, and as such, cannot be cumulated over a period of time.

During the month of March and April, 2008, only six banks borrowed a total of Sh1.756 billion from the CBK window. The amount of loans advanced dropped from what was advanced towards the end of 2007 and early this year.