The Central Bank of Kenya (CBK) has been withdrawing an average of Sh62.85 billion from the banking sector each day since the start of the year as lenders contend with excess liquidity. The surplus cash stems largely from rising customer deposits at a time when loan demand remains subdued.
The abundant liquidity has also pushed up the amounts offered in Treasury bills auctions, a market largely dominated by banks. At the same time, lenders’ excess reserves above the mandatory 3.5 percent cash reserve requirement have climbed to about Sh57 billion.
Fund managers have further contributed to the growth in deposits, placing a portion of their Sh680 billion in assets under management in fixed deposit accounts as of September 2025.
Regulations require unit trusts to channel their money market funds into short-term government securities and deposit accounts. Their combined investments in bank deposits and government debt stood at Sh588 billion during the period, representing 86 percent of total assets under management.
Overall, bank deposits and cash circulating in the economy increased by 9.8 percent to a record Sh6.03 trillion in the year to December 2025. Demand deposits recorded the sharpest growth, rising by Sh255.5 billion to Sh1.97 trillion, compared with a Sh50.6 billion increase in 2024.
Fixed or term deposits also grew by Sh166.8 billion to reach Sh2.277 trillion, while currency held outside banks rose by Sh30.4 billion to Sh323.2 billion. Foreign currency deposits expanded by Sh89.3 billion to Sh1.347 trillion.
During the same period, lending to the private sector grew by 5.9 percent to Sh4.085 trillion, lagging behind banks’ net lending to the government, which rose by 15.4 percent to Sh2.29 trillion.
As loan uptake by businesses and households remains sluggish despite recent interest rate cuts, banks have increasingly channelled their funds into government securities.
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Investor appetite has been evident in recent Treasury bills auctions. Last week, bids reached a record Sh100.4 billion against a target of Sh24 billion, although CBK accepted only Sh41.4 billion of the offers. In the five auctions before that, investors had submitted bids totalling Sh315.1 billion, averaging Sh63 billion each week.
The February Treasury bond issue, which involved the reopening of 15-year and 25-year securities, also attracted strong demand, receiving bids worth Sh213.74 billion against a Sh50 billion target. This marked the highest volume of offers for a non-infrastructure bond.
A forex trader at a commercial bank noted that the central bank has also been injecting shillings into the market through its purchase of dollars, making it necessary to withdraw excess liquidity to maintain stability in the foreign exchange market.
CBK data shows that the regulator has so far absorbed Sh2.765 trillion from banks this year through repurchase agreements and term auction deposits (TADs). In 2025, the total liquidity withdrawn through similar operations reached Sh9.18 trillion.
To manage liquidity levels in the financial system, the CBK relies on various open market operations, including repos, reverse repos and term auction deposits.
Repos involve the central bank selling government securities to banks, temporarily reducing the cash banks hold with the regulator and limiting their capacity to extend new loans. The securities are later repurchased by CBK after three to seven days.
Reverse repos operate in the opposite manner by injecting liquidity into the banking system. Under this arrangement, banks borrow from the CBK using government bonds as collateral for periods ranging between seven and 14 days.
Term auction deposits function similarly to repos but do not require collateral. These instruments are usually issued for longer periods, typically between 14 and 28 days.
