Kenya’s interbank market liquidity access: An insight from network topology

The main purpose of the interbank market is to redistribute liquidity in the financial system. However, the smoothing functioning of the market can be hampered by uncertainty during market distress, accentuated by the complexity of financial linkages. This chapter is inspired by the fact that interbank markets in their early stage of development are noticeably understudied. Using a unique daily transaction-level data set, spanning between 2003 and 2012, the chapter shows that Kenya’s interbank market has become more closely interconnected with increasing network size and connectedness from 2006 to late 2009. This has coincided with a series of liquidity shocks that have affected liquidity demand in Kenya’s banking sector. During liquidity shocks, large, foreign and listed banks have not only increased their importance in the network as borrowers but also formed a higher density of connections in the direct neighbourhood as borrowers. Consistent with the literature, this study suggests that with increased uncertainty and heightened asymmetric information, it is easier for more reputable banks to satisfy credit profiling by other banks and get access to liquidity. Such an incomplete interbank market structure, coupled with a high degree of interconnectedness, can facilitate the spread of liquidity shocks. Indeed, the regression models used in this chapter capture important heterogeneous relationships between topological measures and bank liquidity access during different liquidity shocks.