The Kenyan government’s decision to reclaim idle cash held by public entities in commercial banks under the new Treasury Single Account (TSA) system is reshaping the country’s public finance management framework. While the reform is aimed at consolidating government resources, enhancing transparency, and reducing borrowing costs, it raises pressing concerns for banks that have long relied on government deposits as a stable source of funding.
The Treasury Single Account and Its Objectives
The Treasury Single Account (TSA) is a unified structure that consolidates government funds into one or a set of linked accounts, typically held at the Central Bank of Kenya (CBK). Kenya has adopted a hybrid model. Ministries, departments, and agencies (MDAs) are required to maintain accounts directly with the CBK, while semi-autonomous government agencies (SAGAs) may still operate accounts in commercial banks, provided these do not retain idle balances.
The objectives of the TSA are to improve fiscal transparency, reduce leakage, and give the Treasury a consolidated view of cash resources. This structure enables real-time monitoring of inflows and outflows, making government spending more efficient while reducing reliance on borrowing.
As of June 2023, public entities held KSh 509.8 billion in commercial banks, equivalent to 10.4% of the banking sector’s deposits. A preliminary Treasury report earlier that year showed public entities operated more than 33,000 bank accounts with KSh 431.7 billion in balances that were often inaccessible, even as the government struggled with liquidity shortfalls. By consolidating funds through the TSA, the Treasury aims to unlock these idle resources for pressing expenditure needs.
The Mechanism of Reclamation
The reclamation of idle cash is being rolled out in phases. The first phase targets ministries and departments, the second will include county governments, and the third will cover state corporations and SAGAs.
The CBK will have oversight of all government accounts, allowing it to monitor balances and recall idle cash whenever necessary. This means public entities will no longer earn interest on deposits, which in the past averaged 8.07%. Treasury officials argue that public funds should serve citizens directly, rather than generate income for agencies or commercial intermediaries.
Director Jonah Wala of the National Treasury confirmed that the system has undergone testing after a previous survey concluded that some commercial banks were insincere in disclosing public balances. To prepare for the transition, the Treasury has completed an inventory of accounts and has been sensitizing banks on the forthcoming withdrawal of government deposits.
Impact on Bank Liquidity
The withdrawal is set to affect commercial banks’ liquidity positions. By December 2023, 177 parastatals alone held deposits worth KSh 201.05 billion in commercial banks. These funds have traditionally provided banks with a steady, low-cost source of liquidity that supported lending and investments.
Losing this cushion could tighten banks’ liquidity coverage ratios (LCRs), forcing them to depend more on costlier funding alternatives, such as interbank borrowing or attracting higher-yield customer deposits. Both options are likely to increase banks’ operational costs and could translate into higher lending rates.
The CBK has already responded by requiring banks to maintain liquidity buffers sufficient to withstand a 30-day stress scenario. This follows concerns triggered by market rumors of potential withdrawal caps, which raised speculation about liquidity pressures in the sector. The phased rollout of the TSA is expected to ease the transition, giving banks time to restructure their balance sheets.
Comparisons with Nigeria offer useful lessons. When Nigeria fully implemented its TSA, commercial banks heavily reliant on government deposits experienced a sharp decline in liquidity, which led to reduced credit availability and higher borrowing costs. Kenya’s hybrid TSA model, which allows SAGAs to maintain operational accounts in commercial banks, may cushion some of the impact, but analysts expect funding conditions in the sector to tighten.
Wider Financial and Economic Effects
The effects of the TSA will extend beyond liquidity ratios. For commercial banks, the loss of government deposits may shrink lending capacity, especially to small and medium-sized enterprises (SMEs) that rely on credit to fund operations and expansion. A constrained credit environment could slow activity in sectors of the economy dependent on bank financing.
Borrowers may also face rising interest rates as banks adjust pricing to account for higher funding costs. This could impact affordability for households and businesses already navigating tighter credit conditions.
On the government’s side, consolidating funds is expected to reduce borrowing needs by freeing up idle resources for immediate expenditure. For example, the Treasury plans to use reclaimed cash to pay down pending bills that have delayed supplier payments across ministries and agencies. The centralization of collections through digital platforms like eCitizen, which processes nearly KSh 900 million in daily revenues, shows how consolidated systems can enhance efficiency and cash flow.
Still, risks remain. Critics argue that relying heavily on a centralized platform increases vulnerability to operational disruptions. System downtimes or technical failures could stall payments nationwide, prompting comparisons to “putting all eggs in one basket.”
FAQs
- How will counties be affected by the TSA rollout?
Counties will be included in the second phase of implementation. While they will still access funds for operations, idle balances will be swept into the CBK, limiting their ability to hold surplus funds in commercial banks.
- Can commercial banks replace lost government deposits with other sources?
Yes. Banks may turn to retail deposits, corporate clients, and external borrowing. However, these alternatives are generally more expensive, which could increase their cost of funds.
- Will customers’ access to loans be affected immediately?
The impact is expected to be gradual. Since the TSA rollout will take up to three years, banks have some time to adjust their balance sheets before credit availability is meaningfully affected.
- Do other countries in Africa use a TSA system?
Yes. Nigeria and Tanzania have already implemented TSA frameworks, with Nigeria experiencing a sharp liquidity squeeze in its banking sector, while Tanzania’s model has been less disruptive due to phased implementation.
- What risks could arise from centralizing all government funds at the CBK?
The main risks include operational downtimes, cyber threats, and over-reliance on a single system. Any technical failure could temporarily disrupt payments nationwide.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.