Kenya: 80% of the population's cash held in seven banks
The central bank governor said other banks are "starved of liquidity".Seven out of Kenya's 42 banks hold 80 per cent of the population's cash, according to Central Bank of Kenya Governor Patrick Njoroge.
He said other banks are "starved of liquidity", adding that these issues have been going on for some time.
"If you look at the interbank market for instance some banks will trade at reasonably favourable rates, but when they lend to another smaller bank it's like four times the rates," he told Capital FM.
He said that liquidity needs to move much more smoothly between all banks and that financial institutions should rethink their business model and diversify their investments so that they have more options and are less likely to be destabilised by potential shocks.
At the end of last year, the Central Bank of Kenya suspended the licensing of new commercial banks in a bid to drive consolidation of the banking industry.
Kenya has one of the highest ratios of banks relative to population in the world, standing at 0.93. In comparison, Nigeria has a ratio of 0.12 and South Africa a ratio of 0.35.
The central bank's decision came after the closure of Imperial Bank due to "unsafe or unsound business conditions" and the placement in receivership of Dubai Bank Kenya after liquidity problems.
Analysts expressed fears that there would be a decline in market confidence towards small and midsize Kenyan banks following the closure of these banks.
Moody's rating agency warned in a report that small banks could suffer a hike in their interbank rates as their larger counterparts take steps to reduce their level of exposure.