The Structure of the Interbank Market in Kenya

Abstract

This chapter discusses the evolution of the network structure of Kenya’s overnight market. It applies several measurements derived from network theory to uncover some key microstructure characteristics and the nature of the interbank market segmentation. An important issue is to understand what opportunities and challenges the structure of the interbank network presents for liquidity management and stability of the banking system. The results reveal a fragmented market, consisting of local clusters with hub-like and periphery banks. These features seem to become more prominent with time. Although the interbank structure is largely incomplete (density of about 0.25), each bank can be linked to all other banks in the network in no more than three steps. While this may imply that the core potentially provides an efficient shortcut for most peripheral banks for accessing liquidity in the network, the short-path length suggests that contagion can also spread with ease.