Food purchases piled pressure on Kenya’s reserve of foreign currencies, taking close to 17.1 percent of the country’s total import bill. FILE PHOTO | SHUTTERSTOCK
The recent build-up of dollar deposits in local banks has left them facing renewed pressure on their capital buffers, due to a quicker rise in liabilities on account of the shilling’s depreciation against the dollar.
Dollar deposits count as liabilities for banks, while foreign exchange loans to customers fall on the asset side, similar to shilling loans and deposits.
The value of dollar deposits has, however, grown significantly over the past year, hitting a record Sh1.185 trillion by the end of June, driven largely by a weakening shilling.
Depositors are also hoarding dollars, due to uncertainty about accessing future supply, and also for speculative purposes by some.
The local forex market has this year suffered from bouts of uneven supply, even as demand for hard currency remains high from importers due to elevated global prices.
Analysts at ratings agency Moody’s have now cautioned that the net liability position on forex accounts is now a threat to capital buffers for African banks, especially those in countries whose currencies have fallen sharply against the dollar.
“Banking sectors with large volumes of foreign currency liabilities nearing maturity and limited foreign currency liquidity are most vulnerable,” said Moody’s in a note on African banks.
"Banks in Kenya are vulnerable because of their short on-balance sheet net open positions, as banks have more forex liabilities than forex assets.”
This forex asset-liability mismatch was also flagged as an area of concern by the IMF in its recent country report on Kenya, where it noted that forex market dysfunction led to a buildup of larger gross forex positions on banks’ balance sheets.
“The shares of foreign exchange loans and deposits have continued to rise, and the sizeable on-and off-balance sheet foreign exchange positions of banks increase their vulnerability to exchange rate shocks,” said the IMF.
Over the past one year, the shilling has depreciated against the dollar by 16.7 percent, exchanging at 142.88 units on Friday as per the CBK’s official rate.
Meanwhile, the value of the dollar and other hard currency sitting in bank accounts in the one year to June went up by Sh293.5 billion to Sh1.185 trillion.
While part of the jump in value is due to a growth in the actual stock of dollars, analysts reckon that the depreciation of the shilling against hard currencies is the biggest contributor.
IC Asset Managers (Mauritius) economist Churchill Ogutu says the government can take advantage of the net liabilities or deposits to test the market with a local dollar bond.
“That is what the government is looking at when they speak about a local dollar bond, and that is also where speculators are likely sitting,” said Mr Ogutu.
Corporates account for about 70 percent of Kenya’s dollar deposits, with the rest in the hands of households, indicating that the bulk is not held for speculative purposes.
