Deposits held in commercial banks by customers rose by Sh430.4 billion in six months to cross the Sh5 trillion mark for the first time in June, mainly driven by a weak shilling and digitisation, even as banks try to woo customers with five-year high-interest rates.
Latest figures from the Central Bank of Kenya’s Credit Officer Survey show customer deposits grew 6.9 percent to hit a record Sh5.16 trillion in June compared to Sh4.82 trillion in March.
This was driven by a sharp growth in foreign currency deposits, which hit a record Sh1.186 trillion in June for the first time, up from Sh922.4 billion in December last year, benefiting individuals and firms that had stashed foreign currency.
The Kenyan shilling, which was trading at a mean of Sh123.42 against the US dollar when the year began, has depreciated rapidly in recent months, dropping by 13.8 percent to Sh140.52 by the end of June.
At the same time, banks have stepped up efforts to retain customers’ deposits by offering the highest interest rates in five years, which has contributed to a decent increase in time and savings deposits as well as demand deposits during the period.
The deposit rate hit 7.82 percent in June, which is the highest level since June 2018 when the rate stood at 8.04 percent. Banks have raised rates on deposits for nine consecutive months since September last year at a time they have had to contend with stiff competition from the attractive rates being offered by Treasury bills and bonds, unit trusts and other investments.
“Total deposits increased by 6.9 percent from Sh4.82 trillion in March 2023, to Sh5.16 trillion in June 2023,” said the CBK.
The jump in deposits has hugely improved banks’ liquidity, helping the lenders unlock more funds for lending.
“During the quarter ended June 30, 2023, liquidity improved mainly as a result of increased deposits (57 percent), loan recovery (20 percent), maturity of government securities (14 percent), capital injection (9.0 percent),” said the CBK. “Banks have put in place strategies to grow the deposits in the coming quarter.”
The CBK has also attributed the growth to agency banking and increased digitisation of banking services, which have made it more convenient for customers to deposit cash into their bank accounts using their mobile phones.
“The growth was supported by mobilisation of deposits through digital platforms,” said the CBK in its Bank Supervision Annual Report, 2022.
This comes at a time when the number of deposit accounts has grown sharply as more individuals and firms seek banking services.
The number of deposit account holders has grown by more than 15 times over the last 15 years to 64 million in 2022, up from just four million in 2007, according to CBK data.
Economists say the attractive interest rates being offered by government securities pose huge competition to banks, as lending to the government, normally considered risk-free, is now heavily favoured by investors.
In last week’s auction, the average interest rate on the 91-day T-bill stood at 14.23 percent, that of the 182-day T-bill was 14.36 percent and the 364-day bill attracted a rate of 14.86 percent.
In the auction, the CBK went to the market seeking Sh24 billion across all three tenors but took up a larger amount of Sh38.7 billion.
“What we are seeing is that commercial banks have to increase their interest rates on deposits to try to compete with government securities which are currently offering attractive returns to investors,” said Ken Gichinga, the chief economist at Mentoria Economics.
Mr Gichinga said the high rates offered by government papers are a threat to the economy as the T-bills and bonds are mopping up cash from the economy.
“Banks have really tried to adapt but the high rates on government securities could have adverse effects on the economy because now everyone wants to lend the government,” he said.
The government, however, last month cut its domestic borrowing target by 46.1 per cent, attributing it to an expected increase in external financing in what is likely to ease rates.
“The committee noted that as a result of identified new external financing, the projected net domestic borrowing by the government has been reduced from Sh586 billion to Sh316 billion,” the CBK said.
By December last year, large banks held 74.7 percent of the entire customer deposits in the sector. Medium-sized banks held 17.1 percent of the deposits while small banks held just 8.1 percent of the deposits.
To underline the risk of higher rates of alternative investments offering higher rates than those offered by banks, last year, customer deposits held by microfinance banks dropped by 7.8 percent from Sh50.4 billion in 2021 to Sh46.5 billion in 2022.
“The decline in deposits was due to transfer of funds to alternative attractive investments due to the overall increase in interest rates,” said the CBK.