Why hard currency deposits are piling up

The Central bank of Kenya, Nairobi. FILE PHOTO | DENNIS ONSONGO | NMG

Commercial banks have been the primary driver of growth in foreign currency deposits which hit an all-time high of Sh1.06 trillion at the end of March, the CBK has stated.

According to the Central Bank of Kenya (CBK), the hard currency deposits growth by banks has been via a two-pronged strategy that has included the accumulation of deposits from regional operations and external borrowing by the lenders.

A historical chart on the growth trajectory of the deposits shows the deposits began to grow at a rate higher than the average from 2019 when local banks stepped up their regional expansion efforts.

“Operations of our local banks in the region have been the principal driver of the foreign currency deposits. At the same time, some of the banks have been financing some of their lending externally,” CBK Governor Dr. Patrick Njoroge said on Wednesday.

Besides the regional operations, the value of foreign currency deposits has been partially propped up by a weaker local currency suggesting a slower rate of growth for the deposits in real/absolute terms.

Banks have nevertheless been deploying the deposits as they would other local currency denominated customer and client deposits with the CBK stating this would negate the perception of excess or idle foreign exchange in the economy.

“There is no free foreign currency that is sitting somewhere in somebody’s account as banks are already using these deposits in the same way they would Kenya Shillings,” Dr Njoroge added.

Kenyan banks have been expanding within the East African Community and beyond including KCB Group, DTB Group, NCBA Group, Equity Group and I&M Group.

In 2022, the total number of branches of Kenyan banking subsidiaries grew 11.7 percent in 2022 to 552 branches from 494 branches in 2021.

The local banks hold significant assets in foreign currency in the regional subsidiaries with Equity for instance disclosing the majority portion of its loan book in the DRC is denominated in dollars.

“Kenyan banks have positioned themselves to capitalize on the growing cross border trade inflows,” the CBK stated in its 2022 annual report.

“This has in turn not only contributed to the deepening of customer relationships, delivery of products and services but also utilization of host country resources, both capital and human resources, that have positively impacted market development and social economics.”

The total assets in Kenyan banks subsidiaries stood at Sh1.617 trillion at the end of last year with Equity holding the bulk of the assets at Sh442 billion.

The regional subsidiaries realized a pre-tax profit of Sh32.5 billion in the year ended December 2022, marking a significant 88.7 percent jump from Sh17.2 billion in 2021.

Rwanda contributed to the largest share of the subsidiaries profitability recording Sh10.2 billion in profits in 12 months to December 2022.

The potential to derive income in hard currency by Kenyan banking subsidiaries is the highest in dollarized economies such as the DRC and South Sudan.

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