Dollar bank deposits surge to Sh1.5trn on weak shilling

The CMA attributes the higher returns to sovereign default risk reduction.

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The value of dollar deposits held by Kenyans in local banks rose by 68 percent to a record Sh1.55 trillion in the 12 months to December 2023 on a weakening of the shilling and accumulation of foreign currencies to cover against uneven supply from the market.

The National Treasury published the data on the deposits in a prospectus for its new Eurobond issue, which was sourced from the Central Bank of Kenya (CBK).

The growth in the value of deposits was indicative of an even mix of exchange gains and the introduction of new deposits into the banking system, mainly from corporates, which raised their share of foreign currency deposits in banks to 70 percent in September 2023 from 56 percent in September 2019.

The dollar gained by 27 percent against the shilling last year, handing those in its possession a significant capital gain, on top of the interest they earned from banks for the deposits.

At the end of 2022, the deposits of Sh921.1 billion were worth $7.46 billion, going by the prevailing exchange rate of Sh123.42 to the greenback.

By the end of 2023, the value would have risen to $9.85 billion when calculated at the exchange rate of Sh156.98 to the dollar at the time.

This indicates an increase of 32 percent or $2.4 billion in actual dollars, with the rest of the appreciation in shilling terms attributable to exchange gains.

Businesses, especially those involved in the importation of raw materials and finished goods, had periodic challenges accessing dollars last year, which encouraged those with dollars in hand to hold on to them as a hedge against being caught short when their obligations to external suppliers came due.

The hedging also avoids forex losses should they need to buy dollars down the road if they were to rely on the conversion of shillings whose relative value had continued to depreciate.

However, while the rise in the value of the dollar is a positive for depositors, it represents a risk for banks 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.

Since banks report their financial statements in local currency, the rise in the value of dollar deposits on account of exchange rate movement has the effect of padding the value of their liabilities, even when they are not taking on additional actual dollar deposits.

Rating agency Moody’s recently 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. This forex asset-liability mismatch was also flagged as an area of concern by the International Monetary Fund in one of its recent country reports on Kenya.

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