Commercial banks’ holdings of foreign currency reserves rose by a quarter in the 12 months to August 2018 as forex inflows increased.
According to the latest Treasury data, commercial banks saw the foreign reserves — as distinct from customer forex deposits — rise by Sh63 billion during the period to stand at Sh313.54 billion.
Forex transaction is one of the major sources of non-funded income of commercial banks who buy and sell from the market as well as from the Central Bank of Kenya.
The increase in the banks’ reserves came against the tax amnesty for Kenyans to bring back cash stashed in foreign lands, without having to pay any penalties for levies they may have failed to pay or for economic crimes.
The strong growth in foreign currency reserves among the banks was also driven by the diaspora inflows that grew by 42 percent in the 12 months to last August compared to the same period the previous year.
Official data shows that remittances grew to Sh255.00 billion in the 12 months to last August compared to Sh179.67 billion in the same period in 2017.
Increased foreign liquidity
This far exceeded the foreign net outflows of Sh35.27 billion from the equities market on the Nairobi Securities Exchange during the same period, leaving financial institutions with increased foreign liquidity for trading purposes.
“We have had a lot of inflows. I don’t know the relative strength of the factors leading to this, but they included diaspora remittances, new investments in Kenya and flows from exports such as in agriculture and horticulture,” said Eric Musau, head of research at Standard Investment Bank.
Mr Musau said commercial banks had considerable amounts of hard currency that was not yet used and could go into various ventures, including lending to the government, even as the bulk of their holdings remained in domestic currency.
He noted the amnesty had contributed, but the amount brought in as a result could not be known as no one had declared what they brought in.
The amnesty was first granted in 2016 under the Tax Procedures Act and extended in 2017 to expire in June 2018.
However, Treasury secretary Henry Rotich noted that there had been slow uptake partly due to concerns that questions would be raised as to the source of the cash by the Financial Reporting Centre.
Last June, he extended the amnesty and also amended the law to ensure that no questions were raised under the provisions of the Proceeds of Crime and Anti-Money Laundering Act.