In September 2023, Kenyan corporations and affluent investors increased the proportion of their bank deposits held in dollars to 70%, amounting to $6 billion, according to the latest data from the Central Bank of Kenya.
This surge, driven by a severe shortage affecting the acquisition of essential raw materials globally, contrasted with households’ hard currency deposits of $2.6 billion, a notable increase from the previous period.
The deposits by firms are representative of 70 percent of all forex deposits which stood at KES 1.39 trillion ($8.6 billion) at the end of the same period. The share of foreign currency deposits by firms has been on a steady climb having grown from 56 percent in the second and third quarters of 2019.
The increase in foreign currency deposits by both businesses and households has aligned with the depreciation of the Kenyan shilling in the last year.
During this period, the local currency has experienced a decline of over 25% against the US dollar. Commercial banks have taken the lead in accumulating hard currency, a trend previously associated with the expanded operations of Kenyan banks in the region.
As of June 2023, the Central Bank of Kenya (CBK) observed that the notable growth in foreign currency deposits, reaching historic peaks, was primarily propelled by commercial banks.
This surge in deposits was attributed to the accumulation of funds from regional operations and the acquisition of hard currency loans by the banks.
“Operations of our local banks in the region have been the principal driver of the foreign currency deposits. At the same time, some banks have been financing some of their lending externally,” said former CBK Governor Dr Patrick Njoroge.
The nominal value of the foreign currency deposits has however been lifted in part from a weaker local currency suggesting the deposits could have grown at a slower rate in real/absolute terms. According to the former CBK governor, commercial banks have deployed the hard currency deposits in lending, suggesting no prominence in the hoarding of hard currency.
The apparent increase in the nominal value of foreign currency deposits is partly attributed to the depreciation of the local currency, indicating that the actual growth rate of the deposits may have been slower in real terms.
As noted by the former CBK governor, commercial banks have utilized these hard currency deposits for lending purposes, indicating a lack of emphasis on hoarding foreign currency.
