Kenya has witnessed a notable surge in dollar deposits held by locals in domestic banks, reaching a record high of Sh1.55 trillion by the end of 2023, marking a remarkable 68 percent increase within a year. This surge is attributed primarily to the devaluation of the Kenyan shilling and a strategic buildup of foreign currency reserves to hedge against market volatility.
Corporate entities have significantly contributed to this increase, with their share of foreign currency deposits rising to 70 percent by September 2023, up from 56 percent in September 2019. The surge in dollar deposits has been driven by the appreciation of the dollar against the shilling, resulting in substantial capital gains for depositors.
Initially a safeguard for businesses involved in importing goods, the trend has expanded to a wider demographic, with depositors utilizing dollar reserves to mitigate currency fluctuations and potential forex losses. Challenges in accessing dollars in the market, particularly for external obligations, have reinforced the importance of maintaining dollar reserves.
However, this surge in dollar deposits presents challenges for banks, including increased liabilities and concerns about capital buffers. Rating agency Moody’s has cautioned that the net liability position from forex accounts could pose risks to capital buffers for African banks, especially in countries where local currencies have depreciated against the dollar.
As the trajectory of dollar deposits continues amidst a weakening shilling, stakeholders in the financial sector are grappling with the implications of this significant shift in deposit dynamics. While depositors benefit from growing dollar holdings, banks must navigate the complex relationship between forex fluctuations and capital resilience in an evolving economic landscape.
By: Montel Kamau
Serrari Financial Analyst
12th February, 2024
