Big gainers in Kenya’s currency switch

Commercial banks in Kenya have emerged as top beneficiaries of the switch to new shs. 1,000 notes amid the rush to beat the October 1st deadline. This has handed the banks volumes of deposits thus increasing their liquidity for onward lending to borrowers. In June alone, the banks gained shs. 25 billion in deposits which they lent to their preferred low risk borrower, the treasury while still starving individual households and businesses of loans.

Speaking at a media briefing organized by the Kenya Business Guide in Nairobi, Mr. Ken Gichiga, a chief economist with Mentoria Economics said the banks’ refusal to lend to individuals is a key barrier against the economic impact that the currency change would have had were the cheap deposits lent to enterprises. The banks’ refusal being seen as a protest to interest rate cap law passed three years ago, Mr. Gichiga said that unless this changes, individuals and SMEs are unlikely to reap from the demonetization.

According to Central Bank of Kenya’s (CBK) latest data, currency outside banks registered an 11.3% month-on-month drop from shs. 222 billion in May to shs. 196 billion in June. This being a 30 months high coinciding with the National Madaraka Day announcement of demonetization of the Shs. 1,000 notes on June 1st by the president.

The Kenyan Bankers Association (KBA), an industry lobbyist however disputed CBK’s findings in an interview. KBA chief executive Habil Olaka blamed the low lending to businesses and individuals to low liquidity and their inability to price risk due to the interest rate cap. CBK’s data shows that the country’s banks liquidity grew from shs. 4.74 trillion to a high of shs. 4.89 trillion during the said period as demand for deposits held by commercial banks grew by shs. 22.3 billion to hit shs. 1.21 trillion, the sectors’ all-time high.

The local lenders have turned their focus to government lending thus increasing their income from government securities by 14.1% last year to Shs. 125.8 billion, according to data from their financials.  See this article on how investment in government securities have benefited commercial banks.

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