The value of foreign currency loans and deposits held in local banks fell by Sh504.9 billion in three months ended March on the backdrop of a strengthening Kenya shilling, easing concerns about the lenders’ exposure to external risks.
Deposits in foreign currency fell sharply in the period, dropping to Sh1.63 trillion from Sh1.91 trillion in December 2023 as gains in local currency depleted the holdings of offshore notes in Kenya shilling terms.
Foreign currency loans equally fell, touching Sh990.2 billion from Sh1.21 trillion at the end of 2023.
The fall in foreign currency loans and deposits is a relief to banks after the International Monetary Fund (IMF) warned of high exposure.
“The share of FX (foreign currency) loans declined somewhat in the third quarter of 2023 but remained higher than a year ago. Currently, an unremunerated cash reserve ratio of 4.25 percent applies to a bank’s total domestic and FX deposit liabilities and is filled in shilling. There are no additional capital requirements on FX loans or exposure caps on FX loans,” the IMF observed in a January report.
The share of Kenya’s total foreign currency liabilities stood at 34.9 percent as of September 2023, beating the median of 31.6 percent for emerging and developing economies.
The IMF observed that foreign currency deposits were on the increase even after factoring in the depreciation of the exchange rate, which signalled a nominal increase in hard currency holdings across 2023.
The accumulation was attributable to banks increasing their ownership of foreign currency to service the government-to-government oil importation deal that started in March 2023 and to expectations of the continued depreciation of the Kenya shilling.
The multilateral lender underlined risks, including foreign currency access difficulties, in its caution against accumulating hard currency credit, particularly for foreign currency loans.
“A non-trivial portion of the FX loans are in sectors such as personal loans, real estate, transport and communication, and building and construction; it’s unclear to what extent borrowers in these sectors have a natural hedge as these sectors are not main export sectors,” the IMF added.
“Banks report that with the ongoing dollar shortage, FX borrowers who are unable to source for US dollars in the local market have been offering repayment in shilling, effectively defaulting on the loans and contributing to the rise in non-performing loans.
Firms and businesses had resorted to contracting hard currency loans to access dollars amid the foreign exchange crisis observed across 2023.
Foreign currency liquidity has, however, improved through 2024 following reforms and interventions to halt the depreciation of the Kenya shilling, which have encouraged new inflows of hard currency into the economy.
The Kenyan shilling has been a gainer against major world currencies including the US dollar since mid-February and is part of the best-performing currencies in the world this year.
The Central Bank of Kenya quoted the local unit at Sh128.7 against the US dollar on Tuesday, representing gains of over 19 percent for the shilling on a year-to-date basis.
The change in fortunes for the currency has stamped out speculation in the foreign exchange market supporting ample hard currency in the economy to not only support the exchange rate but also import purchases and profit repatriation by foreign investors.