Kenyans double offshore deposits to Sh247b

Central Bank Of Kenya Building on Haileselasie Road Nairobi. [Wilberforce Okwiri, Standard]

A sizeable chunk of Kenya’s wealth was moved to foreign banks last year in a bid by the rich to safeguard their assets amid the ravages of Covid-19.

This saw the banks more than double their dollar holdings in 2020.

According to Central Bank of Kenya’s (CBK) latest financial stability report, foreign financial institutions reported balances of Sh247 billion as at the end of December 2020, up from Sh120 billion in December 2019.

This was a 106 per cent increase in balances held with foreign financial institutions.

“This may partly explain depreciation of the local currency as customers sought to hold more liquid assets in more stable foreign currencies as the pandemic evolved, an indication of flight to safety and quality,” the report says. 

The economic uncertainty caused by the pandemic in the first months of last year pushed local commercial lenders to buy more government paper, with the sector purchasing Sh1.1 trillion in Treasury bonds as at the end of December 2020, up from Sh830 billion recorded the previous year, a 37 per cent increase.

“Investment in government securities, accumulated foreign-denominated assets and increased lending to large firms signify flight to safety during the pandemic as credit risk increased,” says the report.

At the same time, growth in customer deposits increased by 8.7 per cent to Sh4 trillion at the end of 2020 and further to Sh4.2 trillion as at June this year, with the number of accounts jumping 12 per cent to 70,700 over the same period.

“The need for liquid assets to meet firms’ and households’ needs and emergencies led to 0.7 per cent and 18.5 per cent decline in notes and coins and balances held at CBK, respectively, implying Covid–19 shocks exacerbated flight to safety tendencies,” explains the CBK.

At the same time, non-performing loans (NPLs) in the banking sector increased by 27.4 per cent to Sh424 billion in December 2020 and Sh442 billion in March this year, before easing to Sh435 billion in June. 

CBK further cautions that an increase in Covid-19 infections, coupled with the emergence of new variants, could see restrictions and containment measures upheld into the end of the year, leading to an increase in non-performing loans and erosion of earnings for the sector.   

In the worst-case scenario, CBK says non-performing loans in the sector could hit 18.9 per cent as at the end of this year, up from the current 14.6 per cent.   

“If a shock increase in aggregate NPLs materialises under the baseline, moderately and severe scenarios, seven, eight and 10 banks would require to inject additional capital of about Sh10.5 billion, Sh17.5 billion and Sh21.9 billion respectively in order to meet the minimum core capital adequacy ratio,” the report says. 

CBK, however, says banks in general have sufficient capital buffers to withstand the shock so far despite the pandemic affecting individual banks differently. 

“From a policy perspective, the results may require the CBK to consider putting emphasis on capital preservation to ensure adequate buffers in the event that the shock worsens,” it says.

Banks could also be pushed to strengthen their business models, explore market-driven mergers and acquisitions and implement revised internal capital adequacy assessment programmes that are adjusted to the Covid-19 pandemic condition. 

Other risks to the sector identified by the industry regulator in the near term include political noise around the 2022 general election that the CBK says could impact on the economy and pose direct concerns to banks’ stability.