Businesses cut local currency deposits held in banks by Sh75 billion in the first three months of the year as they sought higher returns in government securities, putting pressure on lenders.
Central Bank of Kenya (CBK) data shows corporates’ demand deposits—money held in non-interest-bearing accounts and accessed any time—fell by Sh54 billion to Sh956 billion at the end of March this year compared with Sh1.01 trillion at the end of December 2023.
The fall in demand deposits was in addition to time and savings deposits—the interest-bearing deposits that are opened for a specific period of time at a fixed rate of interest —declining by Sh21 billion to Sh855 billion.
Households had taken a similar trend, cutting their demand deposits by Sh80 billion in three months to the end of December, before a slight recovery of Sh26 billion in the quarter ended March 2024 when time and savings deposits rose by Sh10 billion.
“Time and savings deposits and demand deposits of the corporate sector moderated, partly due to increased investments in government securities by individuals and non-bank corporates,” said CBK in the quarterly economic review for the quarter ended March 2024.
The average 91-day Treasury bill rate increased to 16.68 percent in March 2024 from 15.70 percent in December 2023, while the average 182- day Treasury bill rate increased to 16.86 percent from 15.80 percent. Bonds, on the other hand, have yielded upwards of 17 percent.
This was in the quarter banks were offering an average deposit rate of 10.34 percent.
The search for higher returns, added to the revaluation of dollar-denominated deposits, cut corporates’ deposits in banks by Sh228 billion to Sh2.719 trillion in the three months to end of March this year. Households’ deposits dropped by Sh43 billion to Sh2.049 trillion in the same period.
Corporate’s foreign currency deposits fell by Sh153 billion to Sh908 billion while that of households reduced by Sh77 billion to Sh401 billion, coming in the period the Kenya shilling strengthened by 18.4 percent against the US dollar to close March averaging Sh131.80 per dollar.
The exchange rate appreciation saw the broad money supply—money circulating in the economy—contract by 5.3 percent or Sh294.2 billion to Sh5.204 trillion in the first quarter of 2024, mainly driven by the fall in deposits.
“The reduction in deposits is largely reflected in foreign currency deposits, mainly attributable to valuation effects on foreign currency deposits following exchange rate appreciation,” said CBK.
Banks continue to face the pressure of competing with the government to retain and grow deposits. Lenders such as Equity Group, Stanbic Holdings and Co-operative Bank of Kenya have all seen interest expense grow at a faster pace than the rate at which they collected deposits.
