alexa Banks gain most in Sh1,000 notes switch - Daily Nation

Banks gain most in Sh1,000 notes switch

Friday August 30 2019

Central Bank of Kenya

Central Bank of Kenya (CBK) building in Nairobi on November 1, 2017. PHOTO | SALATON NJAU 

EDWIN OKOTH
By EDWIN OKOTH
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PATRICK ALUSHULA
By PATRICK ALUSHULA
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Commercial banks are emerging as the biggest beneficiaries of the switch to new Sh1,000 notes, as the rush to return the old currency has handed them cheap deposits for onward lending to borrowers.

The banks, which gained Sh25 billion in deposits in June alone, the first month of demonetisation of the old currency, have maintained their preference for lending to the Treasury, starving households and businesses of loans.

Mentoria Economics chief economist Ken Gichiga on Thursday said the banks’ refusal to lend to businesses, citing legal control on the cost of loans, is a key barrier against the economic impact that the currency change process would have had if the cheap cash deposits were lent to enterprises.

“The demonetisation has seen banks receiving massive deposits, but this would only have had a better impact in the economy if the banks would increase lending to the SMEs and individuals. The banks who have been unhappy with the rate-capping will obviously continue lending to the government, which is their safest bet for now. Unless this changes, we are not likely to reap from the demonetisation,” said Mr Gichiga Thursday at a media briefing organised by the Kenya Business Guide in Nairobi.

Central Bank of Kenya’s (CBK) latest data shows currency outside banks dropped from Sh222 billion in May to Sh196.9 billion in June, being 11.3 percent month-on-month drop.

The Sh25.1 billion drop in currency circulating outside commercial banks in June was the highest in 30 months, in a period that coincided with banks starting the mopping up of old Sh1,000 notes following the June 1 Madaraka Day announcement of demonetisation.

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The industry lobby, Kenya Bankers Association (KBA), in an interview Thursday however disputed that the launch of the new generation bank notes had handed the lenders cheap cash deposits.

“The low lending to businesses and individuals has not been happening due to low liquidity, it is about pricing the risks of the borrowers after the interest rate capping. Should this change in a way that allows us to price risk, we will lend more,” said KBA chief executive Habil Olaka in an interview.

CBK data shows that banks’ overall liquidity grew from Sh4.74 trillion to a high of Sh4.89 trillion during this period as demand for deposits held by commercial banks grew by Sh22.3 billion to hit Sh1.21 trillion, being the all-time high for the sector, showing that more money flew back into banking halls.

Banks spent Sh145 billion in 2018 to pay for interest on deposits, a 7.4 percent increase from the Sh135 billion a year earlier.

The local lenders have turned their focus to government lending, increasing their income from government securities by 14.1 percent in 2018 to Sh125.8 billion, according to data compiled from their financials.