Kenyan banks have witnessed a significant contraction in their balance sheets in the first quarter of 2024, largely due to a decrease in foreign currency loans and holdings of government securities, according to a recent report by the Central Bank of Kenya (CBK). The total assets in the banking sector decreased by 2.7%, falling to $58.2 billion (KES7.5 trillion) from previous levels. This decline reflects broader economic challenges and strategic adjustments by financial institutions.
Decline in Foreign Currency Loans and Government Securities
The most notable change was an 18.5% drop in foreign currency loans, which decreased to $7.6 billion. This reduction is indicative of a reduced appetite for dollar-denominated loans as the Kenyan shilling strengthened against foreign currencies. Additionally, banks cut their holdings of government securities by $474.3 million (KES61 billion), as part of a strategy to mitigate fair value losses amid fluctuating bond prices and a tighter monetary policy environment aimed at controlling inflation.
Shifts in Loan and Deposit Metrics
Net loans and advances, which make up nearly half of the banks’ total assets, also saw a slight decline. They accounted for 49.4% of total assets in Q1 2024, down from 49.7% in the previous quarter. The overall gross loans contracted by 2.8%, falling to $31 billion (KES4 trillion) from $31.8 billion (KES4.1 trillion) at the end of 2023. The sectors most affected by this reduction included manufacturing, energy and water, personal and household, and tourism, restaurant, and hotels.
Customer deposits, which are crucial for banks’ funding, also decreased by $2.2 billion (KES286.7 billion) to $42.6 billion (KES5.5 trillion). This decline highlights the reduced economic activities and financial strain faced by businesses and individuals amid high inflation and elevated borrowing costs. Particularly, foreign currency deposits plummeted by 14.6% to $12.4 billion (KES1.6 trillion) as companies sought dollars from parallel markets due to a liquidity crisis and a previously weakened shilling.
Economic and Policy Implications
The contraction in banks’ balance sheets underscores the challenging macroeconomic environment, characterized by soaring inflation and higher interest rates, which have curtailed economic activity and demand for loans. The CBK’s tightening of monetary policy has been a critical factor in these developments, as it aims to stabilize the economy and control inflation, albeit with significant impacts on lending and borrowing behaviors.
Looking Forward
As the banking sector navigates these turbulent times, the focus will likely remain on managing risks and maintaining stability. The ongoing adjustments in loan portfolios and securities holdings reflect a cautious approach by banks to mitigate potential losses and adapt to the evolving economic landscape.
The broader implications for the Kenyan economy include potential constraints on growth if credit conditions remain tight. Policymakers and financial institutions will need to balance these factors to support economic recovery and stability.