Rich Kenyans have Nearly Sh1 Trillion in Dollar Accounts

In February, wealthy Kenyans and businesses’ cash reserves almost reached $1 trillion due to a severe shortage that prevented the purchase of essential raw materials from the international market.

Data from the Central Bank of Kenya (CBK) show that as people and large corporations looked for a safe haven for their money, foreign currency bank deposits reached a historic high of Sh987.7 billion, just shy of the trillion dollar threshold by Sh13 billion.

The increase in dollar deposits of Sh66 billion in January and February amounted to daily savings of Sh1 billion during that time.

In order to benefit from the sharp decline in the value of the shillings relative to important currencies like the dollar and the pound, investors chose to open accounts that were heavily weighted toward foreign currencies.

Bulk purchasers also sought a reserve of dollars due to a shortage of US dollars, which was attributed to panic purchases and the recently dormant interbank foreign exchange market.

Due to the shortage, industrialists were forced to seek out dollars daily from a number of lenders in order to meet their monthly hard currency needs. This made it difficult for them to maintain good supplier relationships and to bargain for favourable prices in spot markets.

The amount of money stored in bank vaults increased 176.6% in the year leading up to February, marking the highest 12-month growth in recent memory.

This demonstrates that the increase in foreign currency bank deposits was driven primarily by savings, with little impact from the strengthening of the dollar relative to the shilling, which rose 9.4% against the US currency during the period.

In its annual report for 2022, Standard Bank Group, the parent company of Kenya’s Stanbic Bank, stated that the increase in non-interest revenue of “23 percent [was] driven by higher trading revenue from higher client sales in Kenya driven by USD demand following the KES depreciation.”

This demonstrates how investors looked for dollars to protect themselves against the shilling.

The sharp depreciation of the Kenyan shilling against the dollar, according to Rufas Kamau, a lead market analyst at FX Pesa, caused many Kenyans to lose faith in its strength.

However, listed companies may have been hoarding cash in advance of dividend payments, claims financial analyst Churchill Ogutu.

President William Ruto has warned those hoarding dollars of losses after the State House became aware of the dollar stockpiling.

“I’m happy that the players in that sector, including our banks, are coming forward and are working with the CBK so that we can again take charge of our market and that it is not distorted by brokers,” Dr Ruto said on March 12.

“For the people who work numbers, I’m giving you free advice that those who are holding dollars you shortly might go into losses. This market is going to be different in a couple of weeks,” he added.

The shilling has lost value against the dollar, falling from Sh123.4 at the beginning of the year to Sh104.44 at the end of March 2020, to an all-time low of 135.7.

Local demand for dollars has increased significantly this year in tandem with rising imports as a result of the economy’s full reopening, which has freed up previously suppressed demand for both capital and consumer goods.

The invasion of Ukraine by Russia has caused global shocks that have raised the cost of imported goods and increased demand for dollars.

A stronger dollar as a result of the US Federal Reserve raising interest rates to combat inflation has hurt the shilling as well.

Rate increases frequently lead to dollar exodus to safe havens in the industrialized world, driving up demand for the dollar and decreasing the value of the local currency.

All kinds of businesses, banks, and investors want to hold dollars during trying times. It is regarded as the safest currency and the world’s reserve currency.

Since the US economy is viewed as being the most protected from harm to the global economy, the dollar has become the preferred currency among anxious investors.

Investors are known to stockpile cash for speculative purposes after predictions that the shilling would continue to depreciate against the US dollar came true.

Those who hold dollars would be able to convert them to shillings at a profit or wouldn’t experience conversion losses when importing thanks to the anticipated decline.

Following the interbank currency market’s revival at the State House’s request, the acute dollar shortage has subsided.

In contrast to recent market conditions, where some banks ran out of US currency while others imposed a daily cap on dollar purchases of as little as $5,000, bulk buyers of dollars have noticed increased availability of the greenback.