Kenyan banks saw their balance sheets shrink in Q1 2024 as foreign currency loans and government securities decreased, the Central Bank of Kenya said.
The sector’s assets shrank 2.7% to $58.2 billion (KES7.5 trillion) in the three months to March, driven by an 18.5% decline in foreign currency loans to $7.6 billion. The banks also cut their holding of government securities by $474.3 million (KES61 billion).
The decline in banks’ assets could signal a reduced appetite for dollar-denominated loans as the shilling strengthened and a tightening of credit conditions for borrowers as lenders seek to shore up their balance sheets amid a tough macroeconomic environment.
“Net loans and advances remained the main component of total assets, accounting for 49.4% in the first quarter of 2024, a decrease from 49.7% recorded in the fourth quarter of 2023,” CBK said.
The banks offloaded short-term bonds to reduce fair value losses, which happens when they sell the securities at a lower price than they purchased. This came as the CBK tightened its monetary policy to curb inflation, which affects bond prices.
Soaring inflation at the beginning of the year and subsequent interest rate hikes slowed economic activity, making it expensive for firms and individuals to borrow. This cut the demand for loans and customer deposits.
The banks’ gross loans shrunk by 2.8% to $31 billion (KES4 trillion) in Q1 2024 compared to $31.8 billion (KES4.1 trillion) in Q4 2023, revaluing the sector’s balance sheets.
“The decrease in gross loans and advances was largely witnessed in the manufacturing, energy and water, Personal and household, tourism, restaurant and hotels sectors. The decrease in gross loans was mainly due to loan repayments,” CBK said.
Customer deposits, the main source of funding for banks, decreased by $2.2 billion (KES286.7 billion) to $42.6 billion (KES5.5 trillion) in 2024 Q1, highlighting reduced activities amid rising cost of living and a tough macroeconomic environment for businesses.
Foreign currency deposits took the biggest hit, dropping by 14.6% to $12.4 billion (KES1.6 trillion) as the Kenyan shilling strengthened. A weak local currency and FX liquidity crisis in 2023 pushed companies to source dollars from the parallel market.
Local currency deposits dropped 0.2% to $29.4 billion (KES3.8 trillion).
“Customer deposits remain the main source of funding to the banks accounting for 73.6% of the banking sector total liabilities and shareholders’ funds as of the end of the first quarter of 2024,” CBK said.
