Sh225bn kept under the mattress during 2017 polls

A security officer on guard at a vote tallying centre in Kakamega following the repeat presidential election in October last year. PHOTO | FILE 

By GEOFFREY IRUNGU

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Summary

• The money was mainly taken out of demand deposit accounts — money kept in banks but is available on demand — which accounted for Sh12.4 billion of total extra withdrawals between June and December 2017.
• Most of the withdrawals took place between August and November, when the country held two highly contested presidential elections before a slight recovery began in December.
• The withdrawals are seen to have been driven by the need to maintain cash in an uncertain political environment.

The amount of money held by banks dropped sharply in the last quarter of 2017 as Kenyans took out loads of cash for keeping at home in response to the uncertainty surrounding the General Election, newly released data shows.

Kenyans raised the amount of cash kept at home by Sh18.4 billion to Sh225.5 billion between June and December last year, signalling how deep the political contest hurt confidence in banks.

The money was mainly taken out of demand deposit accounts — money kept in banks but is available on demand — which accounted for Sh12.4 billion of total extra withdrawals between June and December 2017. The withdrawals cut the total amount of cash held in customer accounts to Sh1.17 trillion by the beginning of December.

Most of the withdrawals took place between August and November, when the country held two highly contested presidential elections before a slight recovery began in December.

Restless environment

The withdrawals are seen to have been driven by the need to maintain cash in an uncertain political environment as well as to support heavy spending associated with political campaigns.

“People wanted to have more cash with them. For one there was the election spending by politicians who tend to use cash and the subsequent political uncertainty meant people only felt safe with their cash. When you have cash, it is easier to get out of a situation in the event of uncertainty,” said Faith Mwangi, an analyst with Exotix Capital, a UK investment bank with a presence in Nairobi.

The heavy withdrawals left commercial banks with heavy liquidity constraints that only started easing in December.

Liquidity rose steadily through August when it stood at 49 per cent but immediately went on a quick fall to stand at 47.1 per cent by early December.

Ms Mwangi said that besides increasing concentration of cash outside banks, the banking system itself had challenges relating to the capping of interest rates.

This meant that most banks were not so keen on keeping interest-earning deposits for which they needed to pay interest at the rate of seven per cent.

Decline

The steep decline decline in economic activity in the course of last year coupled with a high inflation rate was also seen to erode the purchasing power of those in the lower-income bracket, forcing them to supplement with their savings.

READ: Inflation, stagnant wages left workers poorer in 2017

The economic decline was mainly driven by the slowdown in agriculture sector activity (that also includes forestry and fishing), which grew marginally at the rate of 1.6 per cent compared to 4.7 per cent the previous year and 5.3 per cent in 2015.

“The economy did not perform as well last year compared to the previous year, so you would expect that people will bank less cash in demand deposits. They would probably also withdraw more of what they held in banks to sustain their spending,” said Elizabeth Njenga, an analyst with Sterling Capital, an investment bank.

Ms Njenga said that the uncertain political climate only made an existing confidence problem for banks (following successive collapse of three banks) worse, leading more people to prefer holding their cash at home.

“There has been that reduced confidence in the sector following the bank collapses, but politics in late 2017 just made things worse. If you combine that with the fact that people earned less from last year’s poor performing economy, you begin to see why people took more cash out of the banks,” said Ms Njenga.

Project improvement

The Economic Survey 2018 shows that the economy grew by 4.9 per cent last year.

The Treasury and major global institutions such as the World Bank have said they expect improvement this year, with a 5.5 per cent growth forecast.

“For this year, you should expect to see people depositing more money in the banks and investing some of their savings in various securities. This is because the economy is bound to improve,” said Ms Njenga.

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