Banks gain most in Sh1,000 notes switch

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

In Summary

• The rush to return the old currency has handed them cheap deposits for onward lending to borrowers.

By EDWIN OKOTH
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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.