Banks win on forex scarcity as dollar demand soars

In the wake of the turbulent forex market conditions that prevailed in Kenya throughout the year ending December 2022, banks in the country reaped substantial profits due to widened spreads resulting from the scarcity of foreign currency. However, as the currency market gradually stabilizes, there are concerns about whether the banks' profitability will be sustained. Habil Olaka, the CEO of the Kenya Bankers Association, discussed the evolving landscape of the interbank forex market and its implications for the banking sector in an exclusive interview with CNBC Africa. Olaka highlighted the impact of reduced volatility in the market, driven by regulatory interventions by the central bank, on the future earnings potential of banks from forex trading. He noted that the significant decrease in transaction activity on the interbank market in 2022 was poised to be reversed this year, with a resurgence in trading volumes expected. Despite the positive outlook for market stability, Olaka cautioned that banks might not replicate the lucrative returns witnessed in the previous year due to diminishing volatility. The conversation then shifted towards the fixed income market as Olaka addressed President Ruto's directive for the Treasury to limit local borrowing costs to 10 percent. While the move was intended to stimulate private sector lending by freeing up funds in the market, Olaka emphasized that banks faced challenges in extending credit to businesses amid rising interest rates and non-performing loans. He explained that despite the availability of unutilized funds from reduced government borrowing, banks remained cautious in their lending practices, resulting in a dampened growth in private sector credit. Turning to the lending landscape, Olaka discussed the tepid enthusiasm of banks towards extending credit to Small and Medium Enterprises (SMEs), citing barriers such as a lack of tangible collateral. However, he highlighted government initiatives such as the credit guarantee scheme and movable assets collateral registry aimed at facilitating SME access to credit by providing alternative collateral options. By diversifying the acceptable forms of collateral beyond traditional assets like land and buildings, these measures sought to bridge the financing gap for SMEs and spur economic growth. The conversation concluded with a discussion on the Hassler Fund, a government-backed initiative promoting financial inclusion through microloans. Olaka clarified that the fund complemented rather than competed with banks, as it catered to underserved segments of the market with unique lending terms and minimal collateral requirements. He praised the fund for its success in filling a niche that traditional banks had overlooked, noting the expansion of its offerings to include group lending products for increased impact. Overall, Olaka reiterated that the evolving financial landscape in Kenya presented both opportunities and challenges for banks, necessitating adaptability and innovation to navigate changing market dynamics.