DOLLAR LOANS AND LIABILITIES RISE ON FOREX MARKET WOES.

Banks have increased their issuance of loans in foreign currency due to the recent local forex market dysfunction, according to the International Monetary Fund (IMF). The rise in foreign currency loans is mainly due to commercial banks seeking to hedge against currency risks, which were defined by forex access difficulties in the domestic market. The IMF reported that banks' shares of foreign currency loans, deposits, and liabilities stood at 30, 25.6, and 31.5 percent at the end of 2022, compared to 28.5, 24.5, and 29% at the end of 2021.

The build-up in foreign currency positions indicates that banking clients are bearish about the country's forex exchange direction and expect the local currency to depreciate significantly in the short run. The IMF warns that the build-up of banks' FX exposures has increased the industry's vulnerability to exchange shocks, despite positive recent action to resolve the foreign exchange market dysfunction.

The CBK has taken steps to restart the dealings (interbank forex market) in late March, including the issuance of a forex code for market participants, bringing two inter-dealer brokers, and increasing engagement with market participants. The IMF data shows interbank forex trading volumes for all currencies have improved, and activity has returned to the Forex interbank market. Commercial banks have multiplied earnings from foreign exchange trading by leveraging the crisis, and foreign currency deposits have continued to soar, reaching Sh1.075 trillion as of April from Sh834.5 billion at the same time last year.

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