Stable shillings cuts top banks forex income by Sh9bn

The drop in forex income happened as the Kenya shilling against the dollar from a low of Sh160.79 at the height of the forex crisis in January last year to stabilize at around Sh129 in the seven months to March this year.

The local currency has further maintained that stability to the present. 

The government through the Central Bank of Kenya (CBK) has since February last year made interventions to attain the shilling's stability, including the fixing of dysfunctions in the foreign exchange market, eliminating sovereign default risks and raising domestic interest rates to encourage foreign inflows.

StanChart marked the highest drop in foreign exchange trading income at 60 percent with revenues from this line of business dropping to Sh1 billion from Sh2.5 billion.

Read: StanChart profit falls 13pc as forex, loans income drop

Forex trading income by all other banks also fell by between 36 and 57 percent in the review period.

Absa Bank Kenya Director for Global Markets Stella Mambo notes that forex trading income by banks was strong in the first quarter of 2024 as several shocks converged but that the volatility has since dissipated.

“What we observed in first quarter 2024 was a convergence of macroeconomic shifts, including policy adjustments, market corrections and heightened demand for hard currency which led to a temporary uplift in trading margins,” she said.

“This shift reflects a return to fundamentals with income now more closely tied to client-driven flows, cross-border transactions and hedging solutions. Pricing dynamics have normalized, but the demand for forex remains robust, anchored in trade, remittances and investment activity.”

Banks primarily make money from forex by supporting clients including individuals, corporates and institutions in sourcing for foreign exchange for trade, remittances, investments and cross-border transactions.

Revenue for the banks is typically earned through the spread and structured products that help clients manage currency exposure.

At the height of the foreign exchange crisis in early 2024, foreign exchange spreads on the US dollar were as high as 13 units, handing commercial banks the opportunity to make handsome returns from currency deals.

Spreads have since narrowed while the gap between the CBK Kenya shilling quote from the interbank forex market and selling rates by commercial banks to clients has closed.

Equity Group for instance sold dollars to clients at Sh131.20 on Thursday last week while CBK quoted the local unit at Sh129.22 a day earlier, a difference of just 1.98 units.

CBK has made various interventions in the market to support the stability of the Kenya Shilling including allowing an electronic trading system and lowering of the minimum transaction recorded as a forex interbank deal from $500,000 (Sh64.6 million) to $100,000 (Sh12.9 million).

In February last year, the Treasury also oversaw the issuance of a Sh193.8 billion ($1.5 billion) buyback of Eurobond notes that were due to mature in June 2024 which had fuelled speculation that the country would likely default on the expected payments.

The CBK also raised its benchmark rate to a high of 13 percent and issued a new infrastructure bond which handed investors the highest fixed returns of 18.46 percent, helping galvanize a return of foreign inflows to the economy.

“When I came to the office on June 19 last year (2023), I found a situation where inflation was very high and outside our target band and there was significant pressure on the exchange rate," said CBK Governor Kamau Thugge in a past interview.

"I had a meeting with bankers because I couldn’t understand why there was so much pressure and they were candid noting there some notable reforms agreed upon but not implemented by the CBK. After noting some of the demand pressures including a backlog of people seeking to get foreign exchange, I called for a monetary policy committee meeting within one week and we agreed to raise the policy rate by 100 basis points (one percent) which was a surprise of the market."

The Kenya shilling has traded in a narrow bound range between Sh129 and Sh130 against the US dollar since July last year bringing a sense of stability to the exchange rate.

Exchange rate stability has been healthy for the market as it encourages more sustained cross-border activity.

The stability however means that spreads in the market are expected to also remain in a narrow range reducing the forex trading income for banks.

“From a trading income perspective, while narrower spreads may affect margins, the focus shifts to volumes, client flow and value-added forex solutions, which remain strong growth levers in a stable market,” added Ms. Mambo.

“In such instances, we help our clients navigate these nuances with confidence, offering timely market insights, tailored forex solutions, and risk management tools that support certainty even in shifting environments.”

Banks have been forced to focus on the diversification of non-interest funded income sources to offset the decline in forex trading income.

Other sources of non-funded income for banks include fees and commissions on loans and trade finance.

Absa for instance says it is focused on growing transactional banking, cash management, trade finance and digital platforms that supports payments, collections and value-added advisory.

“Our approach is clear on building resilience by deepening client relationships, digitizing experiences, and embedding value beyond rate fluctuations. The future of unfunded income is solution-led, not volatility led,” said Stella Mambo.

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