From left: CBK governor Njuguna Ndung’u, Treasury secretary Henry Rotich and CMA chairman Kung’u Gatabaki. FILE
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Capital Markets Authority (CMA) on Monday demanded that the role of creating and primary issuance of bonds be transferred from the CBK to the Treasury.
CMA chairman Kung’u Gatabaki said such a move would also remove the risk of conflict of interest that the CBK currently faces.
Mr Gatabaki’s view got critical backing when Treasury secretary Henry Rotich said that the new public finance architecture has transferred the task of managing national debt to the Treasury.
The Treasury has been drawn into the debate over how to tame the multi-billion-shilling bond theft at the Central Bank of Kenya (CBK) that has sent shockwaves across the bonds market.
The capital markets regulator on Monday demanded that the role of creating and primary issuance of bonds be transferred from the CBK to the Treasury in the wake of the scam involving the sale of fake government securities.
Capital Markets Authority (CMA) chairman Kung’u Gatabaki said such a move would also remove the risk of conflict of interest that the CBK currently faces being in charge of the country’s monetary policy while at the same time raising funds on behalf of the Treasury that has a preference for lower interest rates on its debt.
“The CBK should not have an interest in the outcome of the bond auctions,” Mr Gatabaki said, adding that the Treasury was better suited to handle the bonds and keep custody of government securities through its Debt Department.
“The Treasury should take charge of the whole process of creating and issuing government securities.”
And on Monday, Mr Gatabaki’s view got critical backing when Treasury secretary Henry Rotich said that the new public finance architecture has transferred the task of managing national debt to the Treasury.
“The new public financial management law transfers debt management and registry to the Treasury and this will be effected soon,” said the minister even as he insisted that the recent fraud was an ‘isolated case where a staff member took advantage of the system migration to create fake bonds’.
“We are looking at the entire Central Bank ICT system to see whether there are any more weaknesses,” Mr Rotich said, reaffirming confidence in the integrity of Kenya’s bond market.
“Bond issues are reconciled every month and at the end of the year between the Treasury and Central Bank. They are also audited by the auditor general.”
Mr Gatabaki said the fraud, so far confirmed to be worth about Sh105 million, may turn out to be worth billions of shillings when investigations are complete.
Government bonds listed on the Nairobi Securities Exchange (NSE) are worth Sh716 billion in nominal terms or about 20 per cent of the gross domestic product.
Mr Gatabaki’s quest to remove the job of creating bonds from CBK is hinged on the fact that the government is the owner of the bonds and is the one ultimately responsible for the securities and not the CBK.
Though it does not direct the conduct of monetary policy, the Treasury has administrative oversight over the banking sector and capital markets.
The Treasury has traditionally delegated the role of issuing and managing government debt to the CBK — which performs the function as an agent and is paid a fee for it.
The CBK manages the debt on behalf of the Treasury through weekly bond auctions and is also the custodian of the central depository system for the bonds.
The CBK on Monday admitted for the first time that fraudulent bonds were created during the transition to a new ICT system last year.
“The fraudulent Treasury bonds were created during the migration into the new T-24 system by passing irregular credits into two CDS accounts without the entries being backed by cash payments and this was detected while undertaking reconciliation for interest payments,” said the CBK in response to questions on the matter.
The CBK added that one of its employees was involved in the fraud and has since been prosecuted for the offence.
Mr Gatabaki maintained that the fraud may have involved more bonds than has been discovered so far but the central bank said a reconciliation exercise showed there had been no other fraudulent entries in the T-24 system.
“A reconciliation exercise was immediately undertaken of the outstanding Treasury bonds and it confirmed that no further fraudulent entries were effected. We can vouch for the authenticity and close surveillance of the bonds trading in the secondary market as this was a case of taking advantage in the migration process,” said the CBK.
CMA’s quest to have the role of originating bonds transferred comes after it banned six individuals, three of them bond traders, from being employed or holding directorships in NSE-listed firms or market intermediaries for periods ranging between seven and 15 years for their role in handling the fake treasury bonds.
On Monday, CMA said it had banned former Tsavo Securities managing director Fred Mweni for 15 years and former ApexAfrica head of fixed-income market trading Brian Muchiri for seven years.
A brother to Mr Mweni, Bokole Masha, who was also a director at Tsavo Securities, is banned from working for or serving on the board of NSE-listed firms for 10 years.
“Mr Mweni is disqualified with immediate effect from appointment as a director of any listed company or licensed or approved person, including a securities exchange in the capital markets in Kenya for a period of fifteen (15) years,” said CMA in a statement.
Tsavo Securities Limited is required to surrender the capital gains worth Sh3.8 million being the amount derived from purchase and sale of the discounted fraudulent bonds by Mr Mweni and Mr Masha.
The surrendered amount is to be paid into the CMA Investor Compensation Fund. Mr Muchiri is also required to pay back Sh3.7 million he earned from the deals. The money is to be paid to the investor compensation fund.
“Mr Muchiri has been required to surrender the capital gains earned worth Sh3.741 million derived from purchase and sale of the fraudulent bonds through conduct amounting to front running,” said the CMA in a statement.
Mr Gatabaki said the enforcement actions taken against the individuals and entities involved were informed by investigations that have lasted 10 months.
The CMA also reprimanded Tsavo Securities for failure to conduct its business efficiently with the appropriate integrity and professional skills as a licensed investment adviser.
The company’s licence has been restricted to the conduct of investment advisory business to the exclusion of any other business.
“The board members of Tsavo Securities have been reprimanded for their failure to implement effective oversight over the company’s operations and the activities of its key employees,” said CMA in the statement.
Apex Africa Limited is also required to surrender commissions earned from the transactions amounting to Sh58,000 to CMA Investor Compensation Fund.
Its board of directors has been censured for failure to have effective oversight over the company’s operations and on its key employees.
