CBK enlists bureaus in currency wars with banks

Central Bank of Kenya governor Njuguna Ndung’u at a press conference in Nairobi Thursdy.  William Oeri
Central Bank of Kenya governor Njuguna Ndung’u at a press conference in Nairobi Thursdy. William Oeri 

The Central Bank Thursday moved to loosen the grip big commercial banks have in the currency market, insisting it would not intervene to strengthen the shilling even as the unit touched a new low at 91.90 to the US dollar.

Governor Njuguna Ndung’u told a press conference that henceforth, bidding for forex injections would be opened to all banks and forex bureaux to make the market more competitive. There are 123 forex bureaux and 43 banks.

In the past, just 15 banks participated in the bidding and the competition is expected to spread the distribution of forex power within the market.

The announcement came as the shilling appeared to claw back ground from the all-time low of Sh91.90 to the dollar to settle at Sh89.90/90.00 range against the backdrop of CBK warning that it would crack the whip on speculators. Most forex dealers, who sounded quite apprehensive after CBK warned it would take regulatory action on three banks for suspicious currency dealings, declined to speak on the matter.

“What matters is capacity. It remains to be seen if the forex bureaus will have the required volumes to meet the orders of their clients, I think this is what will bring the distinction,” said Philip Wambua , the head of treasury at Bank of Africa. Banks dominate trade financing and bureaus are restricted by the fact that they are just intermediaries between clients.

The Business Daily Thursday reported CBK was taking regulatory action on three large banks after what they viewed as suspicious outflow of $237 million mid this month that led to a huge depreciation of the shilling.

Although CBK declined to name the banks, the governor Thursday said the unspecified action had already been taken. He said the deals in question were transacted between June 9 and 16, 2011. In all, five banks ‘exported’ $260 million. CBK charges that four of the institutions are holding large forex positions that do not reflect trading fundamentals.

“During the same period, the volume of borrowing from Central Bank by strong banks went up—suggesting arbitrage opportunities,” he said.

We reported Thursday that banks were borrowing from CBK and lending the same money to government as its lending rate (Central Bank Rate) was much lower than Treasury bill yields.

Calls for intervention in the market have been mounting as importers, particularly of oil and food, face huge costs and transmit the same to domestic consumers.

“CBK analysis shows that intervening in the current environment through injections will only lead to loss of reserves without solving the problem,” said the governor who was accompanied by bank directors and those of the Monetary Policy Committee. The private sector Thursday reacted with alarm at the announcement. “All the gains the government has made by reducing duty on grain imports will be reversed if this state of affairs continues. Kenyans have to prepare for tough times ahead,” Kenya Private Sector Alliance chairman Patrick Obath. Manufacturers depending on imported raw and intermediate goods are already suffering.

Devki Group, steel and cement products maker, cautioned economic ramifications of the strong Shilling would be dire. “If this situation persists for more than a month, the impact on consumers will be devastating; the economy will be affected if nothing happens,” said managing director Narendra Raval.

CBK insists that there is enough forex in the market, at $5,133 million, and that the exchange rate swings are caused by arbitrage and speculation. CBK is holding $3,904 million as banks hold another $1,229 million.