CBK whips banks to unlock dollars after President Ruto warning

President William Ruto

President William Ruto rings the bell during the Laptrust Imara I-Reit listing ceremony at the Nairobi Securities Exchange on March 22, 2023. Looking on is NSE chief executive Geoffrey Odundo. PHOTO | DENNIS ONSONGO | NMG

The Central Bank of Kenya (CBK) has spooked banks with a new foreign exchange code that comes with threats of punitive fines and licence suspension for offenders, on a day President William Ruto warned traders hoarding dollars to expect losses in a few weeks.

The foreign exchange code, among others, prohibits banks from engaging in trading practices, quoting prices or making transactions with the intention of manipulating price movements or disrupting the functioning of the market.

The banking regulator says the code, which comes into effect this morning, will ‘ensure the integrity and effective functioning of the forex market in Kenya.’

“Market participants should not engage in trading strategies or quote prices with the intent of hindering market functioning or compromising market integrity. Such strategies include those that may cause undue latency, artificial price movements, or delays in other market participants’ transactions and result in a false impression of market price, depth, or liquidity,” says the code.

Banks will be required to immediately conduct a self-assessment and submit to the CBK a report on their level of compliance with the new code by April 30, 2023.

All banks will thereafter submit a detailed compliance implementation plan approved by their boards by June 30, 2023.

The CBK expects the FX code to be fully implemented, and each bank to be in full compliance by December 31, 2023.

“CBK may take appropriate enforcement and other administrative action including monetary penalties as provided for under the Banking Act against any market participant (banks) for failure to comply with the FX Code,” says the new code.

This comes at a time when the State has been seen to take matters into its own hands, exerting pressure on the market through a mix of unprecedented policies such as importing fuel on credit to force the market to release the scarce dollars into the market.

For its part, the CBK has been tasked with the revival of the interbank forex market -- where banks buy from one another -- whose collapse was attributed to the depreciation of the shilling which crossed the Sh130 mark this week.

“I’m happy that the players in that sector including our banks are coming forward and participating and are working with the CBK so that we can again take charge of our market and that it is not distorted by brokers,” Dr Ruto said during the bell-ringing ceremony to list the Laptrust Imara I-Reit at the NSE on Wednesday.

“For the people who work numbers, I’m giving you free advice that those of you who are holding dollars you shortly might go into losses. This market is going to be different in a couple of weeks.”

Market insiders told the Business Daily that the interbank market picked up on Monday following talks between lenders and the CBK and trials to jumpstart the trades.

A spot-check across multiple banks showed banks were selling dollars at between Sh136 and Sh142 on Wednesday, down from a range of Sh140.55 and Sh144.50 a week ago. They were buying the greenback at between Sh127 and Sh130.30 per unit.

Forex bureaus were selling dollars to consumers at between Sh139 and Sh141, compared to Sh142 and Sh146 last week.

Industry players have blamed the reluctance of depositors to release their hard currency holdings to the market as the other major cause of the supply hitch.

Depositors held Sh921 billion worth of dollars in their accounts by the end of December.

But the CBK through the code appears to be now going after banks that have been making billions from the currency crisis.

By September last year, tier-one banks had booked more than Sh52 billion from forex trading, an 87.11 percent year-on-year growth.

The CBK says the code is modelled on the FX Global Code that currently has 51 signatories, including three African countries—South Africa, Mauritius and Angola.

The CBK code requires Kenyan banks to submit a quarterly report on the level of compliance within 14 days after the end of every quarter, the first report being due by July 14, 2023.

Bank employees are expected to exercise extreme care when in possession of price-sensitive information about forex products.

“Market participants should not request transactions, create orders, or provide prices with the intent of disrupting market functioning or hindering the price discovery process,” the code says.

Banks will also be required to identify conflicts of interest that may compromise or be perceived to compromise their ethical or professional judgment such as entertainment and gifts.

Banks boards will, for their part, be expected to put in place adequate and effective structures to provide oversight, supervision, and controls to deal with rogue market participants.

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