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Central Bank of Kenya Open Up Competition in Forex Bidding

The Central Bank of Kenya (CBK) will in future allow 123 licensed forex bureaus to bid alongside 43 registered banks when CBK is buying or selling foreign currencies following a revelation that four leading banks in the country are engaged in forex speculation, driving the Kenya Shilling to unprecedented lows against the dollar.

This is aimed at loosening the grip of big commercial banks in forex bidding as well as scaling up competition. In the past only 15 banks have participated in forex bidding.

CBK has taken this step as part of the measure to overcome the current situation in which the CBK Governor, Prof. Njuguna Ndung’u, said four large banks are holding very large foreign exchange reserves “which do not reflect Kenya’s trading fundamentals thus increasing the the pressure put on the exchange rate.”

Forex Bureaus were established and first licensed in January 1995 to foster competition in the foreign currency market and narrow the exchange rate spread in the market, the CBK says.

This comes against the backdrop of the Kenyan Shilling touching its lowest exchange rate of the past 17 years – Ksh 91.90 to the US dollar.

Prof Ndung’u said depreciation of the Shilling cannot affect inflation given the that money supply growth is constrained.“The current level of the shilling does not therefore reflect the true value of the Kenya shilling, so it will still recoup its true value once the crisis is over,” he said.

The Governor said the fundamentals indicate that there is really no good reason for the local currency to depreciate to the extent it has in the past few months.

Total forex holding in Kenya stands on average up to now US $ 5.133 billion of which CBK is holding on average US $ 3.904 billion and Commercial banks are holding on average US $ 1,229 billion.

Forex holdings are even higher than during the global financial crisis. “This shows that the impact of the current crisis is being exaggerated,” the CBK chief said.

CBK, Monetary Policy Committee member, Prof Francis Mwera said that the central bank is focused on strengthening the fundamentals (demand and supply in the market) while tightening monetary policy to reduce money supply in the market by increasing the central bank borrowing rate thus commercial banks will not be able to borrow over the window.

Dr Jacob Oduor an economics don at Kenyatta University and expert on monetary policy at the Kenya Institute for Public Policy Research and Analysis (KIPPRA) says “the challenge is for the market players to develop a vibrant future foreign exchange market in Kenya to avoid over-reliance on the spot rate and not to intervene.”

The don argues that with a floating exchange rate regime, an open capital account and an independent monetary policy, the CBK cannot successfully intervene in the forex market in the long term without breaking down monetary policy.

“A strong Shilling makes imports cheaper and therefore may lead to reduced costs of production depending on the composition of domestic production input matrix,” Dr Oduor says adding if imported input costs constitute the bigger proportion of the total input cost then cheaper imports will lead to reduced cost of production, which may in turn lead to higher exports.

About Robert Okemwa Onsare

Robert Okemwa Onsare
Robert Onsare is pursuing Electronics Technology at the University of Eastern Africa, Baraton. He is a Cluster Strategy trained facilitator by Kenya's National Economic and Social Council (NESC). Mr Onsare has been an incubation student at the University of Nairobi, School of Engineering, FabLab, a venture project of the university and Massachusetts Institute of Technology (MIT). He is a member of the African Technology Policy Studies Network (ATPS) and a published poet. Mr Onsare is based in Kenya.

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