Bankers blame oil and global crisis for shilling’s slide
Commercial banks on Monday denied accusations of masterminding and benefiting from last year’s rapid depreciation of the shilling.
The charge is contained in a report by a Parliamentary Select Committee on which debate in the House resumes on Tuesday.
The recommendations in the report were erroneous because they were based on inaccurate information, the Kenya Bankers Association lobby said on Monday.
The report recommends, among others, the sacking of Central Bank of Kenya governor Njuguna Ndung’u and increasing the fine for banks found guilty of manipulating the currency from a million shillings to at least Sh20 million. (READ CBK boss must go, says House team)
But on Monday, the banks singled out the claim in the report that 12 banks borrowed Sh600 billion from CBK’s discount window as inaccurate since it was a cumulative figure yet banks were repaying the money they borrowed the following day.
“Since borrowing through the CBK overnight discount window is for overnight only, it is incorrect to add up a succession of overnight loans that were paid off the next day and claim that these were still outstanding loans,” the KBA chairman and the chief executive of Standard Chartered Bank ,Mr Richard Etemesi, said.
Government securities
The money they borrow, they also noted, is their own as they are required to deposit with CBK by buying government securities.
KBA claimed that the report by the team led by Wajir West MP Adan Keynan was keen on finding somebody to blame as opposed to solving the fundamental issues that expose the Kenyan shilling to volatility.
The bankers maintained that they operated within the law governing the industry.
This is the first time commercial banks have come out as an industry to respond to the allegations contained in the report which claims they exploited weaknesses in the financial system to make huge amounts of money at the expense of the currency.
It is also being seen as meant to shape proceedings of debate in Parliament on Tuesday.
When Mr Keynan moved debate on the matter last week, MPs were sharply divided on the report.
The committee which was formed to investigate the rapid depreciation of the shilling between October and December 2011 claims banks exploited loopholes created by CBK to allow them to borrow from the discount window whose rate was kept below the interbank rates.
This loophole, the report said, allowed banks to borrow money from CBK at below 10 per cent rate, invest it in Treasury bills and sell back the same to the government at about 24 per cent interest thereby raking in billions of shillings in profits.
Mr Etemesi said this was not possible because it is illegal and the CBK has ways of spotting such activities.
“There is no linkage between increased activity at the CBK window between June and October 2011 and investment in government securities and foreign exchange trading due to a mismatch in the maturity structure given that borrowing through the CBK window is for overnight only,” he said.
The situation was so serious, the report says, that by September, three top banks — CFC Stanbic, Standard Chartered and Citibank — controlled 42.2 per cent (Sh174.5 billion) of the country’s total forex holdings.
Twelve banks controlled 87 per cent of the holdings at a time the shilling’s slide from Sh84 to Sh107 to the dollar started.
Commercial banks use the discount window to deal with cash shortfalls but only as a last resort.
The shortfalls can arise out of large and unanticipated payments of taxes, dividends and some depositors calling for deposit without prior notice.
A tight monetary policy stance by the CBK, like the one adopted after the currency troubles got out of hand, can also lead to cash shortfalls in commercial banks.
To deal with this, the banks can borrow from one another to mitigate the deficit in what is known in the industry as the interbank borrowing.
If this fails, the banks can then turn to the CBK, as a lender of last resort, through a facility known as the overnight discount window.
Banks are required by law to pay back what they borrow the next day.
But the executives said all banks in Kenya would have to be insolvent to be able to borrow Sh600 billion given the total core capital of all commercial banks in Kenya is Sh259 billion.
“In addition, given the total core capital of CBK is only Sh5 billion, lending 600 billion is beyond the capacity of CBK’s balance sheet,” Mr Etemesi said but refused to comment on why then the regulator had wanted to bypass commercial banks to directly deal with importers in a bid to stem speculation.
According to KBA, commercial banks borrowing from the discount window averaged at Sh4.4 billion per day last year compared to an average of Sh12 billion borrowed through the interbank rate.
KBA, however, did not provide what they thought was the correct amount but maintained that correct interpretation was key.
The 19-member select committee cited institutional and human errors, as opposed to international financial crisis, as the main factors that led to the near collapse of the local currency.
The committee refused to buy the argument that economic causes such as the wide current account deficit, the Euro crisis, large import bill of non-essential commodities and the Arab Spring, were the main causes of the shilling crisis since they are still in place even after the local currency recovered its value in December 2011.
KBA maintains that the depreciation was pushed by panic buying as well as external factors such as fuel importation and the Eurozone crisis.
“We have been a country that has largely been spending more than we generate and unless we go back to solve the fundamental problem of increasing our exports, this problem is bound to recur,” Mr Etemesi said.
But it is the CBK governor, Prof Ndung’u, who stands to be the biggest casualty if Parliament adopts the report given that it recommends his sacking.
Fuelling speculation
He is accused of failing to intervene in a timely manner to stem the crisis. According to the report, the fact that the governor maintained that he would not intervene in the forex market only served to fuel the speculation.
KBA further defended the increased activity that led to increased volumes in forex trade as having been triggered by large depositors who were responding to the volatility in forex trade by converting their monies into dollars.
The report says banks also engaged in what is known as arbitrage, the practice of taking advantage of price differences in the financial market to make profits.
Banks are also believed to have used the electronic brokerage system to support arbitrage.
The committee wants the Ethics and Anti-Corruption Commission and the Auditor-General’s office to carry out a forensic audit on the operations and transactions of the Discount Window and foreign exchange trading by 12 banks that had the largest foreign exchange holdings during the period.
