CBK blames banks for fall of shilling

Commercial Banks have once again been put on the spot for playing a role in the historical fall of the Kenyan shilling.

The Central Bank of Kenya, in a statement on Tuesday, admitted that its attempts to support the shilling have come a cropper as commercial banks withhold the dollars from the market.

“This has failed to get through to the final importer to the detriment of both the economy and the price level,” noted the statement signed by the governor, Prof Njuguna Ndung’u.

The banks, the regulator noted, are accumulating dollars with a view to put pressure on the shilling by increasing the demand.

Commercial banks stand to gain from a weak and volatile shilling as this will increase their foreign currency trading income and thus better their profitability.

During Tuesday’s sessions, commercial banks quoted the shilling at an average of Sh104, a worse off position than Monday’s Sh102. (READ: Why the shilling is in free fall)

However, with the statement from the CBK, the currency gained 1.6 per cent to exchange at Sh102 to the greenback towards the close of the day.

The regulator indicated it will now sell the dollars directly to importers with the hope that this will unlock the supply constraints and ease pressure on the shilling.

The strategy will initially be rolled out through the Energy Regulatory Commission to support the major oil importers. Currently oil imports account for almost one quarter of the country’s import bills and have a wider ripple effect on the economy.

Traditionally, importers source for their dollar demands through commercial banks in the country. The new strategy will, however, appear tricky to the regulator, as it will be forced to sell lower than the banks to attract the importers.

“Importers have been driven into a captive position where they have to pay whatever is demanded from them,” noted Prof Ndung’u. (READ: Panic as Kenyan shilling hits lowest level)

Over the last month as the shilling fell, the CBK adopted a strategy of selling dollars directly to commercial banks to ease on the pressure. This was done selectively to spread the greenback into the market depending on each banks demand.

This is the second time the CBK is raising an issue with commercial banks for hoarding the dollars to the detriment of the home currency.

In June, the bank accused some five banks of hoarding and exporting huge amounts of the currency, which indicated possibility of arbitrage practices. It however fell short of punishing the banks or naming them citing confidentiality clauses in its acts.