Bank bosses face sanctions for forex manipulation in probe
| Dec 09, 2023
The banking regulator has stepped up its probe into possible forex manipulation breaches by unnamed ten commercial banks which will lead to stiff penalties for the lenders if they are found culpable.
Central Bank of Kenya (CBK) said its full-scale investigation focusing on the 10 banks had roped in members of their boards and top management ahead of a determination of its findings.
Governor Kamau Thugge said any lender found culpable will face the full force of the banking law.
“We didn’t accuse them of currency manipulation what we did see were fairly wide spreads of purchase and sale of foreign exchange and we sought explanation as to why these spreads were wide,” Dr Thugge said on Wednesday in response to Standard queries during a post monetary policy briefing.
“It appears to go against the foreign exchange code that had been issued against the bank. We did some targeted inspection of these particular banks the reports were completed they were then sent to the bank’s management as well as the board for a response and that process is still ongoing.”
Dr Thugge has maintained that CBK intends to going forward, “address any speculative activity on forex in the banking sector.”
“Of course, if we find out that there is some violation of the code that action will be required as by the law,” said Dr Thugge on Wednesday.
The bid-ask spread (or the buy-sell spread) is the difference between the amount a dealer is willing to sell a currency for versus how much they will buy it for.
Despite CBK’s strict penalties on forex market manipulation and a government-supported fuel import agreement, the local currency has continued to decline since the start of the year.
The foreign exchange income of commercial banks has at the same time witnessed a significant surge in the nine months of this year compared to the corresponding period last year.
The new foreign exchange code, supported by the CBK, emphasises that market participants must refrain from employing trading strategies or quoting prices to impede market functioning or jeopardise market integrity.
“CBK may take appropriate enforcement and other administrative action including monetary penalties as provided for under the Banking Act against any Market Participant for failure to comply with the FX Code,” says the FX Code, which became effective in March this year.
The code stipulates that certain tactics should be avoided as they have the potential to create unwarranted delays, manipulate prices, and disrupt the transactions of other market participants, ultimately leading to a distorted perception of market conditions such as price, depth, and liquidity.
“Such strategies also include collusive and, or manipulative practices, including but not limited to those in which a trader enters a bid or offer with the intent to cancel before execution (sometimes referred to as ‘spoofing,’ ‘flashing’ or ‘layering’) and other practices that create a false sense of market price, depth, or liquidity (sometimes referred to as ‘quote stuffing’ or ‘wash trades’),” says the code.
The banking regulator last year fined 13 commercial lenders for improper practices. The number of rogue lenders, which the CBK did not name, rose by four compared to those fined a year earlier.
“During the year ended December 31, 2022, 13 commercial banks violated the Banking Act and CBK Prudential Guidelines compared to nine commercial banks in the previous year 2021,” said CBK in its Bank Supervision Annual Report 2022.
CBK reforms have also revised the maximum amounts tradeable in the interbank foreign exchange market from Sh76 million to Sh38.2 million. According to CBK data, the shilling reached a historic low Friday, exchanging at an average exchange rate of 153.3382 against the dollar.
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BUSINESSBy Edwin Nyarangi