Banks face hefty penalties in CBK forex manipulation probe

CBK Governor Kamau Thugge before Parliament’s Finance and National Planning Committee on Tuesday. [Elvis Ogina, Standard]

Several banks may be subjected to substantial fines for their involvement in foreign currency manipulation should the Central Bank of Kenya (CBK) determine their culpability through an ongoing investigation.

CBK Governor Kamau Thugge told Parliament’s Finance and National Planning Committee this week the banking regulator has written to 10 commercial banks, seeking clarification on the significant disparity in spreads despite the implementation of interbank market reforms.

Dr Thugge told the Kimani Kuria-led committee the regulator wants the unnamed banks to justify why appropriate sanctions should not be imposed. Upon receipt of their responses, Dr Thugge said CBK would assess the situation and decide on the necessary course of action

“I have written to 10 banks to explain why their spreads are very wide,” he told the watchdog committee.

“I expect to receive their responses as to why action should not be taken. Once I receive their responses, I determine the action to be taken.”

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 shilling has experienced a 17.7 per cent depreciation against the dollar since January, which is twice the rate of the 8.3 per cent decline it faced against the greenback last year.

The foreign exchange income of commercial banks has at the same time witnessed a significant surge in the first half 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. 

Dr Thugge said CBK intends to going forward, “address any speculative activity on forex in the banking sector.” 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 for various breaches.

"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 minimum amounts tradeable in the interbank foreign exchange market from $500,000 (Sh75 million) to $250,000 (Sh37.5 million).

According to CBK data, the shilling reached a historic low Friday, exchanging at an average exchange rate of 150.3618 against the dollar.