Who bled our shilling?

By Financial Journal Writer

Fresh details have emerged over foreign currency transactions by banks when the shilling lost much of its value against hard currencies.

Investigations by the Financial Journal can reveal that unexplained cash inflows amounting to a

Equity Bank Chief Executive James Mwangi. [Picture: file]

whooping $847 million entered the economy in unclear circumstances, coinciding with the time of the shillings’ volatility last year.

The systemic failure to detect such a significant inflow of money means a larger amount could have left the country undetected, thus upsetting the exchange rate.

Analysts say the fact that such huge amounts money can enter the economy without pinpointing its source speaks volumes of the integrity of Kenya’s financial markets surveillance system — meaning it is a key area that any probe of the shillings volatility should not ignore.

"This means that larger amounts can leave without anyone knowing," says Fred Mweni, an investment banker.

The country appeared to have received inflows that do not fall into the traditional categories into which the balance of payments is split. The inflows raised suspicion that Kenya was being used to launder money from criminal sources such as piracy and drug trafficking.

It also did not escape attention that the unofficial inflows rose last year despite the coming into force of anti-money laundering law that parliament enacted about two years ago.

Official remittances stayed in the range of $52 and $84 million per month and totaling $643.8 million for the nine months ending September 31, last year.

Mweni says increased demand for foreign currency to meet demand for foreign exchange for import products such as fuel and food and increased private sector lending could have precipitated extra demand for the dollar at that time.

In October and November last year, the shilling was on a free fall — touching Sh107 to the US dollar. The local unit has since gained ground to hover Sh85 to the greenback.

HOT MONEY

"The shilling fell because of the exit of hot money (amount foreign investors have taken out of the economy as a result of weakening shilling), which I estimated to be about $1.1 billion," said Aly Khan Satchu of Rich Management.

The Parliamentary Committee probe has since primed its guns on the activities of some banks. Those that appeared before the House Committee include Barclays, Citibank Kenya, CFC Stanbic, Family, Equity Bank, Kenya Commercial Bank, Cooperative Bank and Standard Chartered.

However, the committee is yet scrutinise the country’s guidelines on foreign currency transactions and the porous nature of the country’s financial system that easily allows unscrupulous people to either hoard or secretly transfer huge amounts of foreign currency outside Kenya.

The MPs claimed the banks instigated the depreciation, but chief executives of top commercial banks say they could not point out what exactly caused the weakening.

The committee ordered KCB, Equity, Co-operative and Barclays banks to publish records of their earnings from foreign currency trade during the critical period of the shilling’s fall that was characterised by a shortage of foreign currency, especially the US dollar.

NAIROBI SECURITIES

Kisumu Town East MP Shakeel Ahmed Shabbir, who is a member of the select committee, claimed banks borrowed billions of shillings from CBK with which they bought US dollars, fostered an artificial shortage, then speculated with the foreign currency, sparking depreciation and inflation.

Ol Kalou MP Erastus Mureithi, a former managing director of Co-operative Bank, said there had been reports that commercial banks "squeezed all their foreign currency to speculate on it," which the bankers were not addressing and accused them of evading the real source of the problem.

According to reports filed at the Nairobi Securities Exchange and Central Bank of Kenya (CBK), the largest earner from foreign currency trade between March and September last year was Barclays (Sh2.1 billion) followed by Citibank (Sh1.75 billion), StanChart (Sh1.68 billion), KCB (Sh1.3 billion) while CFC Stanbic, which had an income of Sh984 million was fifth.

All the banks have denied any roles in the shillings poor run.

In December last year, Citibank Kenya disclosed it was summoned by CBK on more than two occasions over the rapid depreciation of the shilling against the dollar.

While appearing before the Parliamentary Committee, the international bank said it had no role to play in the decline of the shilling that slid to Sh107 last October.

The bank’s Head of Treasury Ignatius Chichi said CBK had looked at all the bank’s Forex transactions for the year and had given the records a clean bill of health.

Commercial Bank of Africa (CBA), which is the largest privately owned commercial bank in the country, came in sixth, having earned Sh886 million, which accounted for up to 20 per cent of its total income during the period. The bank focuses on serving the banking needs of large corporations, diplomatic missions, NGOs and high-end private clients.

Co-operative Bank, which earned Sh535 million from foreign currency trade during the period under survey came eighth in the list, while Equity, whose earnings from Forex trade accounted for a paltry three per cent of its total income for that period came in tenth.

Co-operative Bank has since protested to Parliament over claims of currency manipulation made against it. The managing director has written to the Clerk of the National Assembly suggesting a possible conflict of interest on the part of a committee member, Erastus Mureithi, who once served as the bank’s chief executive.

Michael Wachira who appeared for Equity said the bank’s target market was not Forex trading and that the volumes of Forex were not that significant as to influence the value of the shilling. The bank earned Sh508 million from Forex transactions.

DOLLAR DEMAND

"We’re definitely not in the top five banks. In no way could we have been responsible for the depreciation of the shilling," said Wachira.

When Equity Chief Executive, Dr James Mwangi, appeared before the committee a fortnight ago, he alleged that 26 major global institutions and brands had relocated to Kenya from South Africa and other countries putting a strain on dollar demand.

He also argued that in recent years, a construction boom had spurred foreign imports that required foreign currency at a time when the Kenyan government was spending 25 per cent of its earnings on fuel imports.

"Our total demand for US dollars went high by 16 per cent," Mwangi said.

However, most MPs believed depreciation of the local unit was engineered for illegal gain by a group banks that might know what really happened when the shilling went down.

Barclays Chief Executive Adan Mohammed told the committee in December that high supply of money in the market occasioned by low borrowing rates as a factor leading to fall of the local unit.

And at the weekend, CFC Stanbic said in a statement it did not engage in any speculative foreign exchange trading and that it was not suspended from Forex trade.

"Recent reports have erroneously suggested that the bank (CFC Stanbic) was among institutions behind the weakening of the shilling through perceived speculative foreign exchange trading," read the statement.

FOREX MARKET

Despite the defence by banks, the big question is: who was responsible for the slide and will it occur again?

In their submissions to the committee, most of the banks poked holes at what they called "weaknesses" in the market fundamentals that could be exploited, and may have been exploited by some players to make money through arbitrage — the practice of making money by exploiting price differences in the Forex market.

In addition, the banks mentioned strong economic growth in the year, which peaked to close to five per cent. This meant huge appetite for imports, further widening the current account deficit.

According to Citibank’s own assessment, various factors led to the decline of the Kenyan unit including rising political and global economic uncertainties that led to steady increase in dollar demand as a store of wealth.

"This was compounded by the fact that domestic interest rates remained extremely low

due to loose monetary policy, the attractiveness of holding local shilling assets in East Africa diminished sharply until mid last year when monetary policy was tightened substantially," it said in its submission.

CBK, which is the financial markets regulator, put up a big fight against claims that a large chunk of the money circulating in the economy and that couldn’t be accounted for originated from neighbouring Somalia where several years of lawlessness has given rise to practices such as pirates and traffickers of counterfeit goods.

The Parliamentary Committee held its last meeting yesterday and will now proceed to compile the report and table it in Parliament after it reconvenes — for adoption, amendment or rejection of its recommendations.

In Monday’s hearings, the committee questioned Richard Etemesi, the chief executive of the Standard Chartered Bank and chairman of the Kenya Bankers Association.

The committee sought to know if CBK had written to the bank querying its participation in foreign exchange market around or the period leading to the fall of the shilling.

Etemesi said that the bank had not received any letters from CBK in regard to the bank’s participation in the foreign exchange business and that the bank played by the rules set by CBK to guide market operations in Forex business.

Aden Keynan, the chair of the committee, said the report would be ready by the end of the week.