Is CBK guilty of currency speculation?

By Jevans Nyabiage

As Kenyans struggled to make ends meet on the face of high inflation and volatile shilling last year, the banking industry was the biggest beneficiary.

Top commercial banks and the industry regulator, the Central Bank of Kenya (CBK) reaped from foreign currency swings to report healthy profits, as other sectors of the economy remained depressed.

Even before the shilling crisis was felt, the CBK registered total income of Sh49.5 billion for the year ending June 2011. This consisted of Sh9.2 billion from ordinary operations, unrealised foreign currency revaluation gains amounting to Sh38.9 billion and Sh1.4 billion from revaluation of fixed assets.

During the same year, CBK’s total expenditure amounting to Sh8.6 billion was recorded. The bank of last resort recorded a net surplus of Sh40.9 billion. The revaluation gains reversed Sh1.6 billion deficit CBK reported the previous year.

"The foreign currency revaluation gains were accumulated as the shilling heavily lost value against major convertible currencies particularly towards the end of the year compared to the closing position as at June 30, 2010," the bank says in its Annual Financial Report.

These figures, however, do not reflect the full extent of depreciation of the currency, which dropped to an all-time-low of Sh107 to the dollar on October 11, last year.

CBK’s Sh39.5 billion profit was realised from foreign currency revaluation as shown in its annual report. This profit is a negative, non-cash effects from foreign currency translation.

But the billion shilling question is why CBK held back this forex reserve when the economy was experiencing serious dollar shortfall whose effect saw the shilling fall to a historic low of Sh107 in October?

Was CBK guilty of currency speculation to make a kill?

Despite surplus, CBK said it would not pay dividends to the Government unlike in 2010 when it paid out Sh2 billion, even after recording losses of Sh1.6 billion.

According to CBK data, in the 11 months to November last year, banks made pre-tax profit of Sh80 billion, beating the Sh74.2 billion recorded in 2010.

Forex trading

Top banks – Barclays, KCB, Equity, Co-operative and Standard Chartered – saw their forex trading income soar, especially in the last quarter of last year, when the shilling was heavily battered.

Other top forex earners are NIC and CFC Stanbic.

High interest rates and a surge in fees and commissions helped the commercial banks to return healthy profits, as Kenyans struggled with a depressed economy in the last quarter of last year.

KCB was the largest foreign exchange income earner, recording a 30 per cent growth to Sh3.6 billion compared to Sh2.7 billion in 2010. The forex income accounted for nine per cent of KCB’s income.

Barclays was also a high earner, growing forex revenue by 59 per cent to Sh2.58 billion, equivalent to 16 per cent of its income. Equity Bank increased forex earnings to Sh1.9 billion up from Sh0.87 billion in 2010.

When the shilling came down tumbling to hit a low of 107 against the US dollar in October, banks came under spotlight over their alleged role in contributing to the steep decline of the shilling.

Members of Parliament recently claimed that banks borrowed colossal sums of money from the CBK to speculate on the shilling, causing October’s sharp depreciation.

Central Bank blamed

A parliamentary report on the investigation of the fall of the shilling claimed that banks misused the Central Bank’s overnight discount window to rake in Sh29 billion at the height of the shilling crisis.

But industry lobby – Kenya Bankers Association – defended banks saying they earned the income from the high demand for foreign currency from importers.

Co-op Bank, NIC, and Diamond Trust Bank earned Sh1 billion, Sh0.94 billion and Sh0.99 billion respectively while CFC Stanbic bank’s results show that about 17 per cent of its income came from forex exchange income of Sh1.76 billion.

MPs are pushing to put a cap on lending rates and force banks to increase their payments to deposits to encourage more savers.

Aly Khan Satchu, Nairobi-based Investment Analyst in an earlier interview said commercial banks in most cases have reported results which have significantly outperformed the economy.

"Although a battle for wholesale deposits broke out as money tightened in the fourth quarter, banks were able to ride the interest rate structure higher and pass through the increased cost of money while holding back passing that benefit through to their deposit and current account holders," Satchu says.

"This spread widening – and clearly this strategy has a finite life as is evidenced by the increased blow back in the media – I feel allowed Banks to post some strong numbers."

Aggressive monetary tightening to curb inflation and prop up currency has seen commercial banks raise lending rates to about 25 percent from 15 per cent since October.