Kenya: CBK in New Move to Stabilise Shilling

Central Bank of Kenya's action restricting commercial banks' access to its lending is expected to stabilise the shilling, analysts said.
On Friday, the regulator announced a raft of measures expected to tighten liquidity as Governor Njuguna Ndung'u increasingly finds himself at odds with big banks that he accuses of artificially weakening the shilling through speculative trading of the currency.
"In determining eligibility for access to the CBK discount (overnight) window, the CBK will consider an individual bank's foreign exchange trading behaviour over the previous four trading days," said the circular issued by the bank.

The industry regulator has in the past accused some large banks of using the overnight discount window to finance their speculative forex market activities, contributing to depreciation of the shilling.
On Tuesday the local currency fell to an all-time low of Sh95.10 to the dollar but re-bounded to Sh92.50 by Friday following CBK's decision to stop injecting liquidity in the market.

Cash-rich banks have been using the supposedly punitive window, through which CBK acts as a lender of last resort, to finance lending to government and other banks -- taking advantage of the Central Bank Rate (CBR) falling below T-bill and the interbank rates -- in what is referred to as arbitrage.
Banking circular number eight signed by CBK director of banking services Jackson Kitili says the regulator will in particular monitor banks' forex trading and make it a factor in lending to them.
"We expect the shilling to strengthen this week as the CBK has today responded to pressure to prop up the local unit by making changes to the use of the CBK discount (overnight lending) window," said analysts at African Alliance.
CBK further outlawed cash-flush banks trading in the interbank market from accessing its discount window on the same day.

Interbank rate averaged 8.24 last week while CBR stood at 6.25 per cent. "Furthermore, any bank borrowing from CBK cannot lend in the interbank market either on the day of accessing the window or on the following day," said the circular.
The bank has come up with a formula for calculating its discount window rate which only in part uses the bi-monthly CBR, but also puts into consideration the prevailing interbank rate.
The method is: CBR+ (average interbank rate-CBR) + 3 per cent penalty. This ensures that CBK's actual lending rate does not fall below the interbank rate and eliminates arbitrage opportunity.
On top, if the interbank rate is lower or equal to CBR, CBK will employ CBR plus a penalty of three per cent meaning banks will prefer to borrow from other institutions to avoid the punitive rate.