Kenya - Banking and securities

Kenya acquired its first separate currency on 14 September 1966, when the initial par value for the Kenya shilling was announced by the IMF. The new coin replaced, at par value, the East African shilling, previously issued for Kenya, Tanzania, and Uganda by the East African Currency Board, whose assets were divided by those nations following a June 1965 agreement.

The Central Bank of Kenya (CBK) was established in May 1966, taking over the administration of exchange control. Because the Kenya shilling soon became the strongest currency in East Africa, a black market for it developed. A complete ban on the export or import, or destruction of hard Kenyan currency was imposed in 1971 to discourage speculation.

The powers of the CBK were greatly reduced in the early 1990s with the liberalization of the financial sector. The commercial banks are free to set their own interest and exchange rates. The shilling has effectively been a convertible currency since the government signed Article VIII of the IMF Articles of Agreement in June 1994, and thereby pledged not to permit any restrictions on current international transactions. Foreign exchange is bought and sold in the interbank market in which the CBK is merely one player, although it intervened frequently with several large transaction in late 1994 and again in mid-1995, first to halt the appreciation of the shilling and then to stem its fall. The CBK retains responsibility for issuing treasury bills and bonds to cover the government deficit.

Of the 29 commercial banks operating in Kenya in 1985, several folded during a banking crisis in 1986. In 1992, there were 15 commercial banks operating in Kenya, and in 2002, there were 48 domestic and foreign commercial banks, 6 building societies, 37 insurance companies, 7 development finance companies, over 1,500 credit unions, and the Post Office Savings Bank. The financial sector is dominated by two multinational banks-the Standard Chartered Bank and Barclays Bank of Kenya; and the parastatal banks-Kenya Commercial Bank and National Bank of Kenya. They have branches in Nairobi and Mombasa and at least 25 other locales throughout the country. Other commercial banks include Citibank N.A., Euro Bank, and First American Bank.

Although they depend largely on the commercial sector for credit outlay, banks have started to turn to agriculture as an outlet. Land and agricultural banks provide financial assistance to farmers in the form of long-term loans for the discharge of onerous mortgages and the purchase of livestock, implements, fertilizer, and so forth. Short-term loans are granted for seasonal expenses.

The reputation of the banking sector has suffered from a series of scandals. The largest financial scandal in Kenyan history broke in 1993 when the CBK closed down Exchange Bank and a related company, Goldenberg International, a gold and jewelry firm. Exchange Bank has been accused of failing to honor foreign exchange contracts and Goldenberg of securing privileged access to the now-scrapped export compensation scheme. The auditor-general has questioned billions of shillings of payments to Goldenberg under the scheme for gold exports that have not been proven.

In 1997, the total assets of Kenya's four largest banks was $2.8 billion, representing half of the total assets of all commercial banks. Banking sector fragility in 1999 resulted from poor management, and worsening economic conditions. In 1998, several major Kenyan banks collapsed, including Trust Bank, Reliance Bank, Prudential Bank, Bullion Bank; and the giant National Bank almost folded. In 1999, Richard Leaky was named director of the Central Bank of Kenya under pressure from the World Bank in order to stem corruption in the banking system.

The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $1.6 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $4.5 billion. The discount rate, the interest rate at which the central bank lends to financial institutions in the short term, was 16.81%.

The Nairobi Stock Exchange was founded in 1965 with six members. It was one of the largest stock markets in the sub-Saharan Africa (with South Africa, Nigeria, and Zimbabwe), with market capitalization of $1.05 billion and 57 listed companies in 2001. The market received a small boost from the decision of the government to allow direct foreign investment in January 1995, but the limit on foreign ownership was 40%. The NSE index fell from 1,913.4 in 2000 to 1,355.1at the end of 2001.