Banks short-changed by MPs report on shilling
NAIROBI, Kenya, Mar 5 – Commercial banks have poked holes into a report by Members of Parliament investigating the rapid decline of the shilling last year, claiming that it was full of erroneous conclusions.
Under the umbrella body of the Kenya Bankers Association (KBA), the financial institutions disputed claims that they borrowed Sh600 billion from the Overnight Discount Window- which is a facility of last resort – last year, contributing to the near collapse of the local currency.
“Specifically, commercial banks borrowing through the CBK (Central Bank of Kenya) Discount Window averaged Sh4.4 billion per day in 2011 compared to an average of Sh12 billion per day borrowing through the interbank market,” chairman Richard Etemesi stressed.
The quoted Sh600 billion, he said, could have been the cumulative amount borrowed throughout the whole year (2011) without taking into account the loan repayment which has to be made the following day.
“When banks borrow overnight, the amount of money that they are borrowing has to be repaid the next day and they may then borrow that money a month or two after that,” he explained terming the reports as ‘grossly misleading’.
He further argued that the CBK lacks the capacity to lend such amounts given that its total core capital is Sh5 billion.
“That means that they (CBK) would be lending multiples of hundreds (of shillings) over their core capital, which is impossible. Secondly, the total core capital of all the banks in Kenya is Sh259 billion and so borrowing Sh600 billion would mean that all banks in Kenya are insolvent,” Etemesi emphasised.
Although he pointed out that banks have been accessing the facility for many years and that borrowing from the Discount Window was not ‘illegal’, he was at pains to explain why the demand suddenly shot up particularly in the second half of the year.
The lobby group blamed the tightening of the monetary policy in March 2011 which led to the rapid increase in the interbank market rate, prompting them to resort to the Discount Window.
KBA also denied abusing the facility by borrowing from it and investing in longer term assets, adding that the ‘maturity mismatch’ would not allow them to do so.
“Existing guidelines prohibit use of funds borrowed through the facility for on-lending to other commercial banks or investing in government securities or foreign exchange,” he argued.
Doing so would attract heavy penalties from the Central Bank.
Many banks instead opted to liquidate their assets including their government securities portfolio to cushion themselves from the high inflationary pressures.
“The stock of Treasury Bills and bonds decreased from Sh425.1 billion in March 2011 to Sh363.3 billion in September 2011 and a further Sh346.5 billion in December 2011,” Etemesi recounted adding that the re-discounting saw many banks incur heavy losses.
Instead, he pointed an accusing finger at those blaming the banks saying they were just being used as scapegoats.
Further, he warned that the shilling would continue to be volatile, if the fundamental problem of a widening current account deficit is not addressed.
“The underlying problem is that we import more than we export. The country has come to rely on imports to support its consumption and unless that fundamental issue changes, the shilling will depreciate again,” he cautioned.
The association also took issue with the Parliamentary Select Committee (PSC) which seemed to contradict itself with regard to the interactions that the banks held with the CBK.
While on one hand the MPs observed that the regular engagement with the regulator at the time of the crisis opened up opportunities for collusion, arbitrage and forex speculation, it also recommended that the drafting of a framework that spells how foreign exchange market players would interact with Central Bank.
And while acknowledging that the MPs had every right to investigate what could have led to the rapid depreciation of the shilling, which lost approximately 26 percent of its value in a span of three months, KBA proposed that those sitting in the select committees need to be well versed with the subject matter.
Having such knowledge, Etemesi held, would ensure that they come up with reports with well thought-out and valid conclusions.
The Kenya Bankers Association’s defence came a day before Parliament was due to debate the report that among other things recommends the sacking of CBK Governor Prof Njuguna Ndung’u over his failure to stem the currency’s decline.
The debate was adjourned on Thursday last week amid claims that some pages on the report that detailed how banks borrowed from the Central Bank over the disputed period, were missing.
