Central Bank of Kenya
Dr. Patrick Ngugi Njoroge
|Headquarters Nairobi, Kenya|
|Currency Kenyan shilling - KES (ISO Code )|
The Central Bank of Kenya was established in 1966 through an Act of Parliament - the Central Bank of Kenya Act of 1966.
The establishment of the Bank was a direct result of the desire among the three East African states to have independent monetary and financial policies. This led to the collapse of the East Africa Currency Board (EACB) in mid 1960s.
Structure of the Bank
Responsibility for determining the policy of the Central Bank is given by the Central Bank of Kenya Act to the Board of Directors. The Board consists of eight members:
- the Governor, who is also its chairman
- the Deputy Governor, who is the deputy chairman
- the Permanent Secretary to the Treasury who is a non-voting member
- five other non executive directors
All members are appointed by the President to hold office for a term of four years and are eligible for reappointment. In the case of the Governor, appointment is for a maximum of two terms of four years each and can only be terminated by a tribunal appointed by the President to investigate his conduct. The executive management team comprises the Governor, the Deputy Governor and fifteen heads of department who report to the Governor. The Bank operates from its head office in Nairobi and has branch offices in Mombasa, Kisumu and Eldoret. The Bank also owns the Kenya School of Monetary Studies (KSMS) which is headed by an executive director answerable to the Governor.
The Central Bank Act and it’s relations with the Government
The Central Bank of Kenya Act of 1966 set out objectives and functions and gave the Central Bank limited autonomy. Since the amendment of the Central Bank of Kenya Act in April 1997, the Central Bank operations have been restructured to conform with ongoing economic reforms. There is now greater monetary autonomy. Though required to support the general economic policy of the Government, the Central Bank has independence in exercising the powers conferred on it by the Central Bank of Kenya (Amendment) Act, 1996. However, both the Government and the Central Bank make mutual consultations on important policy issues. The Central Bank, for example, is required to advise the Government on monetary and fiscal policy issues and other economic issues that may have important ramifications on the Bank’s monetary policy.
Mission of the Bank
The Central Bank plays a unique role in the economy and performs various functions not normally carried out by commercial banks. Over time the functions of the Bank have evolved with the changing economic conditions. As stipulated in the Central Bank of Kenya (Amendment Act), 1996 its main task is that of "maintaining price stability and fostering liquidity, solvency and proper functioning of a stable market-based financial system". It is therefore responsible for formulating and executing monetary policy, supervising and regulating depository institutions, assisting the Government’s financing operations and serving as Government banker, in line with contemporary central banking practice the world over.
Importance of Maintaining Price Stability
Maintaining price stability is crucial for a proper functioning of a market-based economy. Low and stable inflation refers to a price level that does not adversely affect the decisions of consumers and producers. High rates of inflation lead to inefficiency in a market economy and in the medium to longer term to a lower rate of economic growth.
How the Bank Ensures Price Stability
As movements in the general price level are influenced by the amount of money in circulation, the Central Bank of Kenya operates in a way that restricts the growth of the total money stock to a level that is consistent with a predetermined economic growth target (See Monetary Policy Statement). There are three major tools the Bank uses to implement monetary policy:
- Open Market Operations: through open market operations, the Bank buys or sells Kenya Government Treasury Bills in the secondary market in order to achieve a desired level of Bank reserves. The Bank injects money to the economy when it buys Treasury Bills, and drains money when it sells it. As the law of supply and demand take over in the money market, the cost of loanable funds (interest rates) adjust itself to the desired level.
- Discount window operations: the Bank, as lender of last resort, may provide secured short-term loans to commercial banks on overnight basis, but only after they have exhausted their market sources of funds. The discount rate is set by the Central Bank to reflect the monetary policy objectives.
- Reserve Requirements: the Central Bank is empowered by the Act to demand a certain proportion of commercial banks’ deposits to be held as non-interest bearing reserves at the Central Bank. An increase in reserve requirements would be regarded as an attempt to restrict bank credit. A reduction in the reserve ratio would be viewed as an expansion of credit as it increases the credit creation power of the banks.
Other Functions of the Bank
In addition to these primary responsibilities, the Central Bank performs other specific functions:
- Issue of notes and coins: The Central Bank of Kenya is entrusted with the making, issuing and withdrawing worn out notes and coins in Kenya Shillings. The monopoly of issuing notes and coins enables it to exercise control over the money in circulation and thereby fulfil its primary responsibility of safeguarding the domestic value of the Kenya shilling. At present, the Central Bank issues five denominations of notes: Ksh 50, Ksh 100, Ksh 200, Ksh 500 and Ksh 1,000. While, new generation coins are in denominations of: 10 cents, 50 cents, Ksh 1, Ksh 5, Ksh 10 , Ksh 20 and Kshs 40.
- Provision of Banking services to Banks: The Central Bank provides commercial banks with clearing facilities, a task laid down in the CBK amendment Act of promoting the smooth operation of payments, clearing and settlement systems. The Bank is also entrusted with the supervision of commercial banks in order to ensure efficient and sound financial system in the interest of depositors and the economy as a whole.
- Provision of Banking Services to Government: As banker and fiscal agent of Government, the Bank accepts deposits and effects payments on behalf of Government. It also maintains and operates special accounts for the Government. This function has, however, been circumscribed in the recent Central Bank (Amendment) Act of 1996 to prevent any erosion of the Bank’s independence. Section 18(3) of the new Act limits access by the government to Central Bank credit, as this has been the major cause of monetary expansion in the economy [see the Monetary Policy Statement]. The Central Bank also administers the public debt, that is, effecting issuance, payment of interest on, and redeeming of bonds and other securities of the Government.
- Foreign Exchange Operations: The Central Bank holds official foreign exchange reserves of the country for the purposes of: repaying and servicing the country’s public external debt; and intervening in the interbank foreign exchange market largely to smooth out erratic exchange rate fluctuations, thus helping to maintain orderly market conditions crucial for the shilling exchange rate stability.
Functions of Branches
To provide an efficient service to commercial banks and satisfy their requirements for notes, the Central Bank operates three branches in the country. The branch responsibility is to ensure that there is adequate supply of new notes to meet the demand, and to replace unfit notes.