Shilling slide persists despite new CBK forex trade rules
The Kenyan shilling sustained its weakening against the US dollar, contradicting a trend in the open market where the local currency has this week regained some ground after exchanging at record rates and creating a vibrant black market.
Official data showed the shilling slumped to exchange at 131.13 units against the dollar during early trade on Thursday, down from 130.61 the previous day. This was a further slump from exchanging at 130.0088 when the week started on Monday, indicating a depreciation of 0.86 percent.
Interestingly, the price of buying dollars from banking halls and forex bureaus continued to slump from a record Sh147per unit to a lower range of about Sh138 this week—raising questions on the ongoings in the forex market where the shilling has two faces.
This comes even as the CBK on Wednesday issued new guidelines to commercial banks targeted at improving transparency in the foreign currency market.
Kenya runs a flexible exchange rate system where the value of the shilling is determined by the market forces of demand and supply of foreign exchange.
A persistent biting shortage of the US currency--which has widened the spread between the official and open market rates—has however sparked fears of illegal practices in the forex market prompting action by the CBK.
The regulator bestowed bigger responsibility on commercial banks to ensure ethical and transparent transactions in the forex market amid public outcry on the pricing and shortage of the US dollar.
“Over the years, the Kenya financial landscape has experienced considerable and positive transformation. However, weaknesses have also emerged as well as risks” CBK said in its newly published Kenya Foreign Exchange Code (FX Code).
“It will facilitate better functioning of the market, further reinforcing Kenya’s flexible exchange rate regime. The FX Code is intended to promote a robust, fair, liquid, open, and appropriately transparent market” it added.
According to the new code, banks will be required to deploy experienced and qualified personnel with technical knowledge of forex trading.
The new CBK guidelines also prohibit bank personnel handling forex transactions from conflict situations such as receiving gifts and corporate entertainment offers.
“Market Participants should put in place appropriate and effective arrangements to eliminate or manage conflicts of interest. This could include: establishing declaration policies and/or records for identified conflicts of interest and personal relationships, as well as for gifts and corporate entertainment received” CBK said.
The new rules also require banks to establish special boards that would oversee their forex trade businesses.
“The board that is ultimately responsible for the market participant’s FX business strategy and financial soundness should put in place adequate and effective structures and mechanisms to provide for appropriate oversight, supervision, and controls with regard to the market participant’s FX market activity” the new CBK code stated.
CBK also now requires banks to develop remuneration and promotion structures that ensured practices and behaviours that are consistent with the firm’s ethical and professional conduct expectations.
The new code also bans banks from engaging in trading strategies or quoting prices “with the intent of hindering market functioning or compromising market integrity”.
It says: “Such strategies include those that may cause undue latency, artificial price movements, or delays in other market participants’ transactions and result in a false impression of market price, depth, or liquidity. Such strategies also include collusive and/or manipulative practices, including but not limited to those in which a trader enters a bid or offer with the intent to cancel before execution and other practices that create a false sense of market price, depth, or liquidity”