CBK governor Patrick Njoroge warns bank CEOs against speculative trading

NAIROBI: Banking executives have been warned about speculative activity in the foreign exchange market by Central Bank of Kenya Governor Patrick Ngugi Njoroge, on the day the shilling touched a historic low of Sh107 to the US dollar.

At the close of trading, the dollar was quoted at an average price of Sh105.80, after booking gains from much lower levels from earlier transactions. An executive who attended the meeting told The Standard that Prof Njoroge was concerned about the banks' role in the unrelenting depreciation of the shilling.

"In volatile markets like this, banks would often want to cushion themselves by taking specific positions – which could be seen as speculative and this is what the (CBK) governor is concerned about," said the banker who attended the closed-door meeting.

It is feared that commercial banks could be stocking up dollars in anticipation of further strengthening, allowing then to sell them back to the market for more shillings.

A situation of panic buying from banks, would only pile more pressure as demand by importers far outweighed supply of dollars in the market. Tuesday’s was a crisis meeting that was called at the last minute, perhaps as panic hit the regulator about the rapid depreciation of the local currency.

Some executives were not able to attend the meeting owing to the short notice, which they described as 'very important' but unanticipated.

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CBK has been desperately trying to cushion the shilling from hitting or even falling past the October 2011 record of Sh107 by offloading its dollar reserves in the market.

That measure has, however, not been successful in stemming the slump of the shilling against the dollar and other major international currencies. Our source said the CBK was seeking feedback form the commercial banks on the practical steps that could avert further fall of the local currency.

In early trading Tuesday, the shilling edged closer to an all-time low, weighed down by corporate dollar demand and the US currency's strength on global markets, traders said.

Early trading saw the shilling trade at Sh106.60/70, close to the low of about 107, compared with 106.15/35 recorded on Monday's close of business.

"There is sustained corporate demand and inflows are not significant," said one trader at a Nairobi-based commercial bank.

Traders said they were watching to see if the Central Bank would return to the market to sell dollars like it did on Monday, when the shilling touched Sh106.20/40.

"Intervention could be on the cards if it hits an all-time low, but between now and then I would say it will be inching very slowly upwards," another trader said, referring to the shilling weakening.

CBK has in the past few months occasionally intervened to support the currency by selling dollars. It also regularly mops up excess liquidity. The bank also said on Tuesday it planned to mop up Sh11 billion in excess liquidity from the money markets. The mop-ups make it costly to hold onto dollars, which in turn supports the shilling.