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Behind Central Bank move to change notes

A steady increase of illicit financial inflows and rising cases of counterfeit banknotes informed the shock decision by the Central Bank of Kenya to recall the Sh1,000 note by October 1, 2019.

 Addressing a media briefing in Nairobi yesterday, CBK Governor Patrick Njoroge said an increase in suspicious transactions point to a country at the mercy of a thriving underground economy.

Without giving details of the amounts involved in the illicit transactions, the governor said the irregular deals had one leg in dirty cash that is hurting the economy.

“You do not have to know the numbers, but ‘iko shida, iko shida’ (there is a problem)… You don’t wait until the house is burning before you use the fire extinguisher. When you begin to smell smoke, grab that fire extinguisher and begin to deal with it,” he said, illustrating the simmering time bomb in Kenya’s financial system.

Seal position

The revelation paints in bad light Kenya’s attempt to seal her position as the regional investment and financial hub, but CBK efforts are expected to change this.

However, as Njoroge explained why the government had to demonetise the old Sh1, 000 banknote, two petitions were being filed against him, seeking his removal from office on grounds that he had flouted the law.

The first suit was filed by East African Legislative Assembly MP Simon Mbugua and the second one by Nairobi activist Okiya Omtatah.

The two want the High Court to issue temporary orders stopping the implementation of the new banknotes pending hearing of their petitions.

They both cite lack of public participation in the process as provided for in the Constitution, by declaring October 1 as the day when the old generation series of Sh1, 000 will be phased out.

In his petition, Mbugua also says the portrait of first President Mzee Jomo Kenyatta on the notes contravenes the Constitution.

Yesterday, the CBK boss said he was aware of court cases against the new banknotes regime but called them an inconvenience which the bank was ready to deal with as a matter of urgency.

“The design of the banknotes is constrained by the Constitution and the process. It is not in contravention,” he said. Njoroge, who had earlier met with chief executives of banks to roll out plans on distributing the new notes countrywide, said he will deal with the legal challenges as circulation continues.

Before deciding to roll out the move in 120 days, CBK had studied and analysed similar experiences in India and European Union  nations. 

Strike balance

CBK decided to roll out Kenya’s process in four months because India’s attempt to demonitise within 24 hours of the announcement nearly brought the economy to a standstill.

“There is a balance we must strike. The most affected if demonitisation is done immediately would be mwananchi, not those dealing in illicit cash,” Njoroge said.

But some analysts see this as a silent amnesty to give time to the holders of illicit fund some time to pump it back into the economy. Michael Mburugu, a partner at consulting firm PKF, a consulting firm said people holding money they cannot account for are likely to find ways to hide the cash.

“This is a token of quiet amnesty. Knowing our financial institutions, these people will use the same banks, proxies and all to beat the system,” he said.

“People will buy land and get the money in bits then bank it. The intention here is to get the money back into circulation. This is a good strategy if it works,” he said.

To make this process successful, CBK will also ensure that other jurisdictions — both local and international — are on the look out for suspect transactions.

Kenya Bankers Association boss Habil Olaka said depending on how the process is designed, this new move is expected to make the financial system stable.

Kenya Private Sector Alliance chief executive Carole Kariuki said the new banknotes should not worry law-abiding citizens. “This move is one way to help address the current liquidity crunch in the economy by increasing the money in circulation in the economy,” she said, urging forex bureaus not to abet laundering and report any suspicious substantial transactions.

Kenya Association of Manufacturers chairman Sachen Gudka said  to ensure the positive intentions of the new notes to the economy are effective, it is vital that the Central Bank Monetary Policy Committee appropriately monitors and analyses the macro-economic environment to curtail any likelihood of excess liquidity flooding the market within the next 120 days, which would lead to increased rates of inflation.

“At the same time it is important that the government, through the National Treasury maintains its fiscal consolidation strategy by delaying the start of new government projects with the aim of curbing likely heightened inflation,” he said.

Going forward, persons who want to exchange less than Sh1 million will be required to go to banks near them. This includes those without bank accounts.

Those with between Sh1 million and Sh5 million will be required to go to their own banks and the normal deposit protocol will follow. They will, however, be required to say where they got the cash from. Any amount in excess of Sh5 million will require one to visit the nearest CBK office who will deal with situations as they arise. If satisfied, CBK will endorse transfers to a bank account nearest to the customer. CBK plans to mop up Sh217.6 million Sh1,000 pieces.

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