The Central Bank of Kenya (CBK) is now seeking the help of the International Monetary Fund (IMF) as it looks to tighten its leash on commercial banks’ exposure to foreign currency-denominated obligations.
This comes at a time when the CBK disclosed that for the period ended December 2023, three banks were in violation of the Prudential Guideline on Foreign Exchange Exposure which requires lenders to maintain foreign exchange exposure at no more than 10 percent of their core capital. In 2021, only one bank was reported to be in violation of the forex exposure rules.
The National Treasury revealed that CBK has circulated guidelines to commercial banks demanding currency-differentiated disclosures on Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR)—matrices used to assess how well a bank is positioned to meet emerging short-term obligations.
LCR refers to the proportion of highly liquid assets held by financial institutions to ensure their ongoing ability to meet short-term obligations. NSFR is a liquidity standard requiring banks to hold enough stable funding to cover the duration of their long-term assets.
LCR and NSFR require that commercial banks hold adequate reserves of cash or assets that can be easily converted to cash to allow them to adequately meet short-term obligations, especially in an environment of stress.
“We received IMF technical assistance to develop internal liquidity adequacy assessment programme guidelines. The guidelines we plan to issue for comments by banks by the end of October 2024 will include currency differentiated Liquidity Coverage Ratio and Net Stable Funding Ratio as monitoring tools,”the Treasury said.
Currency-differentiated LCR is designed to ensure that CBK is able to monitor and ensure that at all times commercial banks have the proper match between their foreign currency assets, such as loans disbursed, and liabilities, such as deposits taken.
Foreign currency deposits in the country closed June 2024 at Sh1.34 trillion having grown by 13.11 percent year-on-year and declined by 13.33 percent since the start of 2024 on the back of appreciation by the shilling against major currencies.
“While some foreign exchange exposures have recently unwound, we will continue the monitoring of foreign exchange loans, deposits, and on and off-balance sheet exposures in the banking system with a view to identifying potential liquidity risks and strengthening resilience and contingency,” Treasury states.
The adoption of currency-differentiated reporting on LCR and NSFR will be the latest in a series of significant reforms that have been undertaken in the governance of Kenya’s foreign exchange market.
On March 22, 2023, CBK published the Foreign Exchange Code through which it set the standards that guide the conduct of commercial banks and other market participants engaging in the foreign exchange market.
On September 13, 2023, CBK restricted the selling of foreign exchange by money remittance providers to a maximum of $100,000 (Sh12.87million) per customer per day.
On December 11, 2023, CBK introduced the use of electronic matching in the interbank foreign exchange market, a move aimed at streamlining operations by enhancing transparency and unlocking liquidity.
The Treasury has further disclosed that it has sought the support of the IMF to provide support in the evaluation of its regulatory framework.
“We have requested an IMF Financial Sector Stability Review to provide a diagnostic review of the key components of the financial sector.”
including regulation, supervision, safety nets, and financial statistics. The scoping mission took place in May 2024 and the main mission is scheduled for November 2024.
