International Gold Crisis

History of Kenyan banking: History of Kenyan banking

As they have grown to meet the demands of a growing market, Kenyan banks have had to cope with a changing foreign exchange situation that has continued to pose a great challenge to their operations. Following the international gold crisis of early 1968 and its resultant devaluation of the British sterling pound to which the Kenya shilling was pegged, the Central Bank and the Kenya government found it necessary to impose foreign exchange controls and import licensing.

By 1976, with Kenya’s balance of payments remaining bleak, the Central Bank issued a raft of measures aimed at conserving foreign exchange while improving the liquidity of commercial banks and other financial institutions. The first measure limited the transfer of money to Kenyan students studying abroad. The second instructed banks, hotels and tour operators to ensure that payment for hotels, lodges or other services was in foreign currency or from an approved Kenya shilling account. The third measure required all commercial banks and licensed financial institutions to maintain a minimum of liquid assets not less than 18% of all eligible liabilities.

This tightening of foreign exchange controls while helping improve the country’s foreign exchange reserves had the undesired effect of encouraging the emergence of foreign exchange black markets, mainly meant to help Kenyan students studying abroad, who were the most affected by the stringent measures.

The foreign exchange restrictions also set a limit on the amount of foreign currency Kenyans could travel with outside the country. Surplus was to be immediately surrendered to the Central Bank upon one’s return to Kenya and a foreign exchange certificate was issued to those bringing foreign exchange into the country.

By the beginning of October 1982, partly due to the abortive coup attempt of August that year, Kenya was once again reeling under a major foreign exchange crisis. The country’s foreign exchange reserves could only last between two to six weeks as opposed to the conventionally accepted minimum of three months. This forced the Central Bank to introduce even more restrictions on imports thereby limiting companies from bringing in raw materials and spare parts essential to their operations. The result was widespread losses in the private sector and inevitable employee redundancies.

Throughout the 1980s Kenya’s foreign exchange situation remained precarious. It was under these difficult circumstances that Duncan Ndegwa exited the helm of the Central Bank in April 1983. He was succeeded by Philip Ndegwa, until then the chairman of KCB.

Major problems for the financial sector of the economy would however continue despite the change of guards at the Central Bank. The first wave of bank failures in the mid-1980s only served to exacerbate Kenya’s foreign exchange turmoil. During this time the shilling continued to steadily depreciate against major world currencies. By December 1992, the shilling had gone from 7.143 to the dollar in 1972 to 36.216. In March 1993 the shilling was devalued by 25%, raising its exchange rate to the dollar to 45. Three months later, the dollar exchange rate had skyrocketed to 65.

The deterioration in the foreign exchange situation would lead to some fiddles in the banking sector. In 1987 the government lost KShs 600 million in when two commercial banks; Biashara Bank and Bank of Credit and Commerce International (BCCI); failed to remit foreign exchange earnings from coffee exports. The Central Bank was forced to suspend the two banks from engaging in foreign exchange transactions.

It was in the midst of this foreign exchange crisis (and the collapse of several indigenous banks) that Philip Ndegwa was moved out of the Central Bank and succeeded by Eric Kotut.

Kenya’s foreign exchange situation did not improve until 1993 when the then minister for finance, Prof George Saitoti, removed from the Central Bank the power to allocate foreign exchange to importers. In 1995 the Foreign Exchange Control Act was amended to lift the restrictions imposed on the use of foreign exchange. Kenyans could now acquire as much foreign exchange as they needed, not only from banks but also from forex bureaus.

Even as the Central Bank tried to stabilize the foreign exchange situation, banks continued to face rising incidents of fraud. In August 1980 alarm was raised over the loss of millions of shillings from commercial banks through cash theft and forgery of client signatures.