What are the Functions of the Central Bank of Kenya?

The functions of the Central Bank of Kenya are important for monetary policy and financial stability. Article 231 of the Kenyan Constitution establishes the Central Bank, otherwise known by the alternative corporate name of the Banki Kuu ya Kenya.

The main functions of the Central Bank of Kenya are formulating monetary policy, promoting price stability, issuing currency and performing other functions conferred on it by an Act of Parliament.

An Act of Parliament shall provide for the composition, powers, functions and operations of the Central Bank of Kenya. This Act is The Central Bank of Kenya Act.

The Central Bank of Kenya was established by an Act of Parliament of March 24, 1966, and opened its doors to the public on September 14, 1966.

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Powers of the Central Bank of Kenya

The Central Bank of Kenya shall not be under the direction or control of any person or authority in the exercise of its powers or the performance of its functions.

The Bank shall be a body corporate with perpetual succession and a common seal, with power to acquire, own, possess and dispose of property, to contract, and to sue and to be sued in its name.

The Bank shall exercise any type of central banking function unless specifically excluded under the Central Bank Act, and shall enjoy all the prerogatives of a central bank.

The Bank may make its own rules of conduct or procedure not inconsistent with the provisions of the Central Bank Act, for the good order and proper management of the Bank.

The Bank shall not be subject to the Companies Act or the Banking Act.

structure of the Central Bank of Kenya

The Board of Directors provides oversight of the Bank’s functions by formulating policies, other than the formulation of monetary policy, and reviewing performance. The Board comprises eleven members consisting of-

• a Chairperson;
• a Governor;
• the Permanent Secretary to the Treasury or their representative who shall be a non-voting member;
• eight other non-executive directors.

The President shall appoint the chairperson and the eight non-executive directors with the approval of Parliament. The chairperson and the non-executive directors shall hold office for four years but shall be eligible for re-appointment for one further term of four years.

The members of the Board shall be appointed at different times so that the respective expiry dates of the members’ terms of office shall fall at different times.

A member of the Board may resign from office by writing under their hand addressed to the President which resignation shall take effect one month from the date of receipt of the letter of resignation by the President.

If the Chairperson, the Governor or a director dies or resigns or otherwise vacates office before the expiry of their term of office, the President shall appoint another person in their place.

Where the Chairperson, the Governor or a director is unable to perform the function of their office due to any temporary incapacity which is likely to be prolonged, the President may appoint a substitute for that member of the Board to act with the full powers of the member until the President determines that their incapacity has ceased.

A person shall be eligible to be appointed a Director if they –

• are a citizen of Kenya; and
• are knowledgeable or experienced in monetary, financial, banking and economic matters or other disciplines relevant to the functions of the Bank.

Duties of the Board of Directors

The Board of Directors of the Bank, subject to the provisions of the Central Bank Act, are responsible for –

• determining the policy of the Bank, other than the formulation of monetary policy;
• determining the objectives of the Bank, including oversight for its financial management and strategy;
• keeping under constant review the performance of the Bank in carrying out its functions;
• keeping under constant review the performance of the Governor in discharging the responsibility of that office;
• keeping under constant review the performance of the Governor in ensuring that the Bank achieves its Objectives;
• determining whether the policy statements made under section 4B (of the Central Bank Act) are consistent with the Bank’s primary function and policy objectives under section 4; and
• keeping under constant review the use of Bank’s resources

functions of the Central Bank of Kenya

The functions of the Central Bank of Kenya are as follows:

1. monetary policy

Monetary policy consists of decisions and actions taken by the Central Bank to ensure that the supply of money in the economy is consistent with growth and price objectives set by the government.

Price Stability and Economic Growth

The objective of monetary policy is to maintain price stability in the economy. Price stability refers to the maintenance of low and stable inflation.

The Central Bank of Kenya’s principal objective is the formulation and implementation of monetary policy directed to achieving and maintaining stability in the general level of prices. The aim is to achieve stable prices, measured by low and stable inflation, and to sustain the value of the Kenya shilling.

The Central Bank of Kenya Act Sections 4 and 5 provides that the Cabinet Secretary for the National Treasury shall, by notice in writing to the Bank, provide the price stability target of the Government at least in every period of 12 months. The target is provided at the beginning of the financial year.

Movements in the general price level are influenced by the amount of money in circulation and the productivity of the various economic sectors. The Central Bank of Kenya regulates the growth of money stock that is consistent with a predetermined economic growth target as specified by the Government and outlined in its Monetary Policy Statements.

Monetary Policy Decisions and Instruments

It is the responsibility of the Monetary Policy Committee to formulate the monetary policy of the Central Bank of Kenya (see Section 4D of the Central Bank Act)

Monetary policy is guided by a monetary programme, which is premised on the economic growth and inflation targets provided by the National Treasury. Monetary policy decisions are made by the Monetary Policy Committee (MPC).

The MPC meets at least once every two months and reviews data and analysis from various sources including the Central Bank Departments enabling it to decide on any action to maintain or vary its stance.

The daily monetary policy activities are undertaken by the Monetary Policy Management Committee, which meets at least three times a week.

Read more about the role of the Central Bank of Kenya regarding the monetary policy.

2. Financial Markets

It is the role of the Central Bank of Kenya to implement monetary policy decisions, manage the country’s foreign exchange reserves and manage the government’s domestic debt.

foreign exchange reserves

The Central Bank of Kenya (CBK) holds Foreign Exchange reserves that are a national asset held as a safeguard to ensure the availability of foreign exchange to meet the country’s external obligations, including imports and external debt service. The primary objective in the management of these reserves is, therefore, capital preservation.

The Central Bank of Kenya Act requires the Bank to maintain adequate official foreign exchange reserves equivalent to the value of four months imports and manage them prudently.

The reserves are used for:

• servicing government external debt and non-debt government external obligations.
• intervention when deemed necessary to smoothen erratic movements of the exchange rates and CBK external payments.
• cushioning against external crises.

The size of official reserves serves as a confidence signal to potential investors, rating agencies and those contemplating capital flight.''

Capital flight is a large-scale exodus of financial assets and capital from a nation due to events such as political or economic instability, currency devaluation or the imposition of capital controls.

Government Domestic Debt

On behalf of The National Treasury, the Central Bank auctions and manages the government’s domestic debt.

At the beginning of each fiscal year, the National Treasury determines the budgetary gap to be financed from the domestic market. The Central Bank then comes up with a borrowing plan which it implements through auctions of Treasury bills and bonds.

In addition, the Central Bank manages the registry (Central Securities Depository) and maintains the database for domestic debt and contributes to the development of the secondary market for government securities. Commercial banks, pension funds, insurance companies and corporate entities, individuals or retail market also invests.

Forex

The exchange rate released by the Central Bank of Kenya is an indicative rate, meant to help those exchanging currencies gauge the value of the shilling on any given day.

The Central Bank does not set the exchange rate; it is determined by the market, or supply and demand. Individual forex bureaus and commercial banks set their rates, which are held to reasonable levels of variance and margins due to competition in the market.

Typically, consumers looking to exchange smaller amounts will find more favourable rates at forex bureaus, while those looking to exchange larger amounts through foreign accounts will find better rates at commercial banks.

Read more about the role of the Central Bank of Kenya regarding the financial markets.

3. Bank Supervision

One of the statutory objects of the Central Bank of Kenya under the Central Bank Act (Cap 491) is the promotion of financial stability through the maintenance of a well-functioning banking system.

One of the mandates of the Central Bank of Kenya is to foster the liquidity, solvency and proper functioning of a market-based financial system. This is achieved through the following:

• developing appropriate laws, regulations and guidelines that govern the players in the banking sector.
• continuous review of the banking sector laws, regulations and guidelines to ensure that they remain relevant to the operating environment. These include the Banking Act (Cap 488), Microfinance Act (2006), Central Bank of Kenya Act (Cap 491) and Prudential Guidelines and Regulations issued thereunder.
• licensing banks, non-bank financial institutions, mortgage finance companies, credit reference bureaus, foreign exchange bureaus, money remittance providers and microfinance banks.
• inspection of commercial banks, microfinance banks, non-bank financial institutions, mortgage finance companies, building societies, credit reference bureaus, foreign exchange bureaus, money remittance providers and representative offices of foreign banks to ensure that they comply with all the relevant laws, regulations and guidelines and protect the interests of depositors and other users of the banking sector.
• analysis of financial reports and other returns from banking sector players to ensure compliance with the relevant laws, regulations and guidelines.
• contributing to initiatives that promote financial inclusion.

Solvency is the long-term ability to meet debt obligations while liquidity is the short-term ability to meet debt obligations using current assets.

Read more about the role of the Central Bank of Kenya in the supervision of banks.

4. National Payments System

A payments system refers to a system or arrangement that enables payments to be effected between a payer and a beneficiary, or facilitates the circulation of money, and includes any instruments and procedures that relate to the system.

According to the Bank of International Settlements (BIS), a payment system “consists of a set of instruments, banking procedures and, typically, interbank funds transfer systems that ensure the circulation of money.” They are a major channel by which shocks can be transmitted across domestic and international financial systems and markets.

Therefore, National Payments Systems are the conduits through which buyers and sellers of financial products and services make transactions and are an important component of a country’s financial system.

In Kenya, participants comprise the Central Bank of Kenya, the Government, Commercial Banks, Financial Institutions and Payment System Providers. National Payments Systems in Kenya are classified into two categories; Large Value (Wholesale) and Low Value (Retail) Payment Systems. The classification is based on the throughput ( the amount of material or items passing through a system or process) in terms of values and volumes processed.

Read more about the role of the Central Bank of Kenya to the national payments system.

5. Banking Services

The Central Bank is the banker for the national government and the county governments. The banking role encompasses the national government and its ministries, departments and agencies (MDAs) and the county governments. These institutions hold a variety of accounts with the Central Bank, depending on their needs, which allow them to receive deposits and make payments.

The Central Bank monitors these accounts to ensure that the institutions aren’t at risk of overdraft and also advises the institutions on financial matters.

The Central Bank of Kenya maintains various accounts for Government Ministries, which include:

• Recurrent Accounts
• Development Accounts
• Deposit Accounts
• Projects Accounts
• Donor funded Accounts
• Treasury Accounts
• Public Entities accounts, that is, Parastatals.

The government Departments that hold accounts in the Central Bank for funding by the Exchequer Accounts include;

• The Judiciary
• Directorate of Public Prosecutions (DPP);
• Ethics and Anti-Corruption Commission (EACC);
• Independent Electoral and Boundaries Commission (IEBC);
• Teachers Service Commission (TSC);
• Public Service Commission of Kenya (PSC);
• Commission on Revenue Allocation (CRA);
• Parliamentary Service Commission (PSC).

Read more about the role of the Central Bank of Kenya regarding banking services.

6. Currency Services

By law, the Central Bank of Kenya is the only institution in the country that can issue currency. The Central Bank ensures that it procures adequate and secure currency for distribution to meet the country’s needs.

The Central Bank of Kenya is the only institution in Kenya with full discretion and sole rights to issue currency notes and coins. The mandate derives from the Central Bank of Kenya Act, Section 4 A (1) f. This mandate involves the following responsibilities:

• planning, forecasting, procuring and distributing currency notes and coins;
• setting up suitable currency distribution mechanisms;
• safeguarding the integrity of Kenyan currency as a medium of exchange;
• developing policies for proper handling.

The Bank supplies banknotes and coins to the economic system in Kenya in bulk. It also destroys banknotes and coins that are no longer in use selected from what the commercial banks have deposited to the Bank. The Bank also manages the design of its currency and follows through the printing (for banknotes) and minting (for coins) process from the time orders are placed.

Read more about the role of the Central Bank of Kenya regarding currency services.