The debate regarding the fall of the shilling in 2011 rages on in parliament. What is being exposed by both sides of the divide is a lack appreciation of the other side's view. This is expected of politicians as each has an agenda they are pushing. On one hand, the MPs allied to the CBK Governor,led by the finance minister have chosen to blame the shilling's fall on the Eurozone crisis. On the other hand, MPs pushing for the adoption of the parliamentary select committee report are blaming it on the banks. The charges include the hoarding of Forex and the abuse of the 'Discount Window' by the CBK.
This 'Discount window' has been the subject of discussion and would be the best place to start to unravel this controversy. Banks need money from time to time meet client cash withdrawals. They can access this in several ways:
- Selling of Assets such bonds
- Borrowing from another bank (Interbank Market)
- Borrowing from the CBK ( Discount Window)
Banks usually use the Interbank market or sell bonds and reserve the Discount window as a last resort for funding. However, according to the PSC committee report, this appears to have drastically changed in 2011. According to the report, cumulative borrowing over 2011 through the discount window was around Kshs. 600 Billion. This was driven by the discount window offering lower rates than the inter-bank market, which provided an arbitrage opportunity for banks borrowing from the discount window and lending on the inter-bank market.
This, in the face of a currency crisis in the country, was, and still remains a source of grave concern. How can such an anomaly remain unchecked? It points to loss of touch by the CBK of the market. Which begs the question, why haven't any heads rolled at the CBK?
