2 April 2006

Kenya: Inside the Central Bank

Nairobi — That Central Bank governors always find themselves in trouble with the establishment is not surprising, not when one considers the enormous powers bestowed on the office.

It is also not surprising that all major scandals that have rocked the country had to be supported by the Central Bank.

The Central Bank was on the spot during the Goldenberg Inquiry as one witness after another gave details of how the bank facilitated the scandal.

Former governor Eric Kotut and his deputy Eliphas Ruingu are currently in court facing charges related to the Goldenberg scandal.

Exiled anti-corruption Czar, John Githongo, adversely mentioned Andrew Mullei, the besieged current governor, in his dossier.

Githongo says that he had trouble getting details of the money that was returned by the ghost company. Githongo claims that a source provided him with an unreferenced letter from Mullei to former Financial Secretary Joseph Oyula that sought clarification with regard to a number of suppliers' credit and external commercial loans. Githongo claims that the governor was seeking confirmation that the minister of finance had indeed given authorisation for the payment of a number of credits, running into billions of shillings.

Githongo complains that Mullei failed to promptly respond to his queries to confirm payments made through the Central Bank.

"I had been gently reminding Andrew Mullei to provide me with a report on the forensic, contract - particularly on the payment vouchers. For whatever reason, he was equivocating. Hon Mwiraria said that it was him that held the governor back," he claims in the dossier that has baffled the nation.

When Githongo finally got the report from Jacinta Mwatela, it confirmed that the Central Bank had received $4.744m (Sh325 million) had been paid on June 7, from Schroder and Co Bank AG of Zurich on behalf of their client Anglo Leasing and Finance Company.

He later found out other payments were 956,700 Euros (Sh95m). Info Talent returned $5.28m (Sh506m). But Githongo says that he found it unsettling that the money was repaid by a company that does not have legal status and no indication from within Government on who its owners were.

On Bosire Commission of Inquiry, the Central Bank was again on the spot after the loss of billions of shillings through the export compensation scheme.

The commission was charged with investigating the Goldenberg export compensation scandal among others, which cost Kenya billions of shillings in early 1990s.

It emerged that a number of top Government officials and some connected businessmen, exploited a Government scheme designed to revitalise the faltering economy in the early 1990s.

Hoping to persuade exporters to repatriate their hard currency earnings, the Government promised a 20-per cent premium on foreign currency deposited at the Central Bank. A connected company could manipulate loopholes in the system with the help of Government officials. The company made an arrangement to earn up to 35 per cent compensation for the export of minerals that did not exist.

Through this scheme, billions of shillings were paid from the Central Bank into a little known bank owned by the connected businessman.

From the two scandals, it is clear that the Central Bank plays an important role in the economy. And any major scandal has to be facilitated by CBK.

The legal foundation of the Central Bank was set up in 1966, through the Central Bank Act.

Central Bank of Kenya Act provides for a number of key functions. The first is the provision of banking services to the Government and commercial banks, and includes issuance of currency.

It is this role that the Government can use to have the CBK print out excess money for even funding election campaigns. A strong independent governor makes it impossible for the CBK to print money.

Second CBK deals with services rendered to the Government as fiscal agent, like financing of budgetary deficits and managing public debt. It also deals with services rendered to commercial banks, like short-term loans, advances, and rediscounting of bills.

Connected companies are known to take advantage of inside information from the Central Bank to make billions through such services.

For instance, it is possible for an unscrupulous governor to issue treasury bills and bonds at a high interest rate. The governor can then use his or her influence to ensure that a connected company buys most of the bills, thus making billions of shillings in profit.

The third function concerns the external financing services rendered by the Central Bank, which include the management of foreign reserves, administration of exchange controls, carrying out transactions with international monetary institutions, and managing the exchange rate.

A serious Central Bank can make it impossible for unknown entities, such as Anglo Leasing and Finance Company, to make and receive payments.

The fourth function is the supervision of commercial banks and non-bank financial institutions. An errant Central Bank can allow banks to collapse with deposits of unsuspecting customers. Kenya has experienced such collapses in the 1980s and the early 1990s.

With all these opportunities it is not surprising that any government without transparent intentions might want a governor that can sing its tune.

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