The Central Bank of Kenya (CBK) has remained tight-lipped on why there is a shortage of the new currency, which has left banks confused.
A number of bank officials, who spoke on anonymity citing CBK's "heavy handedness" on the sector, said they started experiencing shortages from the second week after configuring their automated teller machines (ATMs). This has forced them to go back to the old currency notes that they have been mopping from the market.
The Kenya Bankers Association (KBA) said some lenders were experiencing temporary shortages and other operational challenges, but added that they should be fixed as soon as the CBK supplies them with the new currency.
"The old notes are still legal tender and we shall continue operations side by side. Where there are shortages, nothing stops them from dispensing the old notes," Mr Habil Olaka, KBA chief executive, told Sunday Nation on phone.
"These are just some operational hitches but I do not expect that banks will still be dispensing the old notes come August and September," he said.
CBK has refused to comment on why there is a shortage of the new currency, a scenario that has left banks, especially in towns far away from Nairobi, helpless.
Other players in the sector said the other challenge has been training. They said the regulator started training them a week after the announcement.
"We are using the train-the-trainers approach, where we train some trainers who go and train the rest," Mr Olaka explained.
With banks having reverted to the old currency, it means that some of the money that has been withdrawn from the market is being returned into circulation, making it a zero-sum game.
The CBK caught the country by surprise during the June 1 Madaraka Day celebrations, when it announced that it was withdrawing Sh1,000 notes in a bid to deal with counterfeits and money laundering. The regulator announced that the Sh1,000 note would cease to be legal tender from October 1.
Days after the announcement, commercial banks said they had started configuring their ATMs to start dispensing the new currency.
It was expected that once the banks configured their machines, they would dispense only the new notes to speed up the currency replacement process, and the returning of the old notes to CBK. Kenya has about 1,700 ATM machines, 780 commercial bank branches and 66,000 bank agents countrywide.
KBA asked banks, bank agents and retailers, as well as citizens, to be vigilant during the transition period as there may be attempts to launder illicit funds through the banking system.
The CBK told reporters at an earlier briefing that it had put in place mechanisms to ensure that all goes as planned and has maintained that it will not extend the October 1 deadline.
As the clock ticks, those with stolen or ill-gotten cash have less than three months to spend it or exchange it with new notes.
Kenya is not the first country to walk down this path. India scrapped 500 and 1,000-rupee bank notes in 2016 to flush out tax evaders. However, this did not get the desired effects as 99 per cent of the money still got back into the system.
A debt-ridden Nigeria introduced new currency and banned the old notes in 1984, under the Muhammadu Buhari government. But this caused chaos and was blamed on the inflation that followed that crashed the country's economy.
Ghana attempted a similar move in 1982 when it ditched its 50 cedis note to deal with rampant tax evasion and excess liquidity. It had the downside of fuelling a currency black market.
There have been at least five success stories where the exercise worked for the economy and resulted in the intended outcomes.
These include Pakistan (2016), the United Kingdom (2002), Australia (1996), and the European Union (2002). Zimbabwe attempted it in 2015 and it is the only African country that partially succeeded, given the fact that it went for the US dollar, a stable currency that is regulated far from home.