Kenya's bid to fight money laundering and other forms of illicit financial flows by phasing out the Ksh1,000 ($10) banknote by October 1 is facing challenges that could compromise the rollout of a new currency regime.
The Central Bank of Kenya has recently gone slow on the issuance of new-generation banknotes. The banking regulator acts as a banker for the government, the largest spender in the economy.
Sources say that the CBK has reduced payments to government ministries, departments and agencies in the new generation currency.
"CBK staff have been told not to make any further payments to the government using the new generation currency," a government source told The EastAfrican.
Some analysts reckon that the new currency may have been smaller than the demand for banknotes, as the government had estimated that there were trillions of shillings--some part of proceeds of crime--held by individuals.
Commercial banks have reported a shortage of the new notes after configuring automated teller machines to dispense the new currency.
The Kenya Bankers Association, the industry's lobby, blamed the shortage on the high demand for new banknotes than earlier anticipated.
Last month, the KBA said its members had anticipated the transition to new currency regime and had put in place the mechanisms to receive the old notes and provide their customers with the new currency.
But this week chief executive Habil Olaka told The EastAfrican that the situation is just "temporary" and will be resolved within a short time.
"Both old and new generation notes are legal tender and will continue circulating side by side for now and going forward old generation systematically withdrawn as new generation ones step up," Mr Olaka said.
"Any temporary shortages of new generation notes are being monitored and will be quickly addressed. The CBK is actually releasing the new generation notes but the demand was unexpectedly higher than had been anticipated."
On June 1, the central bank announced that it was withdrawing Ksh1,000 notes from circulation effective October 1 to deal with counterfeits and money laundering.
But the regulator is now battling a legal suit which seeks to have the decision declared illegal, with the case filed by activist Okiya Omtatah, executive director of the Kenyans for Justice and Development, scheduled to be heard by a three-judge bench on July 29.
At the same time, the shilling this week weakened against the dollar, blamed on excess liquidity.
CBK Governor Dr Patrick Njoroge and Treasury Cabinet Secretary Henry Rotich had not responded to our enquiries by press time.