Central Bank of Kenya (CBK) Governor Kamau Thugge spoke to Business Daily recently on the backdrop of his first year in office. The interviews covered many subjects in the mandate, including foreign exchange, monetary policy, currency, and the banking industry.
You have made a difficult choice between raising the domestic interest rate and cushioning the exchange rate with an adjustment to the debt benchmark, is this the right action?
In a sense, it chooses your poison. In my view, you have to deal with inflation and anchor inflation expectations, because if you don’t, if inflation becomes something you can’t control it affects the whole economy and finally, the banks will not have a negative real interest rate.
Even if you don’t raise the interest rate and allow for inflation to reach 30 percent, no bank will lend you less than 30 percent, so you still have a higher interest rate.
Are we now in balance with the shilling or the closest?
Currently, there is a significant foreign inflow but who knows…now we see stability and we are not disturbed unless there is a clear appreciation or depreciation. Generally, we let the market tell us what the equilibrium level is and so I wouldn’t say where we are now.
Changes in the core capital will trigger amalgamation in the industry, especially for the banks can not raise the capital Sh10 billion more, we will see you force the marriage between the banks?
I will allow it to roll out between the banks and know we have a microfinance sector. If you can’t generate enough capital, it doesn’t mean you quit. Unless asked to mediate, I don’t see the need to force a merger.
There is a fear of creating the risk of concentration where you have big banks swallowing everyone, Is this farfetched for you?
I will still have some banks, I don’t think the concentration problem is a concern. For competitiveness purposes, having a larger bank increases competitiveness. Now if you have a few big banks, they set the stage so they can talk, and then the smaller banks just follow. Having bigger and more competitive banks will help us even lower interest rates.
There has been a push for an expanded mandate for CBK in terms of entity regulation, do you think the bank can take more?
We have submitted some amendments to the Act to move from digital credit to only credit because many of these credit providers are not always on digital platforms.
Your predecessors are a bit unclear on how to engage with stakeholders like banks, is your approach as a regulator different?
Mine is a bit different, I have tried to involve stakeholders as much as possible and we have regular meetings with the CEO of the bank and the head of treasury.
He was part of solving the exchange rate problem. I do not want a hands-off approach, but it is not to suggest that we will not be too hard for them if they do not comply.
One of the first observations I made was that there seemed to be some non-compliance because the penalty was so low. The punishment we impose will bring sanity, where banks will think twice before violating the provisions of the CBK.
Where do we stand now on the creation of a central bank digital currency?
The main conclusion is that if we are in terms of financial inclusion, where we are more advanced than others in terms of digital payments, moving to a central bank for digital currency is not a priority, and this remains so. But, having said that, we have to stick with what happened in that place.
Last year, the CBK showed that there was no demand for new notes and coins, and we saw De la Rue put the business on hold. Some may tell you that they haven’t seen the new record yet, did the request come back?
If you look at the currency in circulation, relative to gross domestic product, Kenya has very little compared to countries like India. There will always be a need for some currency, but at the same time, there are developments in digital payments that continue to reduce the need for new currencies. There will always be a need, but that need will diminish.
What to expect from CBK in its second year in office?
I’ll take you back to our mandate, and the first one is price stability. I think going forward, we want to maintain, and we have modernized the monetary framework.
The second is the stability of the financial system – my vision is to have that stability – fewer but stronger banks, which does not only come from a regional perspective.
Third, there are payments and fees. Our payment system is a bit disjointed, and we want to create the first payment system that other countries have. I have to go to the store and use any payment method of the provider.
