Role of Central Bank of Kenya (CBK)

Role of Central Bank of Kenya

The roles are outlined in the CBK Act of 1966 and the banking Act of 1968 The Act give CBK the powers to ensure financial soundness of the economy this is through issuing of currency, and Control of money supply in the economy. The banking Art allows CBK to operate on commercial basis and offers such services as currency notes to commercial banks, and discounting securities.

a) Issuing of currency and control of money supply
This is the most important role of CBK and calls for a high degree of efficiency and trust. CBK is allowed to print money to match the resources accumulated different sectors of the economy. This means that there is a strong
correlation between the money supply in the economy and the resources in the economy. It is always kept as top secret in order to avoid speculation. CBK maintains some resources to back the Kenyan currency. They are referred to as reserves and they are in form of Gold, silver, and other strong foreign currencies.

b) Adviser to the Government

  • On economic policies necessary at any one point in time to stimulate economic development of various sectors
  • Ways of raising finance e.g. best sources of finance and best cost of the interest to be paid on such finances
  • Best means of managing the private sector from the financial management point of view. In particular it advices on which projects the public sector and which the Government is to finance
  • Gives advice on ways and means of controlling inflation
  • Means and ways of boosting purchasing power of the people in order to uplift their standards of living

c) Banker to the Government

  • Undertakes all government transactions e.g. different government ministries will draw cheque on it for payment for different services and goods the ministry has purchased
  • Receives various payments on behalf of Government e.g. tax payments are deposited in the consolidated account maintained CBK, foreign aid and other funds received Government
  • It also pays foreign loans on behalf of the Government thus it keeps foreign exchange reserves for this purpose
  • It advances loans to the Government both short term and long term to finance Government projects

d) Management of public debt
Public debt is that finance which Government borrows from its citizens and foreigners through Government securities such as treasury bonds and stocks.
Finances from these securities are received CBK on behalf of the Government to finance deferent economic activates. CBK will receive the finance from the securities and also undertakes to pay interest and principle to
the public or foreigner when they fall due. Advice the Government the rate of interest the securities will carry. Advice the Government to what conditions will be ideal to sell Treasury bill or Government stocks

e) Banker to commercial banks

  • Acts as the clearing house where it acts as a middle man in settlement of debt or to any commercial bank in Kenya
  • It is the sole custodian of reserve deposits which law commercial banks are required to maintain with CBK
  •  Acts as a source of short term finance to commercial banks e.g. when commercial banks are faced with short term liquidity problems they borrow from CBK
  • It acts as an arbitrator in disputes between commercial banks e.g. financial expansion disputes
  • It is authorised commercial banks to sell or discount promissory notes, bill of exchange or any other documentary instalment maturing within 180 days

f) Financial controller of all commercial banks Commercial banks are required to be guided in their activities CBK in the following areas:-

  • Areas in which investments are a priority to Government investment plans
  • Submit periodic reports from which important statistics used to gauge the financial soundness of the economy are prepared e.g. savings accumulated over a period of time or investments made over a period of time
  • Advice commercial banks in matters of financial planning
  • Advice commercial banks in their process of credit creation

g) Lender of last resort
If circumstances warrant or dictate CBK may act as lender of last resort in the following circumstances
Under high inflationary circumstances where the general public looses confidence in money and prefers to invest in real estates

A commercial bank may fail to raise the finance necessary to undertake a given investment, either due to high capital investment or due to liquidity constraints thus forcing it to turn to CBK for financing

h) Foreign exchange administration
The county earns through sale of goods and services to the foreign countries. This finance is usually in form of money such as dollars, euro, Japanese yen, sterling pound, douche mark etc. These currencies make up the special
exchange rate in the international trade. The process of management of international trade is aimed at ensuring that there is a balance between inflows from abroad and outflows out of the country. For this reason CBK will
allow as little money as possible to live the economy but to allow as march as possible to enter the economy. In its control of forex, CBK is the sole seller of foreign currency in Kenya. Commercial banks can do this with approval from CBK

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