Why CMA wants central bank out of bonds market

From left: CBK governor Njuguna Ndung’u, Treasury secretary Henry Rotich and CMA chairman Kung’u Gatabaki. FILE 

By GEOFFREY IRUNGU

In Summary

• Capital Markets Authority (CMA) on Monday demanded that the role of creating and primary issuance of bonds be transferred from the CBK to the Treasury.
• CMA chairman Kung’u Gatabaki said such a move would also remove the risk of conflict of interest that the CBK currently faces.
• Mr Gatabaki’s view got critical backing when Treasury secretary Henry Rotich said that the new public finance architecture has transferred the task of managing national debt to the Treasury. 

The Treasury has been drawn into the debate over how to tame the multi-billion-shilling bond theft at the Central Bank of Kenya (CBK) that has sent shockwaves across the bonds market.

The capital markets regulator on Monday demanded that the role of creating and primary issuance of bonds be transferred from the CBK to the Treasury in the wake of the scam involving the sale of fake government securities.

Capital Markets Authority (CMA) chairman Kung’u Gatabaki said such a move would also remove the risk of conflict of interest that the CBK currently faces being in charge of the country’s monetary policy while at the same time raising funds on behalf of the Treasury that has a preference for lower interest rates on its debt.

“The CBK should not have an interest in the outcome of the bond auctions,” Mr Gatabaki said, adding that the Treasury was better suited to handle the bonds and keep custody of government securities through its Debt Department.

“The Treasury should take charge of the whole process of creating and issuing government securities.”

And on Monday, Mr Gatabaki’s view got critical backing when Treasury secretary Henry Rotich said that the new public finance architecture has transferred the task of managing national debt to the Treasury. 

“The new public financial management law transfers debt management and registry to the Treasury and this will be effected soon,” said the minister even as he insisted that the recent fraud was an ‘isolated case where a staff member took advantage of the system migration to create fake bonds’.

“We are looking at the entire Central Bank ICT system to see whether there are any more weaknesses,” Mr Rotich said, reaffirming confidence in the integrity of Kenya’s bond market.  

“Bond issues are reconciled every month and at the end of the year between the Treasury and Central Bank. They are also audited by the auditor general.”

Mr Gatabaki said the fraud, so far confirmed to be worth about Sh105 million, may turn out to be worth billions of shillings when investigations are complete.

Government bonds listed on the Nairobi Securities Exchange (NSE) are worth Sh716 billion in nominal terms or about 20 per cent of the gross domestic product.

Mr Gatabaki’s quest to remove the job of creating bonds from CBK is hinged on the fact that the government is the owner of the bonds and is the one ultimately responsible for the securities and not the CBK.

Though it does not direct the conduct of monetary policy, the Treasury has administrative oversight over the banking sector and capital markets.

The Treasury has traditionally delegated the role of issuing and managing government debt to the CBK — which performs the function as an agent and is paid a fee for it.

The CBK manages the debt on behalf of the Treasury through weekly bond auctions and is also the custodian of the central depository system for the bonds.