Weak shilling lifts central bank’s profit to Sh48bn

Money Markets

The Central Bank of Kenya headquarters in Nairobi. Reports, however, indicate that the bank will not be paying any dividends to the Treasury despite the record profits. PHOTO | FILE  

By GEORGE NGIGI, gngigi@ke.nationmedia.com

In Summary

• CBK made a Sh7.3 billion profit from ordinary operations compared to the Sh751 million loss it reported last year.
• A weak shilling also boosted the CBK’s operating profits mainly arising from forex gains made from sale of dollars in the market.

The Central Bank of Kenya’s (CBK) profit rose to a record Sh48.1 billion in the year to June, buoyed by the rapid decline in the shilling’s value that began in January.

The super profit is mainly the product of book gains earned from revaluation of the regulator’s basket of international currencies in its vaults.

Revaluation gains topped Sh40.1 billion as the shilling weakened from an average of 87.8 units to the dollar in the financial year ended June 2014 to an average of 98.8 by end of June this year.

“The bank’s unrealised foreign exchange gains went up significantly to record levels of Sh40.7 billion due to increased levels of foreign exchange reserves coupled with a weakening of the shilling in the year under review,” the CBK said.

In addition, the CBK made a Sh7.3 billion profit from ordinary operations compared to the Sh751 million loss it reported last year. A weak shilling also boosted the CBK’s operating profits mainly arising from forex gains made from sale of dollars in the market.

“Trading income mainly generated from sale of foreign currency increased to Sh8.1 billion due to movements in major foreign currency sales to the market to stabilise the weakening shilling and major government repayments during the year,” said the CBK.

The CBK foreign currency reserves dropped to $6.6 billion at the end of June this year from a high of $7.5 billion in December, having been depleted by the bank’s intervention in the market to prop up the shilling.

Reports, however, indicate that the bank will not be paying any dividends to the Treasury despite the record profits, having forwarded the surplus to its general reserves — the account that keeps the bank’s profits — that are now worth Sh101.8 billion.

Revenue gaps

The bank has not paid dividends for the past three years despite a 2012 notice asking all State corporations to forward dividends promptly to the Treasury to help it bridge revenue gaps.

The law allows the bank to retain at least 10 per cent of its profit.

A member of the CBK’s Monetary Policy Committee said the bank had the latitude to make a decision on the dividend policy as it is not covered by the Parastatals Act.

The CBK does not pay income tax or stamp duty on its transactions.

The bank’s board had in 2007 established a policy requiring all dividends declared to be net of unrealised income and other revaluation gains, in addition to the minimum 10 per cent retention stipulated by its regulations.

“The bank is expected to undertake projects to comply with constitutional requirements. These include production of new generation currency and installation and upgrade of its IT software hence the need to retain adequate reserves to fund these initiatives,” said the CBK.

The bank said it had capital commitments of Sh2.9 billion at end of June, up from Sh40 million a year earlier, but did not specify the nature of the investments.

The CBK also argued that the reserves act as a cushion from exchange losses that may be incurred in the event that the shilling gains against major currencies in the near future.

READ: CBK working with Treasury to minimise volatility, has ample reserves

The International Monetary Fund had raised concerns over the impending introduction of the new currency, noting the “CBK faces the challenge of implementing the 2010 constitutional requirement to replace the entire stock of currency and the safeguards report recommended that the bank develop an action plan and communication strategy for issuance of the new currency”.

The high earnings could, however, reignite debate over the fraction of surpluses that State agencies can retain, especially in situations where they are deemed to be benefiting from the market conditions at the expense of the public.

The performance of the regulators is ordinarily judged from the stability of the sectors they supervise.

The report also shows that the Kenya School of Monetary Studies, the CBK’s subsidiary which offers hospitality and tutorial services, reported an income of Sh372 million compared to Sh467 million the previous year.

Licence fees from commercial banks and bureaus rose to Sh248 million from Sh220 million while penalties charged on the same institutions dropped to Sh16 million from Sh21 million last year.

Operating expenses were generally lower than the previous year’s, showing tighter expenditure controls.

Expenses that went down include staff costs which dropped 21 per cent to Sh3 billion while the cost of producing notes and coin dropped by half to Sh1.9 billion.