How CBK tracks movement of cash in Kenya economy

By Pascal Sala On Wed, 12 Jun, 2019 21:00 | 3 mins read
New generation banknotes.
Editor's Review

    CBK is in the process of demonetising 217.6 million pieces of the Sh1,000 old series notes, which is currently circulating in the economy.

    The reason for the demonetisation is to counter the rising cases of illicit financial transactions and the emerging counterfeit notes.

    Money supply involves adjustment of the monetary base by the Central Bank by either selling or buying bonds in the open market for bonds.

    The new measure put in place by CBK to replace the 1,000 note seeks to forcefully inject the hidden cash back into the banking system.

    Central Bank by taking the measure seeks to make the “lost” money available for its control.

  Gilbert Mutegi

Central Bank of Kenya (CBK) is in the process of demonetising 217.6 million pieces of the Sh1,000 old series notes, which its data shows is currently circulating in the economy.

Central Bank Governor Patrick Njoroge said the reason for the demonetisation is to counter the rising cases of illicit financial transactions and the emerging counterfeit notes following reports of odd transactions in the banking sector which have raised concern among Kenyans.

CBK said in addition to 217.6 million pieces of the Sh1,000 old series notes, other currencies in circulation are 30.8 million pieces of Sh500, 54.8 million pieces of Sh200,126.4 million pieces of Sh100, 100.5 million pieces of Sh50 and 9.9 million pieces of Sh20.

But how does Central Bank know the amount of money circulating in the market on any day?

Total amount of bank notes and coins circulating in the economy, also referred to as monetary base, is under the direct control of CBK, and is issued in a specific proportion to fuel economic production. This amount include currency in circulation and reserves.

The former is the cash holding of bank notes and coins by people and non-bank institutions while the latter is the cash holding by banks in their vaults together with their deposits at the Central Bank.

As a regulator, CBK monitors deposits and withdrawals in all banks. This way, it is able to tell the exact amount that has been withdrawn or deposited in all banks on any particular day.

Daily net deposits

Through daily monitoring of net deposits in banks, daily net deposits at the Central Bank by commercial banks, and its own weekly open market operations records, CBK knows the exact amount that has brought change to the monetary base, the inventory of the total currencies issued.

This is to say that Central Bank of Kenya, at any given day, has the record of the total amount of currency in circulation as well as the total amount of commercial bank reserves.

Central banks conduct monetary policy by adjusting the supply of money. Money supply involves adjustment of the monetary base by the Central Bank by either selling or buying bonds in the open market for bonds, a process called open market operations .

The process involves contractionary open market operations , that is, selling of bonds by Central Bank, through which money supply in the economy is decreased and expansionary open market operations, that is, buying of bonds, which leads to an increase of money supply in the economy.

Store of value

Since money functions as a store of value (reason corruption lords have stashed loads of it in their houses) and a medium of exchange, some of it flows through the markets and back into the banking system while some are just stored by people in their homes, as in the current situation. 

Based on banking statistics, CBK can make good estimates of how much of the issued currency is “put to work” and how much is “lost”, but they cannot tell exactly where it is. 

Holding large sums of cash by people outside of the banking system (in excess of their total average cash requirements for transactions), hampers monetary policy in that those sums of money are “unavailable” in the banking system, but yet in circulation. 

The new measure put in place by CBK to replace the 1,000 note (the denomination in which most of the cash is held) seeks to forcefully inject the hidden cash back into the banking system.

Central Bank by taking the measure seeks to make the “lost” money available for its control, or alternatively have it rendered a mere pile of paper if not surrendered before October 1. The writer is a former banker