Functions of the Central bank of Kenya


Date Posted: 4/16/2012 1:54:46 AM

Posted By: sashoo  Membership Level: Silver  Total Points: 382

The attainment of political independence in Kenya in 1963 provided a strong impetus in favor of the establishment of the Central Bank as the National Monetary authority, which would use a variety of monetary controls in order to ensure efficiency of operations of the monetary system. The legislation that established the Central Bank of Kenya Act received presidential assent on 14th September 1966, when the first Kenyan currency went into circulation.

Functions of the Central Bank of Kenya

1. It acts as a banker’s bank.

2. It serves as a lender of last resort to commercial banks and also to the government.

3. It encourages the adoption of the financial system according to the changing needs of the markets.

4. It administers external reserves, exchange controls and handles external financial relations.

5. It manages the national reputation. It takes into account accumulated borrowings undertaken by the government to finance its expenditure.

6. It has the sole responsibility of issuing currency. It regulates the issue of notes and coins.

7. The bank is a government banker. It does not maintain the accounts of businesses and individuals in the private sector. It only maintains the accounts of governmental departments. This usually starts in a bank returns as public deposit.

8. Important of all is that it acts as an agent to the government. This is seen when it implements the monetary policy in the pursuit of the government's national economic development. As part of this process, the bank acts as a medium for a two-way transmission between the government and the financial markets. Among other things, it collects extensive statistical information on all financial institutions. The information is usually about the following:

• The volume of business.

• The sectors of the economy that may need financial assistance inform of lending.

• Who is providing deposits to financial institutions?

9. The Central Bank of Kenya has a duty to supervise the banking industry in general. The bank can issue directives to commercial banks and other financial institutions indicating how much they should be lending (quantitative directives). This has been done through what is known as moral persuasion (friendly persuasion). The bank is mandated to inspect and supervise the directives given to non-bank financial institutions and commercial bank.

It spurs economic growth and development as it ensures commercial banks are well run
The Central Bank stabilizes currency and the economy through imports and exports policies.
It ensures smooth operations of the money market by adopting policies which enables people to get short term loans for development.
It ensures equitable development of the country as it makes finances available or focus on areas that need special attention.
It regulates and finances banks and other financial institutions. This assures them the needed finance for expansion of economic activities in the country. They regulate money supply in the country which is important in ensuring that there is enough finance for investment.

Next: The origin of the East African currency
Previous: The Kenya financial system

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