Grace Period to Exchange Ksh1000 Notes Likely to Fail in Tackling Illicit Financial Flows

The long grace period granted by the CBK to withdraw the old Kshs 1000 bank notes as legal tender, and the indefinite timelines to demonetize other denominations of bank notes, is likely to erode the effectiveness of the policy in tackling illicit financial flows as intended by the regulator.

These are sentiments held by analysts from Cytonn Investments, as published in this week’s Cytonn Report, dubbed Kenya Listed Banks Q1’2019 Report.

The Central Bank of Kenya, in a gazette notice dated 31^st May 2019, announced that it had launched new generation notes of 1000, 500, 200, 100, and 50-shilling denominations aimed at tackling illegal financial flows.

The regulator further highlighted that all the old 1000 shillings bank notes in circulation, valued at 217.6 billion shillings, shall cease to be legal tender and be withdrawn from the market by 1^st October 2019.

According to analysts from Cytonn Investments, it is likely that perpetrators of illicit activities and beneficiaries of corruption will have enough time to formalize black money.

Such activities include the use of multiple depositors through mobile and banking agents, conversion of the 1,000 shillings bank notes into lesser denominations, collusion with businesses to make backdated sale entries and investment in less regulated sectors that encourage cash transactions.

Read Also: What you Need to Exchange Current 1,000 Banknotes for New Currency

Expected Effects of Withdrawal of Current Bank Notes in Circulation by the CBK

Given the ample time provided by the CBK to exchange old notes with the new generation notes, the demonetization is expected to have little or no effect on market liquidity.

This is because the long transition period (approximately 4 months) will grant market players enough time to restock their capital balances.

Also, the large population of banked Kenyans, estimated at 75 percent of the bankable population, portrays a high rate of financial penetration and a largely cashless economy.

This implies that demonetization would hardly affect money circulation. The transition is also expected to be efficiently aided by the well-developed banking and mobile money infrastructure.