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

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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.

OR

Discuss The Central Bank and its functions

It was established by Central Bank Act 1966 and the Banking Act 1968. The management and policy decisions are entrusted to the Board of Directors, comprising of seven members including the governor, deputy governor, and permanent secretary to treasury.
The governor is the executive head of the bank. The Central Bank is entrusted with the responsibility of maintaining economic stability and financial soundness of a country. It is therefore entrusted with two objectives:

a) Responsibility of maintaining financial soundness of the economy. The bank has therefore to identify gaps in financial markets and seek solutions to these gaps. The central bank is the governing authority of the financial system of any country. It is the apex of financial system and is responsible for ensuring the smooth working of the banking sector and other financial institutions.

b) To act as a commercial bank. It therefore has to operate profitably when offering services to different parties. The Central Bank acts as a lender of last resort to commercial banks.

c) Issuer of currency notes and coins. The central Bank is the only legal institution that is authorized to issue legal tender.

d) Implementation of the monetary policy. The monetary policy is the regulation of the economy through changes in money supply, interest rates and exchange rate. Lower interest rates resulting from increased money supply, will encourage investment and consumption. Lower interest rates will however, result in capital outflows hence depreciation of the currency. The fall in external value of the country?s currency makes exports more competitive and imports more expensive. On the whole consumption, investments and net exports will raise hence promoting employment. Higher interest rates resulting from a reduction in money supply will produce opposite effects; fall in consumption, investment and net exports.

e) Government banker. The central Bank acts as bank and custodian of the government.

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