The Central Bank of Kenya (CBK) has introduced a new electronic forex trading platform, Electronic Matching Systems (EMS), extending access to non-bank actors. This move allows significant dollar holders to sell their holdings to the highest bidder in an open market.
According to CBK rules for EMS, non-bank participants can sell forex on the platform but are restricted to making purchases through their commercial bankers. These participants are not permitted to influence the exchange rate through displaying two-way prices, ensuring adherence to strict standards to prevent market disruption.
The CBK emphasizes that these non-bank participants must conduct “know-your-customer” (KYC) checks on counterparties to prevent money laundering, terrorist financing, or other criminal activities.
The introduction of EMS is part of the CBK’s ongoing reforms to enhance the forex market’s functionality. The forex market faced challenges last year due to hard currency supply problems despite a significant amount of dollars held in local bank accounts by Kenyans.
Direct sales on EMS can potentially unlock the supply of dollars to smaller banks struggling to access them in the formal interbank market.
By the end of October 2023, Kenyans held a record Sh1.45 trillion worth of hard currencies in local bank accounts, representing a 61 percent increase from the previous year. Corporates constitute about 70 percent of Kenya’s dollar deposits, indicating that the majority is not held for speculative purposes.
The CBK has also reduced the minimum transaction amount for interbank forex trades to $100,000 (Sh15.7 million), with additional lot sizes of $50,000 for EMS deals. This move is expected to enhance liquidity in the market, although clarity is needed on whether these limits apply to non-bank participants.
Previously, the minimum limit had been set at $500,000 before being lowered to $250,000 in August last year. Additionally, the CBK has removed the requirement limiting the spread between bids and asks, allowing market participants to negotiate rates based on supply and demand.
To ensure liquidity and fair prices, the CBK has designated the top 10 commercial banks in terms of foreign exchange trading as market makers for the EMS platform.
