The primary aim of demonetising the KSh1000 note, which is worth approximately 10 US dollars, is to fight money laundering, counterfeiting and corruption by forcing those with stashes of cash from illegal profits into a corner.
At a press conference on 24 September, central bank governor Patrick Njoroge said that the demonetisation of the 217 million banknotes is on schedule. “We have received very good support from other jurisdictions,” he added, citing the examples of Uganda and Tanzania, which have already repatriated their holdings of the old currency notes.
- Both countries banned the use of the old notes within their jurisdictions as soon as the demonetisation was announced on 1 June, primarily to prevent their financial systems from being used to launder Kenyan currency.
- Other big local players, such as telco giant Safaricom, have issued circulars to their staff and clients with deadlines for the use of the old banknotes. While the telco set 26 September as its deadline, the US embassy in Nairobi has not been accepting them since 12 September.
- To prevent situation like in India, where instant demonetisation in 2016 caused economic disruption, the Central Bank of Kenya (CBK) said it has been on “a very strong, layered, targeted public-awareness campaign”. This has included telling parents to give their school-going children only new notes and working with the public to identify banks and money agents still issuing old notes.
- With less than a week to go, other government agencies such as prisons and investigating agencies have also been rushing to change old notes.
Banks fill their coffers
The process requires anyone seeking to exchange more than KSh5m in the old banknotes to seek Central Bank approval – a move widely seen as targeting corruption and money-laundering proceeds.
Within the first month of the June announcement, deposits in banks grew by KSh22.3bn while currency outside banks fell by KSh25.1bn – the first negative growth since CBK started making the data public.
By the end of August, CBK said it had collected roughly half of the 217 million notes in circulation. Njoroge tweeted information on the size on transactions.
Forgers waste no time
Meanwhile, the war against counterfeits has been less successful. In August, Patrick Njoroge admitted there was fake new currency in circulation.
- Just a month after the new currency went into circulation, three people were arrested with KSh100,000 worth of fake notes. Then, in early September, three people, including a Congolese and a Nigerian, were arrested in Yatta, about 122km from Nairobi.
Fighting such counterfeits will be the Central Bank’s next big problem, as the true extent of the vice is still unclear because the public is still getting used to the new banknotes.
The success of the demonetisation process is a testament to Kenya’s financial maturity, as initial fears of inflation due to increased liquidity have mostly not panned out.
Still, the initial aims of using the process to enhance the war against corruption and criminal activities may have been too ambitious.