In our first Article, “Regulatory Framework on Diaspora Remittances in Kenya”, we highlighted the various legal provisions governing Diaspora Remittances in Kenya. Today our focus will be on Exchange Rates and Foreign Exchange Controls for Diaspora Remittances in Kenya.
Kenyans in the diaspora possess diverse forms of capital, including intellectual, financial, political, cultural, and social capital, which contribute to the country’s development.
The Central Bank of Kenya (CBK) Act Cap 491 contains regulations for foreign exchange dealings. A monthly survey conducted by CBK shows that there is a high inflow of remittances in March 2024 of USD 229,327.94 from North America compared to Europe which brought in USD 70, 459.26 whilst the rest of the world had an inflow of USD 107,984.99.
Facilitating Global Trade through Foreign Exchange
Diaspora remittances are in foreign currency, and foreign exchange allows for currency conversions, facilitating global trade (across borders), which can include investments, the exchange of goods and services, and financial transactions. The only currency in Kenya is the Kenya Shilling, which is used as a medium of exchange allowing individuals to buy goods and services.
The CBK has a Financial Markets department that prepares daily indicative foreign exchange rates for public reference. These rates represent the average buying and selling prices set by major participants in the foreign exchange market at the beginning of each trading day. As such, they serve as a reliable indicator of the shilling’s value for anyone interested in tracking it on a given day.
In March 2023, the CBK published the Kenya Foreign Exchange Control Code (The FX Code) whose aim is to foster a strong, fair, transparent, and liquid foreign exchange market. It ensures that diverse Market Participants, particularly licensed banks engaged in wholesale foreign exchange transactions, adhere to global standards of conduct and best practices by ensuring that illegal financial transfers are avoided, and appropriate money laundering policies are put in place to protect the integrity of the domestic markets and the global financial framework.
According to the FX Code, all Market Participants were expected to submit to CBK a detailed compliance implementation plan that is approved by the CBK Board by 30 June 2023, fully implement the FX Code, and be in full compliance by 31 December 2023.
Authorized Dealers and Exceptions under the CBK Act
Foreign exchange regulations play a crucial role in maintaining the stability and integrity of financial markets. These regulations are outlined in the Central Bank of Kenya (CBK) Act Cap 491, which provides guidelines for foreign exchange transactions and the licensing of authorized dealers.
According to the CBK Act, no person in Kenya can transact foreign exchange business except an authorized dealer, unless granted specific permission by the Bank. This regulation ensures that foreign exchange transactions are conducted through regulated channels, thereby minimizing the risk of illicit financial activities and safeguarding the integrity of the financial system.
Licensing Requirements for Foreign Exchange Business
Kenya has quite a number of Foreign Exchange bureaus and money remittance providers. These two service providers play a crucial role in diaspora remittances. The CBK has published a directory of licensed money remittance providers and foreign exchange bureaus accessible here https://www.centralbank.go.ke/wp-content/uploads/2017/07/Directory-of-Licenced-Foreign-Exchange-Bureaus-.pdf and https://www.centralbank.go.ke/wp-content/uploads/2016/06/CBK-Directory-of-Licenced-Money-Remittance-Providers.pdf.
To be able to provide these services, one must obtain a license from the Central Bank of Kenya. The application process involves: –
- Submitting a formal application in a prescribed form and fee to the CBK.
- The Bank will evaluate the application based on various factors including the applicant’s financial status, management, capital structure, and the public interest.
- If satisfied, the Bank may grant a license with specified conditions, which it can modify as necessary. Licenses typically expire on December 31st of the year following issuance, but renewal applications can extend the validity until the renewal process is completed.
Renewal and Revocation of Licenses
Licenses issued for foreign exchange business are subject to renewal on an annual basis. To renew a license, the authorized dealer must submit a renewal application to the Bank (CBK) at least two months before the expiry of the license, along with the prescribed fee. Failure to commence business within six months of obtaining a license may result in the need to reapply for a new license.
The Central Bank also holds the authority to revoke or suspend a license if the authorized dealer ceases business operations, fails to comply with regulatory requirements, or engages in conduct detrimental to the public interest. However, before taking such actions, the Bank provides the authorized dealer with an opportunity to present their case and address any concerns raised.
Compliance and Oversight
Authorized dealers are obligated to adhere to strict compliance standards set by the Central Bank. This includes maintaining accurate records, adhering to prescribed foreign currency asset levels, and complying with regulations related to foreign currency accounts. The Bank reserves the right to conduct inspections of authorized dealers and their operations to ensure compliance with regulatory requirements.
The CBK also imposes stringent anti-money laundering (AML) and counter-terrorist financing (CTF) regulations (Highlighted in our previous article) on authorized dealers to prevent the abuse of the financial system for illicit purposes. These regulations require authorized dealers to implement robust AML/CTF compliance programs, conduct customer due diligence, and report suspicious transactions to regulatory authorities.
Penalties for Non-Compliance
Non-compliance with foreign exchange regulations can result in severe penalties, including fines and imprisonment. Individuals or entities found guilty of contravening these regulations may face fines of up to Kshs. 500,000.00 or imprisonment for a term not exceeding three years, or both.
Conclusion
Foreign exchange regulations in Kenya are designed to promote transparency, stability, and integrity in financial markets. By licensing authorized dealers and imposing strict compliance standards, the Central Bank of Kenya aims to prevent illicit activities and maintain the country’s financial reputation. Understanding and adhering to these regulations is essential for businesses and individuals involved in foreign exchange transactions to operate lawfully and responsibly, therefore enhancing a good environment for diaspora remittances to thrive and elevate the country’s economy.
For more on this topic, please reach out to Lilian Opondo at lopondo@gvalawfirm.com or Litigationlawyers@gvalawfirm.com.
