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Kes kenyan shilling

What Is KES (Kenyan Shilling)?

The KES, or Kenyan Shilling, is the official currency of Kenya. As a national currency, it falls under the broader financial category of Currency and Foreign Exchange. The Central Bank of Kenya (CBK) is the sole authority responsible for issuing the KES and for formulating monetary policy to achieve and maintain price stability within the Kenyan economy. The KES is divided into 100 cents, although cent-denominated coins are less commonly used in daily transactions today. Its value, like other currencies, is influenced by various macroeconomic factors, including inflation and the country's balance of payments.

History and Origin

The history of currency in Kenya dates back to the Maria Theresa Thalers introduced by Arab traders in the 1800s. Later, the Indian Rupee gained prominence, especially during the construction of the Kenya-Uganda railway in 1896, as it was used for paying Indian laborers. In 1920, with Kenya becoming a British Crown Colony, the Indian Rupee was abolished, and the East African Currency Board (EACB) was established to manage currency issuance for the region. The East African Shilling was subsequently introduced on January 1, 1922, and became the official currency across Kenya, Uganda, and Tanganyika by June 1923.13

Following Kenya's independence, the Central Bank of Kenya (CBK) was established in 1966 by an Act of Parliament to take over the role of currency issuance.12 On September 14, 1966, the Kenyan Shilling replaced the East African Shilling at par. The initial KES banknotes, introduced in denominations of 5, 10, 20, 50, and 100 shillings, featured the portrait of Kenya's first president, Mzee Jomo Kenyatta, and depicted diverse economic activities on their reverse side.11 Coins were first issued in April 1967.10

Key Takeaways

  • The Kenyan Shilling (KES) is the official currency of Kenya, managed by the Central Bank of Kenya.
  • It replaced the East African Shilling in 1966 after Kenya gained independence.
  • The KES is a floating currency, with its exchange rate determined by market forces of supply and demand for foreign exchange.
  • Its value can be influenced by internal economic factors, such as inflation and fiscal policy, as well as external trade relations and remittances.
  • The Central Bank of Kenya aims to maintain price stability and manage the KES to support the country's economic growth.

Interpreting the KES

Interpreting the Kenyan Shilling primarily involves understanding its value in relation to other major global currencies, such as the US Dollar, Euro, and British Pound. This is typically done by observing the prevailing foreign exchange rates. A strengthening KES means that it takes fewer shillings to buy a unit of foreign currency, making imports cheaper and potentially dampening export competitiveness. Conversely, a weakening KES makes imports more expensive but can boost exports.

The Central Bank of Kenya provides daily indicative exchange rates, which are calculated as the weighted average of spot trades in the interbank foreign exchange market.9 While these rates offer a general guide, individual commercial banks and forex bureaus set their own rates based on market competition.8 Understanding these movements is crucial for businesses engaged in international trade, individuals sending or receiving remittances, and investors evaluating asset values.

Hypothetical Example

Imagine a Kenyan exporter, "Safari Goods Ltd.," sells handcrafted items to customers in the United States. On January 1st, the exchange rate is KES 130 to US$1. Safari Goods sells items worth US$1,000, converting it to KES 130,000.

Three months later, the KES strengthens due to increased foreign investment in Kenya, and the exchange rate moves to KES 120 to US$1. If Safari Goods sells another US$1,000 worth of items, they would now receive only KES 120,000 after conversion.

This example illustrates how fluctuations in the KES exchange rate directly impact the local currency proceeds for businesses involved in foreign trade. For Safari Goods, a stronger KES (lower KES per USD) means less income in shillings for the same dollar value of exports, affecting their overall profitability if their operational costs are in KES.

Practical Applications

The Kenyan Shilling is central to all financial transactions within Kenya, impacting various aspects of finance and the broader economy.

  • Trade and Commerce: All domestic transactions, from retail purchases to large corporate deals, are denominated in KES. For international trade, businesses use the KES to convert foreign earnings or to purchase foreign currency for imports. Commercial banks like KCB Bank offer various foreign exchange services, including cash services for major currencies, foreign drafts for overseas payments, and Swift transfers for international money movement.7
  • Investment: Investors in Kenya purchase assets, such as stocks, bonds, and real estate, using KES. Foreign investors must convert their capital into KES to participate in the Kenyan markets. The performance of the KES relative to their home currency significantly impacts their overall investment returns.
  • Government Finance: The Kenyan government collects taxes and disburses funds in KES. Its national debt, a significant portion of which is external, requires the Central Bank to manage foreign exchange reserves to facilitate repayments.6
  • Personal Finance: Individuals earn, save, and spend in KES. The purchasing power of their KES income is directly affected by inflation and currency stability. Remittances from Kenyans living abroad contribute significantly to the economy, with funds typically converted into KES upon receipt.

Limitations and Criticisms

While the Central Bank of Kenya aims for a market-determined exchange rate, the Kenyan Shilling has faced criticisms regarding its valuation and the Central Bank's interventions. In late 2018, the International Monetary Fund (IMF) suggested that the KES was overvalued by approximately 17.5%, implying that its market value was stronger than warranted by underlying economic fundamentals.5 This assessment was based on factors such as Kenya's current account deficit.

However, the Central Bank of Kenya Governor at the time dismissed these claims, stating that the IMF's methodology was inappropriate for Kenya's economic context and that the exchange rate reflected the KES's true value.4 Despite official assertions that the CBK only intervenes to minimize volatility, some analysts have argued that the Central Bank of Kenya has historically managed the shilling's value, which could impact the competitiveness of Kenyan exports by making them more expensive on the global market.3 Such interventions, intended to maintain stability, can sometimes distort the natural market clearing price of the currency and affect the country's economic growth. Maintaining a flexible exchange rate is crucial for a country's external competitiveness and to allow appropriate economic adjustment.

KES (Kenyan Shilling) vs. East African Shilling

The Kenyan Shilling (KES) is the current national currency of Kenya, while the East African Shilling was a historical currency used across Kenya, Uganda, and Tanganyika (now Tanzania) under the East African Currency Board. The primary distinction lies in their issuer and geographic scope. The East African Shilling represented a common currency for the then-British East African territories, facilitating regional trade and financial integration.

However, with the independence of these nations, the desire for independent monetary policy led to the dissolution of the East African Currency Board. Kenya established its own Central bank in 1966, leading to the introduction of the KES. This marked a shift from a regional currency managed by a single board to distinct national currencies, each overseen by its respective central bank, allowing for country-specific monetary policy and control over the domestic money supply.

FAQs

What is the symbol for the Kenyan Shilling?

The commonly used symbol for the Kenyan Shilling is KSh, often appearing before the numerical amount (e.g., KSh 100). Alternatively, prices are sometimes written in the form x/y, where x is shillings and y is cents, such as 50/= for 50 shillings or -/50 for 50 cents.

Where is the Kenyan Shilling used?

The Kenyan Shilling is the legal tender exclusively within the Republic of Kenya. It is used for all transactions, including daily purchases, payment of salaries, and settlement of debts across the country.

Who issues the Kenyan Shilling?

The Central Bank of Kenya (CBK) is the sole institution mandated by the Kenyan Constitution and the Central Bank of Kenya Act to print banknotes and mint coins for the Kenyan Shilling. The CBK is responsible for ensuring the adequacy and integrity of the currency in circulation.2

How does the value of the KES affect import and export prices?

When the KES strengthens (appreciates), it means you need fewer shillings to buy foreign currency. This makes imported goods cheaper in Kenya but makes Kenyan exports more expensive for foreign buyers, potentially reducing demand. Conversely, a weakening KES (depreciation) makes imports more expensive and exports cheaper, which can boost export competitiveness. Understanding these dynamics is crucial for businesses engaged in currency exchange.

Does the Kenyan government control the KES exchange rate?

The Central Bank of Kenya states that the exchange rate for the KES is market-determined, based on the supply and demand for foreign exchange.1 However, the CBK may intervene in the foreign exchange market to minimize volatility or achieve monetary policy objectives, which can influence the exchange rate's movement.