Regu-Lesson: Unveiling Kenya's Foreign Exchange Regulations

The regulations governing foreign exchange dealings within Kenya are established in Part VI A of the Central Bank of Kenya Act and are further detailed in Legal Notice No. 23 dated 28th February 1996. These regulations encompass a comprehensive framework that outlines the guidelines, responsibilities, and requirements for various entities involved in foreign currency transactions. This Regu-Lesson article elaborates on these regulations, shedding light on the roles of authorized dealers, forex bureaus, transaction limits, travel restrictions, investment opportunities, and enforcement mechanisms. By delving into the intricacies of these regulations, a clearer understanding of the landscape surrounding foreign exchange activities in Kenya emerges.

Authorized Banks and Forex Bureaus

Engaging in the purchase and sale of foreign currency is restricted, unless at least one of the parties involved holds the status of an authorized dealer, having obtained the necessary license as stipulated under section 33(B) of the Central Bank of Kenya Act.

Authorized banks possess licenses to execute a variety of foreign currency-related transactions. These include buying, selling, borrowing, lending in foreign currency, and conducting other pertinent foreign currency operations. Additionally, authorized banks are empowered to facilitate payments between residents and non-residents of Kenya. They are also entitled to participate in spot money market activities and conduct derivative foreign exchange transactions.

Forex bureaus are permitted to conduct the buying and selling of foreign currency in cash, as well as the purchase of travelers' cheques, personal cheques, banker's drafts, and bank transfers. While Forex bureaus can sell travelers' cheques, it is essential for them to acquire prior approval from the Central Bank of Kenya before doing so. However, it's important to note that Forex bureaus are only allowed to engage in spot foreign exchange activities and are prohibited from partaking in derivative foreign exchange transactions.

Notably, Forex bureaus are not authorized to establish correspondent account relationships. Conversely, authorized banks are strongly encouraged to establish correspondent banking accounts, particularly in Tanzania and Uganda. This measure aims to foster trade, investment, and cultural exchange within the region.

In March 2023, The Central Bank of Kenya (CBK) introduced a forex code exclusively for commercial banks. This initiative's primary objective is to enhance transparency within Kenya's wholesale foreign currency market.

Dubbed the Kenya Foreign Exchange Code, this framework is intended to bolster the efficiency of the market, reinforcing the nation's flexible exchange rate regime to enhance economic resilience. The FX Code's focal points comprise six core principles to be embraced by institutions: ethics, governance, execution, information sharing, risk management and compliance, and confirmation and settlement processes.

The CBK anticipates full implementation of the FX code, with all banks in complete compliance by December 31, 2023.

Foreign Transactions

Both residents and non-residents of Kenya have the liberty to: (a) Invoice for goods and services in either Kenyan Shillings or foreign currency. (b) Possess foreign currency. (c) Engage in the buying and selling of foreign currency with authorized dealers. (d) Import and export currency, adhering to the stipulations in Legal Notice No.118, featured in Kenya Gazette Supplement No. 48 dated September 4th, 1998.

Residents and non-residents are permitted to engage in foreign exchange transactions with authorized dealers up to a value equivalent to $10,000 without any restrictions. Transactions surpassing this threshold necessitate documentation that substantiates the transaction's purpose.

For example, when it comes to dividends remittances, the following documentation is required:

• Audited balance sheet and profit and loss accounts

• Directors' resolution declaring the dividend

• Certified copy of the list of shareholders

• Evidence of payment of withholding tax

Travel Restrictions

In line with the Legal Notice, individuals entering or departing Kenya are allowed to carry a maximum of five hundred thousand Kenyan Shillings (KES 500,000) or the equivalent of five thousand United States Dollars (US$ 5000) in foreign currency. Amounts exceeding these limits can be transported with the condition that they are declared at the entry or exit points. Travelers should be advised to utilize Form CBK/C.D./1, accessible at customs entry or exit points nationwide, for the purpose of currency declaration.

Foreign Investment

Non-residents are permitted to engage in inward investments. These investments can span various sectors, including real estate, equities, money, stock exchange securities, and other suitable investment avenues. Detailed information concerning investment procedures can be acquired from the Investment Promotion Centre (IPC), currently located at the National Bank of Kenya Headquarters on Harambee Avenue, Nairobi.

Financial Securities Transactions

Kenya's capital markets continue to expand, with treasury bills and bonds dominating the short-term securities market. While there is limited activity in commercial paper trading, there are opportunities for investing in government securities.

Investors interested in government securities must possess a bank account with a Kenyan commercial bank. Opening a Central Depository System (CDS) account with the Central Bank is also a mandatory requirement. Alternatively, investors who choose not to open a CDS account can invest through a client account at their commercial bank, which will manage investments on their behalf.

Both Kenyan residents and foreign investors meeting the specified criteria are eligible to directly invest in government securities through the Central Bank. Even Kenyan nationals residing abroad can participate, provided they maintain an active Kenyan bank account. They can establish a CDS account and submit the requisite forms to the Central Bank via email.

Import/Export Transactions

Exporters are authorized to retain their export earnings in foreign currency accounts held with local banks or exchange these earnings for local currency. Although remittance of payments related to technical, management, royalty, and patent fees is permissible, such agreements and renewals necessitate approval.

Foreign exchange dealers must ensure possession and retention of compliant import documents, including:

• Import Declaration Form (IDF), unless accompanied by government-approved exemption proof

• Customs Clean Report of Findings for imports exceeding US$ 5,000 in value

• Transport documents, such as bill of lading

• Original commercial invoice

• Customs entry form

Occasionally, importers may need certain goods that require advance payment to suppliers. In such cases, banks can use their discretion to process clean payments, contingent upon importers' commitment to furnish the necessary documents promptly after shipment.

Enforcement and Compliance Measures

The Central Bank of Kenya (CBK), in partnership with law enforcement agencies, holds the responsibility for overseeing and implementing the Regulations. These bodies may intermittently require crucial documentation and details to ensure adherence to the Regulations. Measures for enforcement encompass fines and penalties that are in accordance with the provisions outlined in sections 33H, 33K, and 33L of the Act.

Our Unique Expertise and Capabilities

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