Kenya: Fighting corruption with new money
In a step regarded by experts as one of the bravest acts in the fight against corruption, the Kenyan government has changed the design of Kenyan banknotes through the Central Bank in accordance with the Constitution of 2010. Although it has taken several years, but now it is so far.
Corruption in Kenya has had a lot of room for manoeuvre. A newer directive for all commercial banks, foreign exchange bureaus and financial institutions called for a legally binding statement from each person who made an amount over Ksh. 1,000,000 or 10,000 euros. One had to disclose his source of income, the purpose of the payment and for deposits a statement from which source the money originated. Even in the case of an international transfer, persons must provide proof of where, the nature of the transaction and the relationship with the person transferring the money.
With all these new banking regulations, most people with illegally acquired money preferred to deposit it in their homes and warehouses. Proper circulation of money could not be controlled. We could see politicians spending up to 10.000.000 Ksh or 100.000 Euro per day without revealing their sources. Nobody believed in a legal origin.
The Central Bank decided on 12 June 2019 to amend all banknotes with a deadline of four months to bring all old banknotes to the bank to exchange them. Nevertheless, holders of larger amounts of money must make a declaration of origin. Central banks in East African countries have also been informed to stop the exchange with the Kenyan currency until the October 2019 deadline.
This step has dealt a major blow to corruption. Those responsible estimate that several billions are hidden in Kenyan shillings in houses and warehouses. The oldest 1000 banknote has even been given a shorter deadline to be exchanged. The population welcomes this step. Those who cannot explain where the money comes from can at least use the paper to make a fire.
The effects cannot yet be predicted exactly. Probably the money supply will decrease, because criminal structures can hardly justify their wealth. But whether there is so much black money or illegal money in circulation to trigger economic changes cannot be said. From an economic point of view, the decline in the money supply leads to a reduction in the price level. This would do some sections of poorer society good.