Demonetisation has had something of a bad press in recent years, the disruption caused by the removal of the 500 and 1,000 rupees in India of 2016 and, more recently, Nigeria’s naira redesign being cases in point.
But in 2019 the Central Bank of Kenya (CBK) demonetised the 1,000 Kenyan shilling (KES) banknote, with relatively few issues. It has issued a comprehensive report on its experience that offers interesting lessons for any central bank planning such an exercise 1.
CBK had two key motivations for demonetising the KES 1,000, a high level of counterfeiting and illegal financial flows (IFFs) from tax evasion, revenues from criminal activity and public corruption. At the time, the KES 1,000 was worth about $7. It accounted for 80.3% of the total value in circulation and was also widely used outside of Kenya in the East African economy.
Areas of focus
Given the predominance of this denomination, CBK paid close attention to the experience of other countries when they demonetised, particularly the 2016 demonetisations in India and Pakistan, but also the UK’s 2018 announcement of the plan for the polymer £50 transition and the ECB’s 2002 changeover to the euro. Based on this CBK focused on four main areas.
1. A gradual process
CBK decided on a four month transition period, which it estimated to be long enough to allow a smooth conversion and adjustment without compromising its goals of tackling IFFs and counterfeiting. Time was needed to get logistics right both for transportation and for the recalibration of ATMs and at point of sale for merchants. CBK did not want panic or for uncertainties to disrupt the changeover.
2. Strong engagement with key stakeholders
The changeover was announced on Madaraka Day, a national celebration, along with the news of a new series of banknotes. After this CBK met with the CEOs of the commercial banks and other relevant institutions, which was the start of continuous engagement over the transition period. The banks ensured there was an adequate supply of new notes at their branches and worked to the changeover guidelines given.
Co-ordination was extended to the East African region to ensure that possible IFFs outside of Kenya did not return into the financial system through the banks in the region.
3. Extensive public awareness campaigns
It was important that the public and merchants understood the changeover process, timelines and the CBK’s intentions for the changeover.
A wide range of channels were used – press releases, regular press conferences, adverts in the printed press and on TV, social media, CBK’s website, the use of vernacular and regular radio stations, posters and pamphlets. A sensitisation campaign was also run using road shows.
A key part of this was a prompt response process to counter concerns identified.
4. Robust AML/CFT frameworks
Kenya already had Anti- Money Laundering (AML) and Countering Financing of Terrorism (CFT) frameworks in place, and these were used as the basis for managing the changeover.
Banks had to confirm with clients the nature of their business to understand how they came by the cash presented. Close collaboration was achieved between the CBK and banks, foreign exchanges, payment service providers, money remittance providers, other financial institutions and investigative agencies.
Weekly reporting mechanisms were in place for suspicious activities and suspicious counterfeiting activities was monitored.
Transition process: The transition was successfully achieved in the four month window with 96.6% of KES 1,000 notes returned. The third and the last two weeks of the transition window were the busiest and no last minute rush to hand over notes took place.
There were 12,343 currency exchange transactions in addition to normal cash transactions.
62% of cash exchanges were for a value of KES 500,000 or less, 79% less than a million and 92% less than two million.
IFF achievement: KES 7.386 billion was rendered worthless by the end of the exercise because, when handed in, it had not complied with AML/CFT requirements. The value of this currency was returned to the Treasury as a windfall benefit. This represented 0.2% of M3 and 3.4% of total cash in circulation.
Economy: The economy was not disrupted. Key indicators of economic activity and inflation were constant. Commercial bank deposits increased by 3.5% as demand for physical cash reduced.
Communications: There were some unexpected success stories in the communications campaign. The report details these, but examples include:
5,000 T shirts with the logo ‘Uko Tayari’ were printed initially. Uko Tayari is a Kiswahili message which means ‘Are you ready?’ On the back of the T shirt was a message saying ‘exchange now, not last minute’. In the end 26,000 were distributed.
On Twitter and WhatsApp there were cartoons about the changeover. One of the messages said ‘Call your parents’, exhorting people to nudge their elders to get involved. This was re-tweeted 200,000 times.
The Governor visited a number of provincial locations in person in markets, at the docks etc. and these received significant coverage.
The report is rich in detail and is an interesting example of one country’s changeover programme.
1 - Demonetisation-The-Kenyan-Experience-in-2019.pdf (centralbank.go.ke)