Central Bank of Kenya (CBK) Governor Kamau Thugge spoke to the Business Daily recently in the backdrop of his first year in office. The interview covered many subjects under his mandate, including foreign exchange, monetary policy, currencies, and the banking industry.

You had made the tough choice between raising domestic interest rates and cushioning the exchange rate with an adjustment to the benchmark lending rate, has this been the right course of action?

In a sense, it’s choosing your poison. In my view, you need to deal with inflation and anchor inflation expectations, because if you don’t, if inflation becomes something you can’t control it affects the entire economy and ultimately, banks will not have negative real interest rates.

Even if you don’t push up interest rates and allow inflation to go to 30 percent, no bank will lend to you at less than 30 percent, so you will still have higher interest rates.

Are we now at equilibrium with the shilling or at least close to it?

Right now, there are significant foreign inflows but who knows…for the time being we see stability and we don’t interfere unless it’s a sharp appreciation or depreciation. Broadly we allow the market to tell us what the equilibrium rate would be and so I wouldn’t say whether we are at this point.

Changes in core capital will trigger amalgamation in the industry, especially for banks unable to raise the higher Sh10 billion capital, will we see you forcing marriages between banks?

I think we will allow it to play out between the banks and you know we have a microfinance sector. If you can’t generate enough capital, it doesn’t mean you shut down. Unless asked to be intermediate, I wouldn’t see the need to force mergers.

There is a fear of creating concentration risks where you have big banks swallowing up everyone, Is this farfetched for you?

I think we will still have quite a few banks, I don’t think the issue of concentration is a concern. For purposes of competitiveness, having bigger banks enhances competitiveness. Right now when you have just a few big banks, they set the stage so to speak, and then the smaller banks just follow. Having bigger and more competitive banks will help us even lower interest rates.

There has been a push for an expanded mandate for the CBK in terms of the regulation of entities, do you feel the bank can take on more?

We have submitted some amendments to the Act to move away from digital credit to just credit because a lot of these credit providers are not always on digital platforms.

Your predecessor was somewhat hands-off in terms of engaging stakeholders like banks, is your approach as a regulator different?

Mine is somewhat different, I have tried to engage the stakeholders as much as possible and we have had regular meetings with bank CEOs and their heads of treasuries.

They were part of resolving the exchange rate problem. I wouldn’t want the hands-off approach, but that’s not to suggest that we won’t be very hard on them if they don’t comply.

One of the first observations I made is that there seemed to be a number who were not complying because the penalties were so low. The penalties we are bringing on board will bring sanity, where banks will think twice before violating any CBK provisions.

Where do we stand today on the creation of a central bank digital currency?

The main conclusion was that given where we are in terms of financial inclusion, where we are quite ahead of others in terms of digital payments, going to a central bank for digital currency was not a priority, and this stand remains. Having said that, however, we need to keep up with what’s going on in that space.

Last year, CBK indicated it had no demand for new notes and coins, and we saw De la Rue pausing its business subsequently. Some might tell you they haven’t seen any new notes around, has that demand returned?

If you look at currency in circulation, relative to gross domestic product, Kenya’s is very low compared to countries like India. There will always be a need for some currency, but at the same time, there are developments in digital payments that continue to reduce the need for new currency. There will always be a need, but that need will keep reducing.

What should we expect more of from the CBK going into your second year in office?

I’ll take you back to the mandate, and the first is price stability. I think going forward we would like to maintain that, and we have already modernised our monetary framework.

Second is the stability of the financial system—my vision is to have that stability—fewer but stronger banks, which will not just come from a regional perspective.

Thirdly, there are payments and the costs involved. Our payment system is a bit disjointed, and we would like to create a first payment system which other countries have. I should go to a store and use any payment method no matter the provider.