The International Monetary Fund said late on Monday it has provisionally approved an extra $250 million to top up Kenya's $500 million Extended Credit Facility, meant to boost the country's foreign exchange reserves to help tackle a widening balance of payments gap.

At 0649 GMT, commercial banks quoted the shilling at 99.10/50 against the dollar, stronger than Monday's close of 99.30/70.

"We saw the shilling move down because of what IMF said yesterday. Central bank has been supporting (the shilling) all along and we expect them to keep doing that," said a trader at one commercial bank.

"We've seen better dollar inflows from corporate guys, probably because of the high interest rates they are trying to play cautious."

Kenya's central bank has been tightening shilling liquidity in the market by mopping up the local currency through repurchase agreements, while on the other hand supporting greenback supply by selling dollars directly to commercial banks.

Analysts also expect the central bank to raise the benchmark lending rate at a monetary policy meeting later on Tuesday by 100 basis points to 12 percent, in a further tightening of monetary policy.

In the money market, the average interbank lending rate rose to 21.7706 percent on Monday from 20.8507 percent on Friday, as banks competed for the few shillings available in the market.

Traders said the shilling could gain further against the dollar helped by reduced dollar demand by importers and the tight shilling liquidity squeeze in the market.

"With end month now out of the way we expect the shilling to continue applying pressure on the greenback," Bank of Africa said in a daily report.