CENTRAL BANK OF KENYA
Speaking Notes by
PROF. NJUGUNA NDUNG’U
GOVERNOR
“NEXT GENERATION RISK MANAGEMENT”
A THOMSON REUTERS RISK MANAGEMENT FORUM
Nairobi Serena Hotel, Kenya
Thursday, July 23, 2009

Thomson Reuters Risk Management Forum, July 23 2009
Distinguished Guests;
Ladies and Gentlemen:
1. It is my distinct pleasure to be joining you this evening at this important Forum.
I would therefore wish to express my gratitude to Thomson Reuters, the
convenors of this event for the invitation.
2. The timing of the Forum is apt in view of the prominence that risk
management has gained in financial circles over the last few years. The global
financial crisis has only served to underscore the importance of scaling up risk
management practices and appropriate pricing of risk to counter dynamics in
the global financial markets.
3. I am therefore pleased to see a diverse gathering of financial sector players this
evening. Thomson Reuters also brings a vast repertoire of international
experience on risk management that we are keen to draw upon.
4. Whereas risk management has been prominent on the radar of financial
institutions and markets, the global financial crisis has unearthed serious
shortcomings in risk management practices. And furthermore, coming from
the centre, this has been disastrous.
5. One of the cardinal causes of the crisis is now widely agreed to be deficiencies
in risk assessment and pricing of complex products. These complex products
were indeed at the heart of the crisis. Markets failed to price these products
appropriately and deficiencies in the regulatory architecture precipitated
excessive risk taking.
6. It is imperative that market players and regulators reflect on reviewing risk
management practices. I am therefore confident that the local experiences to
be shared tonight and the international experiences to be gleaned will only
serve to enrich this discourse.

Thomson Reuters Risk Management Forum, July 23 2009
7. The Central Bank, can share the perspectives on Risk Management from a
regulator’s viewpoint. The Central Bank of Kenya has over the last five years
promoted the inculcation of a risk management culture in the Kenyan banking
sector.
8. The Central Bank has also adopted a risk-based supervisory approach. This
approach is premised on the overarching objective of proactively addressing
threats to financial sector stability. Maintaining the stability of the banking
sector is indeed one of the core mandates of the Central Bank.
9. I am pleased to note that the banking sector has, to a reasonable extent,
embraced risk management. This is perhaps one of the key reasons behind the
relative stability of the Kenyan banking sector in the recent past inspite of local
and global turbulences.
10. However challenges remain as the Kenyan banking sector embraces risk
management. The first challenge relates to the implementation cost,
particularly amongst medium and small banks. Human resource competences
are also a constraint. The other key challenge we note from our regulatory seat
is the view by some institutions of risk management from just a compliance
perspective.
11. These are not insurmountable challenges and market players should pool
resources and efforts to address them. In this regard, the Central Bank will
work with the banking sector to entrench risk management. The Bank will also
leverage on the Kenya School of Monetary Studies (KSMS) to provide capacity
building programs on risk management for the sector.
12. I would also urge banks not to view risk management just from a compliance
perspective but also as a business imperative. Entrenchment of risk
management enables institutions to effectively price their products in line with
their risk profile. This will not only enhance their competitiveness but also

Thomson Reuters Risk Management Forum, July 23 2009
maximize shareholder value. But information must be available to provide
assessment on the risk profile.
13. The Central Bank of Kenya will therefore continue with its efforts to enhance
risk management in banks. This drive will be supplemented by initiatives to
scale-up surveillance at the system-wide level. In this regard, the Bank’s
existing early warning system will be scaled up to incorporate both macro and
micro prudential indicators of financial stability.
14. Other measures that the Central Bank will take to strengthen it’s supervisory
tools include:-
• Stepping up supervisory co-operation and co-ordination with domestic and
foreign financial sector regulators. This is particularly pertinent as Kenyan
banks extend their reach locally and regionally and also as products
developed encourage other regulators to come into the picture.
• Encouraging the adoption of forward looking techniques by banks in their
risk management framework. This is particularly in regard to the use of
stress testing. This measure will however be accompanied by “market
education” to ensure that the results are not misinterpreted.
15. My role this evening was just to set the stage for the lively interactions on risk
management that will follow shortly. The Central Bank is certainly open to
considering ideas that can push forward the risk management frontier. It now
remains for me to wish you fruitful deliberations and a pleasant evening.
Thank You