CENTRAL BANK OF KENYA
Remarks By
PROF. NJUGUNA NDUNG’U
GOVERNOR
3RD ICPAK FINANCIAL SERVICES CONFERENCE: THEME –
“SUSTAINING TRANSFORMATION AND INNOVATIONS”
HHiillttoonn HHootteell,, NNaaiirroobbii
July 5, 2011

Governor’s Remarks at 3rd ICPAK Financial Services Conference – July 5, 2011
Mr. Patrick Mtange, Chairman, Institute of Certified Public Accountants of
Kenya;
Ms. Caroline Kigen, Chief Executive Officer, Institute of Certified Public
Accountants of Kenya;
Distinguished Guests;
Ladies and Gentlemen:
It gives me great pleasure to be here today to open this 3rd financial services conference.
Let me at the outset thank the Institute of Certified Public Accountants of Kenya for
organizing this forum and for extending an invitation to the Central Bank of Kenya.
Ladies and Gentlemen: The theme of this conference is “Sustaining
Transformation and Innovations”. The choice of this theme is timely given the
ongoing reforms in the Kenyan financial sector.
Ladies and Gentlemen: Kenya’s current development blueprint Vision 2030
envisages the development and deepening of the financial sector. This will enable it to
finance the development agenda while ensuring financial inclusion. For this reason,
ambitious targets have been set of raising savings and investments to GDP ratio from
14% to over 30%. In pursuit of this strategy, the Central Bank in collaboration with
market players has initiated several reforms geared towards creating an enabling
environment and space for innovative financial services. With these reforms, we
anticipate the financial sector will be stable, efficient and accessible. But also able to
effect the necessary transformations. These initiatives include:
Rollout of mobile phone financial services – The Central Bank has
encouraged the adoption of innovative technological platforms such as
mobile phones to extend the reach of financial services. Mobile financial
services have in particular presented Kenya with an opportunity to
significantly upscale access to financial services cost effectively. The Kenyan
mobile financial services story has become a much acclaimed global case
study. To date, over 15 million Kenyans transfer about Ksh.3 billion to each
other daily with over one million transactions.
Licensing Deposit Taking Microfinance Institutions (DTMs), whose
focus is the lower end of the market, which is concentrated in the rural and
peri-urban areas. The Microfinance Act, 2006 which empowers Central Bank

Governor’s Remarks at 3rd ICPAK Financial Services Conference – July 5, 2011
to licence and supervise DTMs, was operationalised in 2008. Formalizing the
operations of DTMs is expected to bring more people, especially those
previously unbanked or underbanked, into the realm of the formal sector not
only through their lending activities but also savings mobilization. This
recognizes that in an economy with segmented markets, different vehicles are
required for particular segments of the economy or market. So far 6 DTMs
have been licensed with 1.35 million deposit accounts, 520,362 active loan
accounts and Ksh.9.4 billion in deposits.
Introduction of agent banking mechanism in May 2010 where banks
were allowed to engage third parties to provide certain banking services. The
aim is increased outreach of banks to the vast under-banked and unbanked
Kenyan populace by introducing “banking beyond branches”. It also enables
banks to leverage on additional cost effective distribution channels to offer
financial services. We have seen agency banking take banking to the people
unlike previously when people had to go to the banks. So far 6,368 agents
have been approved and are delivering financial services to Kenyans.
Licensing credit reference bureaus to collect, collate, analyze and
disseminate credit information among credit providers. Credit information
sharing provides credit history (information capital) as an alternative form of
collateral to the traditional physical collateral, to secure credit facilities from
banks. Individuals will also be able to use their positive credit history to
negotiate for better terms and conditions from their banks. On the other
hand, banks will benefit from the mechanism since it will address the
problem of information asymmetry that was used to raise a risk premium on
loans and by extension the problem of non-performing loans which has in the
past threatened the stability of the banking sector. The traditional problems
of moral hazard and adverse selection that hinder financial sector growth
have been minimized.
Ladies and Gentlemen: These innovations have seen our financial sector experience
transformation as evidenced by the following outcomes:

Governor’s Remarks at 3rd ICPAK Financial Services Conference – July 5, 2011
Exponential growth of bank branches from 740 in 2007 to 1,072 in April
2011.
Increase in the number of loan accounts from 1.2 million in 2007 to 2.1
million in May 2011. The loan portfolio in the same period has increased from
Ksh.533.8 billion in 2007 to Ksh.1.05 trillion in May 2011.
Increase in the number of deposit accounts from 4.7 million in 2007 to 14
million in April 2011. Deposit values have grown from Ksh.709.8 billion in
2007 to Ksh.1.4 trillion in May 2011.
Increase in the automated teller machines (ATMs) from 1,012 in 2007 to
2,153 as at 31st March 2011.
Micro savings accounts operated through mobile phones have increased to over
700,000 with a deposit level of Ksh.737 million.
Ladies and Gentlemen: The structural transformation of Kenya’s financial sector
has not been achieved without challenges. Key among these challenges is the need to
balance the goals of financial efficiency, stability and integrity on one side with financial
inclusion on the other. The role of the regulator in an economy like ours is also to
develop the market and balance out these challenges. The regulator should, and
especially after the global financial crisis, not look for avenues of more regulation but
support transformation and innovation through better regulation. What is better
regulation? From Sir Andrew Crockett, it is a regulatory regime that:
Can readily identify weaknesses and emerging vulnerabilities.
Is capable of analyzing risks and so adequately pricing risks.
Provides appropriate incentives (penalties) to induce prudent behavior in the
market place.
This will encourage innovations and strong institutions to develop in the economy.
Ladies and Gentlemen: The structural transformation experienced thus far is just
but the beginning. The Central Bank and other players have earmarked several other
reforms which are expected to take development of the financial sector to new frontiers.
In addition, the Central Bank has embraced financial education as a critical component

Governor’s Remarks at 3rd ICPAK Financial Services Conference – July 5, 2011
of its financial inclusion strategy. The consumers will then be equipped with knowledge
to make informed financial decisions and to analyze alternatives.
In the same token, Ladies and Gentlemen, as efforts progress towards a more
developed financial sector, there is need to ensure existence of adequate disclosure of
information by providers of financial services, efficient dispute resolution mechanisms,
comparability of offers and data protection. As financial institutions embrace
innovations, there is need to ensure that innovations have adequate consumer
protection legislation. It is therefore encouraging to note that the constitution
promulgated last year makes provisions for consumer protection. The constitution
creates adequate space to build strong institutions to implement these provisions which
will define appropriate incentives and rules of the game to encourage prudent behavior
in the market.
Finally, Ladies and Gentlemen: While discharging your duties as accountants,
auditors and advisers of financial institutions, you play a critical complementary role to
the Central Bank in ensuring that such innovations are supported by sound internal
controls of these institutions not to undermine safety and efficiency of the financial
system, but at the same time provide enough room for innovation and development.
Therefore, the Bank appreciates your role in supporting the banking sector reforms.
But now, we also require your support on new ideas to introduce innovations in the
financial markets to support and sustain its transformation as the theme of this
conference ambitiously shows.
Ladies and Gentlemen: It is now my honor and privilege to declare this conference
officially open and to wish you fruitful deliberations.
Thank you