CENTRAL BANK OF KENYA
Remarks by
PROF. NJUGUNA NDUNG’U, CBS
GOVERNOR
CENTRAL BANK OF KENYA
at the
OPENING OF THE KBA 3RD ANNUAL BANKING
RESEARCH CONFERENCE
Safari Park Hotel, Nairobi
Thursday, September 25th, 2014

The Chairman, KBA Governing Council;
Members of the KBA Governing Council;
Banks’ Chief Executive Officers;
Distinguished participants;
Ladies and Gentlemen:
It is my honour and pleasure to join you this morning at this very
important Conference that focuses on the role of the banking sector
in the economy’s growth. It is therefore my singular pleasure to be
invited to open the KBA Third Annual Banking Research
Conference and to make some remarks at its commencement.
First and foremost, I would like to commend the KBA for its
consistency in hosting the Annual Banking Research Conference.
This is further evidence that the banking industry is keen on
having its operations and strategic focus informed by analytical
work.
This being the Third Annual Conference, the body of knowledge
that the process has generated is without a doubt going to be
beneficial to all stakeholders. Research and its output is a “public
good”. The broader benefits arising from knowledge cannot be
restricted to those who have a direct interest in the research.
Research that improves the policy environment benefits all and
indeed the economy at large.
This year’s Conference theme of “Putting banking at the centre of
the economy’s sustainable growth” is an example of this point.

Several papers focusing on finance and economic growth have
confirmed the causal relationship. It is on that basis that I
consider this Conference’s theme on sustainability of this
relationship to be inspiring, given that it provides an opportunity
for deeper reflection taking us beyond the general finance –
growth nexus.
The Kenyan economy has an ambitious real output growth target
of at least 10 percent to enable the realization of the aspirations
of Vision 2030. The high and sustained growth targets will only
be achieved through increased investment and increased
productivity. The Banking industry must intermediate and
provide the funding required for the investment but even more
important is long-term finance with attractive terms.
Ladies and Gentlemen: The presentations lined up for this
Conference give me confidence that we are embarking on a
conversation that will lead to the consolidation of the gains to the
economy from the dynamism of the banking industry. Let me
make a quick reflection over the five areas around which the
Conference presentations focus;
Firstly, increasing support for agriculture is important and
in the right direction. This is because the agricultural sector
– the leading contributor to the economy’s output, to direct
and indirect employment, and to export earnings – does not
attract as much bank credit as it requires. The importance

will be supported by tangible solutions for financing
agriculture.
Secondly, sustainable development is a very important
subject today. A market-led process that will culminate in
the development and adoption of sustainable finance
principles must be backed by research. Sustainability in this
case must also look at the investments supported by the
banking sector and their outcomes to growth. This also looks
at boom-bust cycles.
Thirdly, the interactive dynamics of the banking industry
and housing development is a further area that touches on
both commercial and social interests of households.
Facilitation of home ownership needs to be seen beyond
mortgage financing, which is only a demand side remedy;
there are a host of supply side constraints some of which are
financial in nature while others are non-financial - both
sets require critical examination. But more important are the
macro-prudential indicators and property boom we have
seen.
Fourthly, a credible measure that tracks the changes in
housing prices is very important. Our mandate at the Central
Bank, particularly as the Monetary Policy Committee, of
ensuring stability in the economic system necessitates that we
look at all the key markets and track price evolution beyond
inflation dynamics; the foreign exchange market is always
on our radar, given that its policy management is under our
purview; we are also able to track price evolution in the

securities market. Given that instability could emerge from
the housing market, making it imperative that we have a
price tracking measure that can stand the test of scrutiny
and therefore can be relied upon to identify any early signs
of volatility from that segment of the economy that easily
proliferates to other sectors, as has been proved
internationally. It is gratifying therefore, that the KBA
desires to have a housing price index that will fill this gap.
We need to move away from the thinking of a bubble in the
market and especially property prices driven on one hand by
a supply constrained market, and on the other hand a
transitioning demographic structure.
Fifthly and finally: a revisit to the dynamics of credit
demand for the private sector, its drivers and whether there
are international dimensions that influence the domestic
credit market is interesting. This is an area that is at the
heart of the finance-growth nexus. Beyond the policy
interest of determining how credit affects aggregate demand,
a clear understanding of what motivates the private sector to
seek bank credit enables the industry to react in a timely
manner. And by identifying constraints, it can propose
modalities for overcoming them. At the top in this agenda is
to link it to investment. Is our investment constrained by
credit? We need to know more.
Ladies and Gentlemen: The body of research work arising from the
Conference’s theme will obviously not be definitive; but it will

surely provide a good platform for reflection on the many ways
through which the banking industry is readying itself towards
further enhancing its role in the economy’s progress. There is also
a possibility that ideas will emerge which have a quick response
that can be put into practice in the short run; furthermore, there
is an opportunity to pick areas for further investigation.
I am confident that the banking industry, that has remained
stable on the back of the steady growth seen over the past decade,
will continue to play an important role in supporting the various
economic sectors through provision of credit. With an asset base of
Ksh.2.70 trillion as at the end of December 2013 compared to
Ksh.2.33 trillion as at the end of 2012, the industry is clearly
maintaining the growth path. Similarly, customer deposits grew by
14 percent in the period from Ksh.1.71 trillion to Ksh.1.94
trillion. The banking industry’s asset growth of 16 percent between
2012 and 2013 at a time when the economy’s real growth rate
was less than 5 percent points to the possibility of the acceleration
of the growth momentum emanating from finance. That growth
will be accelerated once the overall cost of doing business that is
being addressed, declines. This will ensure that the underlying
asset quality accompanying the growth in the banking industry
remains good.
As a country, we are making strides in ensuring that financial
inclusion is enhanced. The FinAccess 2013 survey results

revealed that Kenya’s financial inclusion landscape has
undergone considerable improvement. The proportion of the adult
population using different forms of formal financial services was
at 66.7 percent in 2013 compared to 26.4 percent in 2006. This
is a notable achievement. The proportion of the adult population
totally excluded from financial services has declined to 25.3
percent in 2013 from 38.4 percent in 2006. Similarly, the
proportion of Kenyans accessing informal financial sources
dropped from 35.2 percent in 2006 to 7.8 percent in 2013. This is
a reflection of the positive outcomes of policy initiatives by the
Government and the Central Bank as well as the initiatives of the
financial sector players and their innovations.
There is scope for further deepening of the financial sector, and
especially the banking industry, and as a result, this will lead to
further financial inclusion. Even with the industry’s assets
looking impressive at the levels I highlighted earlier, they still
remain below 50 percent of our GDP. Economies that have
achieved higher levels of development, accompanied by high
levels of financial inclusion have a higher banking assets to GDP
ratio, with some well over 100 percent. With the level of
innovation and dynamism in our banking space, there is no
reason why we cannot aspire to be like those economies and grow
our assets with strong banks and a strong policy drive to financial
inclusion for financial development.
I see research being at the centre of such growth. As a researcher

myself, I know that collaboration will remain core. I commend the
KBA for seeking collaboration with other institutions, among them
the Central Bank, in its research efforts. I see that collaboration
in this research Conference manifested in the diversity of paper
authorship.
I look forward to seeing the Conference papers reviewed and put in
the public domain so that the intended purpose of promoting an
idea-based engagement is realized as well as development based
on a certainty policy path.
With those remarks, I declare this Conference officially open, and
wish all the participants fruitful engagements over the next two
days.
Thank you for your kind attention