CENTRAL BANK OF KENYA
Remarks
by
PROF. NJUGUNA NDUNG’U
GOVERNOR
CENTRAL BANK OF KENYA
AND PATRON
KENYA INSTITUTE OF BANKERS
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Mr. Reuben Mbindu, Chairman, Kenya Institute of Bankers;
Chief Executives of Commercial Banks and other Financial
Institutions here present;
Distinguished Ladies and Gentlemen:
It is with great pleasure that I join you this morning at the start
of this landmark conference. I take this opportunity to thank the
Kenya Institute of Bankers for fulfilling its promise to hold such
a conference on an annual basis. I appreciate your invitation to
this conference and applaud everyone who participated in
organising this conference for their commendable commitment.
Ladies and Gentlemen: My task this morning is to represent the
Cabinet Secretary to The National Treasury who could not make
it as the Chief Guest to this 2nd National Banking and Finance
Conference. Let me start with some few remarks on the
performance of Kenya’s banking sector.
The banking sector has recorded an improved performance - the
sector’s balance sheet expanded by 15.6 percent from Ksh.2.50
trillion in May 2013 to Ksh.2.89 trillion in May 2014 mainly
supported by an expansion of banking services and financial
inclusion. Consequently, the sector’s profitability increased by
12.5 percent from a profit before tax of Ksh.48.7 billion for the
quarter ended May 2013 to Ksh.54.8 billion for the quarter

ended May 2014. The gradual improved performance has been
supported by continued rollout of innovative banking products,
adoption of cost effective delivery channels, and continued
expansion of banks across the country and beyond Kenya.
Ladies and Gentlemen: As part of Kenyan banks desire to improve
their performance, they have explored business opportunities
within and beyond Kenya’s borders. As at 31st December 2013:
Eleven Kenyan banks had established subsidiaries in East
African Community (EAC) member states and South Sudan.
One Kenyan bank owned a 50% stake in a Mauritius bank
while another Kenyan bank had a minority stake of 11.4% in
a bank operating in Malawi.
The eleven Kenyan banks had established 288 branches in
EAC member states and South Sudan as compared to 223
branches in 2011.
The foreign subsidiaries had a total of 5,219 employees
compared to 3,760 in 2011.
The total assets of the foreign subsidiaries stood at Ksh,306.3
billion compared to Ksh.195.6 billion in 2011.
The foreign subsidiaries had mobilised deposits worth
Ksh.236.5 billion compared to Ksh.152.5 billion in 2011.
Ladies and Gentlemen: This snapshot of cross-border operations
of Kenyan banks demonstrates that the banking sector has made

a sizeable contribution to the economic growth of not only Kenya
but that of the entire Eastern Africa region and beyond. I note
with satisfaction that the practices of Kenya’s banks operating
outside the country are serving as best practices in some of the
host countries. I therefore commend the Kenyan regional banks
for their role in strengthening the financial sectors of the
regional countries.
Ladies and Gentlemen: The continued regional expansion of
Kenyan banks augurs well with the on-going EAC integration
process. Allow me now to share with you the current efforts by
the EAC Central Banks towards the envisaged East African
Monetary Union (EAMU). The Monetary Union Protocol was
signed by the EAC Heads of State in November 2013 with an
envisaged timeline for a single regional currency by 2024.
Pursuant to the Protocol, the EAC Central Banks are required to
integrate their financial systems and adopt common principles
and rules for the regulation and supervision of the financial
system by 2018. In this regard, the EAC Central Banks have
already commenced efforts towards the harmonisation of the EAC
Central Banks supervisory and regulatory rules and practices.
The starting point was a request in 2011 to the players,
especially those with regional presence, to indicate the aspects
they would wish to be harmonised.

Ladies and Gentlemen: In order to achieve a harmonised and
improved supervisory and regulatory framework, the EAC Central
Banks agreed to use the pronouncements by international
standard setting bodies such as the Basel Committee on Banking
Supervision (BCBS), Financial Stability Board (FSB) and
Financial Action Task Force (FATF) as a basis for the
harmonisation exercise. The main aspects of the supervisory and
regulatory rules and practices that will be harmonised include
the legal status of licenced entities, licensing requirements,
licence validity, prudential requirements on capital and
liquidity, corporate governance requirements, permissible
activities, prudential returns and public disclosures.
The EAC Central Banks have developed a convergence criteria for
all aspects of divergence and expect to attain convergence by the
Monetary Union Protocol deadline of 2018. The benefit of these
developments to Kenyan banks is to increase the market size,
allow diversity of banking products and strengthen our banks. We
have introduced the East African Payment System (EAPS) to
reduce the cost of doing business. We are now working on
convertibility of the EAC currencies – MOUs have been signed.

These initiatives will bring the EAC closer together. The central
banks in EAC believe that these are important quick wins for the
EAC regional integration process.
Ladies and Gentlemen: For the continued regionalisation of the
banking sector operations to generate the desired impact, a
concerted effort to up-scale the skills and competences of our
human resources as a region is necessary. In this regard, the
Kenya Institute of Bankers (KIB) and other capacity building
institutions should rise to the occasion not only to modernise
their capacity building initiatives but to develop programmes
that cater to the capacity needs of the entire EAC region and
beyond.
As the banking sector players establish presence across borders,
KIB should explore avenues of satisfying the emerging human
resource needs in the countries where the banks are expanding
to. I am aware that the annual East African Banking School
organised by the EAC Banking Institutes is designed with the
regional banking sectors in mind. However the on-going
integration calls for more tailored capacity building initiatives.
In this regard, KIB and counterpart Banking Institutes should reexamine their strategies to ensure that the envisaged integrated
financial market is not derailed by inadequate human resource

capacity.
Let me now turn to some interesting and current outcomes and
landmark achievements for the Kenyan economy, that will
continue to enhance and consolidate our financial sector
performance:
First, the success of the Sovereign Bond debut for Kenya that was
over-subscribed by over 500%. The government took US$2.0
billion against US$8.8 billion offered at an average interest rate
of 6.6%. This success has several implications:
1. The Sovereign Bond brings into the market an asset that is
risk free and will form a benchmark of pricing risk free
assets in Kenya. Since the interest on the Sovereign Bond is
fairly competitive, it will lead to a re-pricing downwards of
domestic financial assets – so domestic interest rates will
decline.
2. The Sovereign Bond is already trading in the Irish Securities
Exchange – This will improve Kenya’s standing and rating
in the international capital markets.
3. The government, due to this success of entry into the
international capital market, will reduce expensive
domestic borrowing. This will of necessity release some
liquidity into the domestic market. For this liquidity to be

usefully applied to domestic and regional investments,
interest rates on lending will have to decline substantially.
4. Since government domestic securities have now a competing
exogenous substitute, those banks that have depended on
trading with government securities will now have to
apportion a larger proportion of their funds for domestic
lending to firms and households. The KIB should now help
such banks to re-build their infrastructure for monitoring
and screening existing and potential borrowers but also
supported by the Credit Reference Bureaus. This may have
been left behind in the rush to trade with risk free
securities.
Second, the Kenya Bankers Association has provided a
breakthrough to transparency in pricing of banking services. In a
Committee chaired by the Cabinet Secretary to the National
Treasury and whose recommendations were announced by the
President, there will be a reference interest rate to be called
KBRR (Kenya Banks Reference Rate). It will be an average of CBR
and the 91-day Treasury bill – a risk free return on asset
indicator.
The first KBRR will be announced by the MPC on July 8th,
2014. For us at the Central Bank the KIB and indeed this

Conference should lead the way to show how pricing of credit
will benefit inclusive growth of the financial sector, by
benefitting both the borrower and the lender. At the end, we will
support very strong inclusive growth agenda of the Government.
Finally, the FATF (Financial Action Task Force), a standard
setting body on Monday 23rd June 2014 upgraded Kenya from
the Dark Grey List to the Grey List on its Anti-Money
Laundering/Combating the Financing of Terrorism (AML/CFT)
Regime. Kenya’s AML/CFT regime was in 2011 found to be
deficient. Since then, the country amended its laws, introduced
the Terrorist Financing Law and established the Financial
Reporting Centre. For KIB and Kenyan banks, it means it is easier
for correspondence bank facilities, easier to negotiate competitive
rates for international credit lines and above all, the credit and
risk rating for the country is now positively enhanced. These are
the issues KIB should take on board to see the prospects of the
financial sector development in line with the government growth
agenda.
With these remarks, it is now my pleasure – on behalf of the
Cabinet Secretary to The National Treasury, Hon. Henry Rotich –
to declare the 2nd KIB National Banking and Finance Conference,
officially open.

I wish you fruitful deliberations and report progress to develop
our financial sector in line with the Government’s development
agenda.
Thank you.