CENTRAL BANK OF KENYA
Agile Regulation for Digital Transformation
Remarks by Dr. Patrick Njoroge
Governor, Central Bank of Kenya
Wednesday, September 22, 2021
As Prepared for Delivery
Excellencies, Ladies and Gentlemen:
Good Morning, Good Afternoon! I am pleased to join you at the Agile
Regulation for Digital Transformation (A. Reg4DT) Webinar. Let me at the outset,
express my gratitude to the World Bank and its partners in this initiative for the
invite.
While on the one hand, the coronavirus (COVID-19) pandemic has upended lives
and livelihoods, on the other hand, it has fostered digital transformation at an
unprecedented scale. As digitalization has transformed delivery of services for
businesses, governments and changed our way of life, regulators have been
assessing the resultant opportunities and risks. The A.Reg4DT initiative is
opportune to develop the capacity of regulators in Africa as digitalization
transforms every facet of our lives.
Indeed the world has changed dramatically from 2007, when mobile phone money
transfer services were introduced in Kenya to meet basic financial needs of
transferring money from urban workers to their rural families. Subsequently,
mobile phones laid the digital rails, that have seen the transformation of financial
inclusion not just in Kenya but across Africa.

Shortly thereafter, was the global financial crisis from 2007, in the advanced
economies, predicated on excessive risk taking and the trend at that time of
deregulation. Africa was largely spared the direct effects of this crisis given its
relatively limited linkages to global financial markets at that time. The focus
immediately after the crisis was the strengthening of the global banking sector
through enhancing capital and liquidity buffers, risk management and an overhaul
of corporate governance practices.
One of the spillover effects of the global financial crisis was the emergence of
decentralized finance (De-Fi). The promoters of De-Fi sought to leverage on the
loss of trust in governments and financial institutions particularly in advanced
economies. This saw the emergence of cryptocurrencies, headlined by Bitcoin,
positioned as alternative payment instruments. This later morphed to stablecoins
and more recently, there has been the growing discussion on Central Bank Digital
Currencies (CBDCs). Recently, cryptocurrencies have morphed into more of
wealth management instruments and less of payment instruments.
Amidst these developments in the global financial arena, came the COVID-19
pandemic that has dominated global discourse over the last eighteen months.
Unlike the global financial crisis that was largely an advanced economy
phenomena, COVID-19 has extended its damage across the world. It has upended
global lives and livelihoods and literally left no one unscathed. But amidst the
gloom and doom, human resilience powered by digital platforms has shone
through.
In Africa, the digital rails built on mobile phones have served us well, enabling
official and personal transfers to the most vulnerable segments of our population
including women, youth and Micro, Small and Medium Enterprises (MSMEs). Our
financial institutions, governments and businesses have pivoted to digital platforms
to adapt to the new normal occasioned by the pandemic. In the Kenyan banking
sector for instance, transactions outside bank branches have increased from 91
percent before the pandemic to over 96 percent currently. Significantly, the number
of bank transactions on mobile phones has increased from 56 percent to 85 percent
of all transactions.

As digitalization democratizes and transforms financial services to anytime
anywhere access by customers and new business models emerge, regulators must
adapt to the new terrain. At the Central Bank of Kenya (CBK), our regulatory
philosophy has evolved to maximizing the opportunities presented by technology
and innovation while minimizing the risks. This requires an agile approach on our
part which is the focus of our deliberations today.
This leads me to the question of what does agile regulation mean? Allow me to
highlight three broad directions to set the stage.
First, regulators need to walk with the innovators. Reflecting back on the
introduction of mobile phone financial services, we at CBK adopted a test and learn
approach that sought to understand the business models, risks and their mitigants.
This approach later developed across the world through the sandbox approach.
Financial services are moving from an institution-based approach to an ecosystem
approach with incumbent regulated institutions at the centre. Agile fintechs are key
partners in the ecosystems to provide cutting-edge innovations such as credit
scoring and customer relationship management solutions based on artificial
intelligence. Regulators must seek innovative approaches to understand these
fintechs, mentor them and grow their risk management capabilities.
In this regard, CBK partnered with the Monetary Authority of Singapore (MAS) in
2019 to launch the Afro-Asia Fintech Festival to create a collaborative platform for
African and Asian fintechs and regulators. On the back of this collaboration, two
regional hackathons (competitions) drawing fintechs from across Africa were
conducted in 2019 and 2020. These initiatives have offered us valuable insights
into the workings of the budding fintech scene in Africa and continue to be a useful
insight in our regulation and supervision of the emerging fintech ecosystems.
Second, regulators need to be alert to changing perimeters. Digitization is
breeding a new generation of services that mimic financial services. While these
services may lead to enhanced access for unserved and underserved segments of
our populace, they pose considerable consumer protection concerns. A case in point
is the growing proliferation of unregulated digital lending applications (apps).

These apps have been flying below the regulatory radar, as they are not deposittaking, the traditional threshold for regulators to take note. However, they are
posing enormous consumer protection concerns due to among others high interest
rates, over indebtedness, unethical collection practices and personal data abuse.
Most importantly, these concerns are spilling over to a loss of trust in the financial
system.
This is an area of concern in Kenya with Parliament at the tail end of considering a
bill that will empower CBK to oversight unregulated digital lenders. Our approach
in regulating these entities will focus more on the market conduct concerns as
opposed to the traditional prudential concerns of capital and liquidity.
Third, is national, regional and international co-operation. With the shift from
institution-based financial services to ecosystems, opportunities and risks will
traverse national and indeed regional boundaries. Regulators will need to coordinate, co-operate and share information. A case in point is cybersecurity that is
increasingly transnational in nature and requires a global circle of trust as a key
countermeasure. On the other hand, the Big-Techs are increasingly extending their
reach to financial services with a global footprint. African regulators will need to be
at the global table as the governance architecture for the increasingly pervasive
Big-Techs is drawn up given the significant spill over risks.
As I draw to a close, the upskilling of regulators—their people, processes and
systems—will be imperative in the new age of agile regulation. I therefore look
forward to the rolling out of the A.Reg4DT programme across the continent to
support regulators as digitalization transforms the financial services map.
Thank You!