CENTRAL BANK OF KENYA
KEYNOTE ADDRESS
BY
PROF. NJUGUNA NDUNG’U
GOVERNOR
CENTRAL BANK OF KENYA
AT THE
OFFICIAL LAUNCH OF THE FIRST LICENSED CREDIT
REFERENCE BUREAU - CRB AFRICA LIMITED
Intercontinental Hotel, Nairobi
4th March 2010

Chairman, CRB Africa – Mr. Michael Karanja;
Chief Executive Officer, CRB Africa – Mr. Wachira Ndege;
Board Members, CRB Africa, here present;
Chair, KBA – Mr. Martin Oduor-Otieno;
Executive Director, KBA – Mr. John Wanyela;
Chair, Vision 2030 Delivery Board - Dr. James Mwangi;
Distinguished Guests;
Ladies and Gentlemen:
I am pleased to join CRB Africa and the banking fraternity in the launch of
the first ever licensed Credit Reference Bureau in Kenya. The launch marks
a new dawn in the Kenyan banking sector. It is the first and most important
step towards building information capital. The second step will be for the
banks and the public to share this information; and the third step will be to
use the information to develop the market and to make appropriate
decisions.
I would like to commend the Board and Management of CRB Africa for their
enterprising efforts culminating in their being licensed as the pioneering
Credit Reference Bureau in Kenya. This is a landmark achievement worthy
of congratulations from each one of us.
Ladies and Gentlemen: The main objective is to increase access to
credit. We know the benefits of credit access and cost effectiveness of that
credit to development at the firm level and at the household level. Allow me
to focus briefly on the benefits which CBK sees as accruing from the
adoption of credit information sharing in Kenya.
First, credit information sharing will facilitate the development of
information capital. The risk premium associated with information
asymmetry will henceforth be eroded. This will allow cost of credit to
decline substantially. Second, information capital will change the current
collateral technology. Credit by the banking sector in Kenya has to a large
extent been underwritten by physical collateral such as land and buildings
and costs of evaluating that collateral – with inappropriate definition of

property rights. Borrowers without access to such collateral have been
constrained from accessing credit. Credit information sharing will thus
enable borrowers to build a track record (reputational capital) that they can
use to access credit. This will especially be pertinent to those borrowers in
the informal and Small and Medium Enterprises (SMEs) who have a track
record and good performance to use their reputational capital to access
credit. The SME sector is very important to the development of this country
as envisaged in Vision 2030.
Ladies and Gentlemen: The third benefit is to enhance information
symmetry and support financial development. The existing state of
information asymmetry between borrowers and banks is a constraint to
innovation and financial sector development. Two important outcomes in
information asymmetry are the moral hazard problems from the borrowers
and adverse selection from the banks. These two problems punish the
economy with low provision of credit. Information asymmetry has also led
to severe adverse selection among banks themselves.
Fourth, in a segmented market like ours, some segments remain untapped
because banks do not have adequate information to price suitable products.
In part this has also contributed to the high cost of credit. Borrowers have
had to bear a “risk premium” because of this lack of information. It is
therefore the Central Bank’s expectation that savings arising from the
increased credit information shall translate to lower cost of credit. In turn,
more Kenyans will be able to access credit from banks.
As you all know, the Monetary Policy Committee’s (MPC’s) efforts since
September 2009 to signal to the market the need to expand credit to the
private sector at affordable interest rates has not yielded the desired results.
Banks have continuously cited structural rigidities as impeding their wish to
lower interest rates. With the launch of credit information sharing, we
believe it signals the seriousness with which their concerns are being

addressed. Banks should henceforth pass the accruing benefits to the
Kenyan public through appropriate reductions in the cost of credit.
Ladies and Gentlemen: The current level of interest rates is a
combination of costs (like information search costs); risk premium most of
it unrealized goes to profits; our legal system with delays and lack of clear
enforcement of contracts; and of course banks’ profit margin. High interest
rates increase the level of default risks. With good credit track records, the
risk premiums and search costs imposed on customers will ideally shrink.
In this regard, we expect that credit information sharing will be an incentive
for good credit behaviour that will attract competitive pricing of credit
facilities. The message to Kenyans is that now more than ever before, there
will certainly be benefits accruing from adhering to the contractual terms of
loans.
Ladies and Gentlemen: In summary, credit information sharing will
increase vibrancy in the market for borrowers and lenders. Borrowers will
be able to access enhanced facilities at competitive prices, as they grow their
credit histories and track records. Conversely credit providers will be able to
develop new and competitive products that will tap into previously unserved
and underserved market niches with the power of available information.
This can only impact positively on the banking sector and the Kenyan
economy as a whole. The vibrancy of the credit market implies availability
of resources for the productive sectors of the economy to exploit the
otherwise moribund opportunities.
But we should also not forget it is the end of the road for serial defaulters
who took advantage of information search costs and information
asymmetry to defraud banks and individuals - including bouncing cheques
for lack of funds.
Having said all that - Ladies and Gentlemen: Let me now take this
opportunity to thank our development partners and donors, in particular,
the Financial and Legal Sector Technical Assistance Project (FLSTAP),

Financial Sector Deepening (FSD) Kenya and the International Finance
Corporation (IFC), for their unwavering support over the more than 4 years
we have committed our efforts to developing an appropriate credit reporting
mechanism for Kenya. I would also wish to recognise the efforts put forward
by the market players led by KBA who unreservedly partnered with CBK in
developing the regulatory framework and in hosting the Kenya Credit
Information Sharing Initiative (KCISI) which has put in place the
modalities of operationalising the initiative.
I urge all banks to support the ongoing pilot run by KCISI aimed at ensuring
that all banks are fully prepared to as seamlessly as possible participate in
the sharing of their credit information. The ability of all banks to participate
in the initiative is the only way they will reap maximum benefits. The
project manager and his team at the KCISI have assured me that they are
ready and available to assist all banks to ensure compliance.
Ladies and Gentlemen: The role of easily accessible and affordable
credit in economic development need not be overemphasized. However,
most banks finance their credit with short term deposits which constrains
their credit structures to mainly short term. This is even more punishing
because the overdraft facilities for working capital are also short-term and
very costly. We thought with a vibrant bond market, this traditional
mismatch would go away! In an effort to address the mismatch, a Technical
Committee has been formed by the CBK to look at proposals for
Development Banking Products or development loans with longer tenors
than the current term loans in commercial banks. Supply of long term funds
will support this line of development. The key target markets for the
Development Banking Products are the SMEs with huge growth potential.
To further address the structural rigidities in pricing of credit, CBK will later
in March 2010 launch a study report on collateral system and associated
costs in Kenya. The study, jointly commissioned by KBA, CBK and FSD
Kenya, is aimed at establishing the current status on creation, perfection

and enforcement of collateral in Kenya. Recommendations to overcoming
any existing obstacles are expected to be detailed in the study report.
Ladies and Gentlemen: As I draw to a close, I would like to assure you
that the CBK in collaboration with the Government and the market players
will enhance its efforts in addressing other structural rigidities that
contribute to market inefficiencies – for this reason, we would also like to
hear from the market as well – to take stock of developments as well as
other emerging constraints.
Ladies and Gentlemen: CBK believes that the banking sector credit
information sharing initiative should serve as a model for other credit and
utilities providers. CBK will engage other players to ensure that we move
with speed to rope in other financial and non financial credit providers. To
this end the Microfinance Act was amended vide the Finance Act, 2009 to
permit credit information sharing. Inclusion of all credit providers and
utility service providers will allow the full benefits of credit information
sharing to permeate through the whole economy.
Ladies and Gentlemen: It now remains for me to wish CRB Africa all the
best as they commence their operations. We do believe that the licensing of
CRB Africa and other CRBs in future will go a long way in positively altering
the Kenyan banking sector landscape. We want to build strong institutions
in the financial sector and information capital is one of the pillars of a
strong institution. As I have emphasized, strong institutions define the
appropriate incentives (punishments) that encourage prudent behavior.
With these few remarks, ladies and gentlemen, it is now my honour and
pleasure to declare CRB Africa officially launched.
Thank You