CENTRAL BANK OF KENYA
Remarks by
PROF. NJUGUNA NDUNG’U
GOVERNOR
Intercontinental Hotel, Nairobi
March 24th, 2010

Governor’s Remarks at the Launch of Study Report on Cost of Collateral in Kenya – March 24, 2010
Hon. Uhuru Kenyatta, Deputy Prime Minister and Minister for
Finance;
Permanent Secretaries, here present;
Mr. Martin Oduor Otieno, Chairman, Kenya Bankers Association;
Mr. John Wanyela, Chief Executive Officer, Kenya Bankers
Association;
Mr. David Ferrand, Director, Financial Sector Deepening Trust
Kenya;
Distinguished Guests;
Ladies and Gentlemen:
It is with great pleasure that we congregate here this morning to chart the way
forward on another avenue of enhancing efficiency in our banking system.
This is through changes in the collateral technology in use. But before I make
my remarks, allow me to thank the Hon. Deputy Prime Minister and Minister
for Finance for agreeing to grace this occasion and deliver a keynote address.
Also, allow me to thank KBA and FSD for their tireless effort to deepen the
financial sector.
Yesterday, we held our Monetary Policy Committee meeting in Mombasa CBK
Branch. The first review was a survey on what sustains high interest rates -
The response from the market showed two factors; cost of credit and credit
risk sustains high interest rates. But what is behind cost of credit and credit
risk - perhaps the collateral technology in use. The cost of collateral is being
addressed today by this study.
Ladies and Gentlemen: Kenyan banks have persistently cited cost of
collateral as contributing a significant portion of premium factored in the
interest rates they charge. To demystify the assertion, Central Bank of Kenya
(CBK) and Kenya Bankers Association (KBA) in conjunction with Financial
Sector Deepening Trust (FSD) Kenya commissioned a study to review the
Kenyan collateral process with a view to determining the costs associated with
each step in the process. The consultants were also required to put forward
succinct recommendations based on their findings. Evidence seems to show
that the three steps of collateral process in Kenya; that is: creation,
perfection and enforcement, entail enormous costs and time.

Governor’s Remarks at the Launch of Study Report on Cost of Collateral in Kenya – March 24, 2010
Ladies and Gentlemen: The report has brought forward several
recommendations. They will be implemented and will result in both cost and
time reduction. The implementation of the recommendations touches on
several Government agencies, most of which are represented here today. I
believe your presence in this occasion goes a long way in showing your
readiness to play your part in addressing the constraints noted.
The study has indicted the collateral process in Kenya; the collateral process is
flawed and as a result it is characterized with high costs. There are more than
20 applicable statutes relating to collateral creation and perfection. This
makes the process cumbersome, expensive and complex. It is high time the
statutes are looked at to not only ensure uniformity but also simplify the
process. Lenders have cited the slow and expensive judicial process as
contributing to premiums they factor in their interest rates. A certain and
reliable judicial process facilitates quick recovery by lenders when secured
facilities are defaulted. Good borrowers will thus not be penalized for a
mistake that is not of their making. In addition, there are many manual and
uncoordinated registries.
Ladies and Gentlemen: What are the other complementing initiatives to
this study: Going forward the following two events will shape the outcome of
the recommendations of the report.
• First, the licensing of credit reference bureaus has introduced a
substitute to physical collateral, which is information capital and
reputational capital as well as appropriate risk pricing. CRB Africa was
launched early this month. It is expected that the credit information
sharing mechanism will be fully operational by July this year and as a
result we expect to subsequently see a reduction in costs of credit as
banks pass the resultant benefits to their customers. Similarly, it is high
time that Kenyans henceforth adhere to their credit contract terms in
order to build favourable credit track records for use as information
collateral.

Governor’s Remarks at the Launch of Study Report on Cost of Collateral in Kenya – March 24, 2010
• Second, the CBK and KBA have formed a committee to drive forward
the recommendations of the study. The formation of the committee
reflects the importance attached to the study by both KBA and CBK. The
implementation of the recommendations will not only be beneficial to
the financial sector but the entire economy. This will happen at three
levels:
o First, through the supply of required credit in future.
o Second, through lengthening the maturity profile of term loans.
o Third, the appropriate definition of property rights and certainty
in enforcement of contracts will be strong building blocks of a
deepened financial sector.
It is therefore important and complementing to explore the widening of the
membership of the committee to include the various players represented here
today. A broad based implementation committee will support the quick
execution of the cross cutting recommendations contained in the report.
Ladies and Gentlemen: As I conclude let me take this opportunity to thank
FSD Kenya, our development partner in several projects aimed at inclusive
financial markets in Kenya; Kenya Bankers Association who partnered with us
in this study; ShoreBank International and Walker Kontos who authored the
report being launched today; and all market players who took part in the
study; but more importantly those who came here today to take part in the
launch and I am sure they do believe we can achieve the prescribed results.
Finally, Ladies and Gentlemen, let me let me take this opportunity to invite
our chief guest to address this gathering.
WELCOME DEPUTY PRIME MINISTER, HON. UHURU
KENYATTA.