CENTRAL BANK OF KENYA
Address by
PPRROOFF.. NNJJUUGGUUNNAA NNDDUUNNGG’’UU
Monday, November, 24th, 2008

Chair, Governing Council of the FIRST Initiative;
Distinguished Members of the Council here present;
Management and Staff of the FIRST Initiative Program
Management Unit;
Distinguished Guests;
Meeting Participants;
Ladies and Gentlemen:
I am pleased to be here this morning at the opening of the FIRST
Initiative Consultative Group meeting. My thanks go to the Governing
Council and the Program Manager for the kind invitation. Allow me also
to thank FIRST Initiative for choosing to host both the Governing and
Consultative Group meetings in Nairobi famed as “the Green City in the
Sun’’. I would also wish to welcome you all to Nairobi and hope that you
will extend your stay to enjoy the varied and scenic delights that Kenya
offers.
Ladies and Gentlemen: This is indeed a ‘’watershed’’ meeting that
comes after the completion of the first four year mandate of FIRST
Initiative. I am informed that FIRST Initiative began its’ operations in
2002 with a five year mandate that was successfully completed in 2007.
The mandate was to provide Technical Assistance to support growth and
poverty reduction in low and middle income countries by promoting a
financial sector that was stable, deep and diversified. This is indeed a
noble objective and it is therefore gratifying to note that FIRST will now
enter a second phase of operations to run to the end of 2012.
Role and significance of FIRST in Development
FIRST mission to deliver flexible, top-quality technical assistance related
to financial sector is welcomed in the region where the role of the
financial sector is recognized as an engine for development. Most of you
in this room can remember vividly the days of financial repression when
government legal restrictions prevented financial intermediaries in the
economy from functioning at their full capacity. The regulations
generally included interest rate ceilings, compulsory credit allocation,
and high reserve requirements. The development philosophy has shifted
away from direction and control. Governments of developing countries

have now realized the great potential of the financial sector in fostering
development. The formation of FIRST as an institution was to help
developing countries tap the potential support to the development of the
financial sector.
The fact that FIRST initiatives always come in after Financial Sector
Assessment Program (FSAP) and other assessment have been
undertaken by the IMF and the World Bank signals to governments of
developing countries that our partners not only perform a “health check”
of our financial system but they also offer “health solutions” after a
prognosis has been identified.
Many of the projects financed by FIRST initiative have helped countries
tighten their adherence to international standards and codes for the
financial sector. In doing so, I belief in the assertions that FIRST has
helped developing countries achieve part of their development goals of
building an efficient, inclusive and transparent financial system. The fact
that FIRST works closely with the recipient institutions to prioritize
technical assistance activities that are consistent with the recipient
country plans is a great plus. It re-defines development partnership of
donors and recipient countries.
I note with great pleasure FIRST model of doing business. It encourages
recipient governments to identify their financial sector problems,
prioritizes them, and then supports viable solutions. It also pools the
efforts of several development agencies, leveraging their expertise and
reducing duplication. Often, FIRST takes on targeted projects and once
completed, FIRST disseminates the results to boost their impact and
catalyze long-term support from both development partners and
recipient governments.
In Kenya the Vision 2030 has identified that the problems of high
interest rate spreads and limited access .The focus then is how to reduce
these spreads, raise access and deepen the financial sector. The level of
solutions require policy reforms that alleviate market, institutional and
political barriers to competition. The Vision 2030 has identified areas in
which policy reforms can have a major impact in reducing such barriers
and thus increasing the effectiveness and competitiveness of financial
intermediation.

Here in Kenya, I would like to acknowledge an initiative such as
FinAccess initiated and partly funded by FIRST which has given us the
survey information which has become an integral part of financial market
processes and analyses. The results have helped us understand some of
the issues in the financial sector and have provided us a better
understanding on how to develop the sector. There is an increasing body
of evidence to support the view that financial sector development
contributes to both economic growth and poverty reduction by affording
people greater access to finance.
Going Forward
Going forward, I have noted with satisfaction that FIRST will seek to
strengthen the causal links between its technical assistance and the
contributions of deep, orderly financial systems to economic growth,
poverty reduction, and social equity. FIRST will do this by increasing its
emphasis on achieving market development outcomes, and filling gaps in
domestic financial markets. It will also continue to give priority to
supporting governments in lower-income countries in developing action
plans geared toward these outcomes.
Such a move is welcomed in the region where there has been a very
strong upward trend in diversification of economic activities among rural
households over the decade. One robust finding of the rural panel
analysis is the importance of access to credit as a correlate of escaping
from poverty. In Kenya for example, most (70 percent of) Kenyans do
not have access to any form of credit. For those who do access loans,
there is significant disparity in average amounts—with non-poor
households borrowing 42 percent above the average amount, and poor
households 77 percent below; the advantage for urban households is even
larger, whereas female headed are way below average (World Bank
2008). The question is whether we have adequate financial vehicles for
each of these diverse house-holds.
Financial stability and development are a crucial prerequisite and a
facilitator of reforms in other sectors, including private sector
development, infrastructure, housing, and social policies. Financial
sector development is vitally linked to growth and poverty reduction.

Well-functioning financial systems channel funds to productive uses
essential for a country’s transformation.
Financial Services
In Kenya, we have identified that a well-functioning financial system is
critical to accelerating economic growth. That is, a vibrant and globally
competitive financial sector will drive high levels of savings and finance
Kenya’s investment need.
According to the Financial Access Survey 2007, by FSD Kenya, the
banking sector serves only 19 per cent of Kenya’s bankable population
with 8 per cent being served by other financial services providers such as
MFIs and SACCOs. 38 per cent are totally excluded and 35 per cent rely
on informal financial services providers. The evidence is also that access
to financial services outside the main cities still remains limited. The
introduction of MFI’s, the SACCO’s and CRBs will produce the best
financial infrastructure to reach all segments of the economy and
information flow to help them function properly.
For Kenya to achieve its aspirations of Vision 2030, the levels of
investment will require a continuous increase in the level of national
savings to sustain economic growth. In this regard, financial sector
reform measures will be implemented and more savings products
developed to support the requisite national savings.
To do so I intend to suggest areas where support of FIRST initiative will
be most welcomed in Kenya’s case, but also applies to most countries in
SSA:
• Enhance the role of the Government in the financial
sector to provide a legal, regulatory, and supervisory framework
that promotes soundness and competition in the sector. More
support for the review, amendment and drafting of financial sector
laws and regulations that govern all the regulators with the
objective of strengthening their effectiveness.

• Reduce the existing deficiencies in the clearing and
settlement mechanisms in national payment systems. The
modernization of the national payment system has included,
among other things, the introduction of Real Time Gross
Settlement (RTGS) and the Kenya Electronic Payments and
Settlement System (KEPSS) to all participants. But now require
enhancement to ensure overall adoption.
• Increasing access to credit. The major impediments to growth
in developing countries especially in SSA is the insufficient access
to credit for large segments of the population and enterprises,
especially micro, small and medium sized ones. Areas which FIRST
can support include: improvements in the operation of the
government registries including: assistance to the Companies
Register to enable the Registry clear the backlog in filing and allow
for speedy and accurate information sharing of corporate
information and data; improvements in the land registration
system through digitizing land records; establishment of a legal and
regulatory framework for the operation of a credit reference bureau
that would facilitate the much needed information flow among the
credit granting institutions.
• Improve the financial legal environment. The legal system
in the region currently faces major challenges in supporting
effective financial intermediation. Furthermore, the drafting,
implementation and application of the legislative and regulatory
reforms, require strong capacity in the judiciary and in the
legislative and executive offices charged with legislative drafting
and law revision.
• Clear and effective laws backed by a strong and credible
judiciary are an essential element in creating an environment that
is conducive to business and financial activity. Enforcement of
contracts in the financial sector is a major signaling mechanism
that helps the financial sector development and innovation
intermediation.

• Develop a financial sector that reflect the economic structures of
the country and avoid temptations of one size fits all. Most SSA are
characterized by formal and informal finance. The process of
formalization requires understanding of the economic structures.
Conclusion
In conclusion, I realize that the issues for discussion during this meeting
are vital to the financial sector at this crucial time when the world is
seeking solutions to the global financial crisis; the Central Bank of Kenya
and the Ministry of Finance are interested and also party to the issues
being discussed here. The financial sector reform agenda is now even
more urgent in the wake of the ongoing global financial crisis. I am
informed that you spent a good part of yesterday discussing the crisis and
I am sure that you came up with useful proposals that you will be
sharing. It is inevitable that there will be fundamental changes to the
global financial architecture and institutions that govern it. This will pose
a greater challenge to developing countries that are already resource
constrained and yet need to quickly embrace these changes. Again,
partners such as FIRST Initiative will be called upon to quickly deploy
technical assistance to client countries.
Targeted technical assistance in the financial sector will support
governments’ effort to deepen a market based economy which
contributes to a sustainable fiscal position and improved allocation of
resources. Broad-based financial and legal sector reforms will directly
contribute to improving equity and reducing poverty through expanding
access to financial services. Poverty is sustained by exclusion in the
market. The poor benefit from financial services by providing a safe
haven for their savings. The route to savings together with investment
opportunities that promise returns is the road to enhance poverty
reduction. These objectives will be achieved through provision of
technical expertise and building capacity to implement our countries’
financial sector and legal sector reforms whenever required.
I therefore look forward to the output of today’s discussions that should
enable FIRST to meet and exceed the monumental expectations from
client countries in its’ second phase of operations.

On that note, it is my honour and pleasure to declare the FIRST
Consultative Group Meeting officially open and to wish you fruitful
deliberations.
Thank you