GOVERNMENT BORROWERS FORUM
Paris, France
Keynote Speech by Dr. Patrick Njoroge
Governor, Central Bank of Kenya
May 3, 2016
As Prepared for Delivery
Honorable Minister, World Bank Vice President and Treasurer, Madame Commissioner,
Excellencies, Distinguished Guests. Good morning! It is a great pleasure to speak before
this distinguished group today. I would like to express my thanks to the organizers and
our French hosts for their gracious hospitality.
This meeting brings together public sector representatives facing common challenges and
opportunities relating to their public sector borrowing programs. It takes place at a
crucial time, given the current state of the global recovery and the increased downside
risks. In its communiqué three weeks ago, the IMFC noted that the global outlook had
weakened and summarized the situation as follows: “Although recent developments point
to some improvements in sentiment, financial market volatility and risk aversion have
risen [...] Downside risks to the global economic outlook have increased since October,
raising the possibility of a more generalized slowdown and a sudden pull-back of capital
flows. [...] Against this backdrop, it is important to buttress confidence in our policies.”
Allow me to elaborate on how we are addressing these challenges, and the initiatives we
are undertaking to strengthen our sovereign borrowing program. Like other central banks
around the world, we are agents of the government with respect to its borrowing
program, but we have lead some of the reforms in this area due to the close connection
with other aspects of our mandate. I will conclude with a few words about the status of
our banking sector.

Macroeconomic Stability
In the second half of 2015, the Central Bank of Kenya moved decisively to deal with the
emerging risks, particularly, rising inflation expectations and pressures in the foreign
exchange market. This was against a backdrop of increased instability in the global
financial markets, with uncertainty around the timing of the increase in U.S. interest
rates, coupled with pressures from China’s financial markets and the debt crisis in
Greece. Significant stress was also observed in our domestic government securities
market in August to October 2015, due to the tighter liquidity conditions and a
perception of increased borrowing requirements. Market conditions stabilized and then
improved towards the end of 2015—inflation expectations are now better anchored,
interest rates have fallen to normal levels, and the foreign exchange market has remained
stable. Developments in the foreign exchange market are supported by a narrowing of the
current account deficit with improved exports, strong diaspora remittances, and a lower
oil import bill.
Turning to fiscal policy, Kenya’s fiscal position is set to adjust gradually through a
combination of lower expenditures and higher revenue collection. The fiscal deficit is
targeted to narrow to 4.1 percent of GDP by 2018/19, from an estimated 8.0 percent of
GDP in FY 2015/16. Public sector debt, having risen in the recent period to 53 percent of
GDP in March 2016, remains sustainable.
This recent experience has underscored the importance of a strong macroeconomic
framework, in addition to the following:
Timely communication with the market players is essential. There are significant
benefits in announcing a detailed advance borrowing plans by the government. We
have also re-established a high-level “Market Leaders Forum” where representatives
of the Central Bank, National Treasury, and the large commercial banks and custodial
investors, discuss freely the government’s domestic borrowing plans.
Close policy coordination between the monetary and fiscal authorities is also
important. This would minimize the risk of stress in the financial markets.
Increased differentiation by investors of the economies where they invest is urged.
Kenya has differentiated itself from other destination economies by pointing to the
sources of its resilience—e.g., highly diversified exports and external markets, strong
regional bias, low level of investment by foreigners in government securities (4
percent in March 2016) and equities (22 percent in March 2016). In addition, more
granular assessments by investors of the destination economies would support their
differentiated investment decisions.

There is a strong commitment to implement policies that sustain macroeconomic stability
and to ensure availability of policy buffers to address adverse effects of global shocks.
Nevertheless, the impact on Kenya of these external shocks is expected to be minimal
due to the diversification of its export products and markets, and stable financial
linkages. However, the shock of a potential U.K. exit from the European Union remains
of great concern. Looking ahead, we expect that our level of foreign exchange reserves—
currently equivalent to 5.0 months of import cover—and the new IMF precautionary
arrangements amounting to US$1.5 billion, will provide adequate buffers against shortterm shocks.
Strengthening the Government Borrowing Program
Let me now highlight the significant steps that have been taken in recent years to expand
and enhance the efficiency of the government borrowing program. Kenya is proud of the
progress thus far, which has resulted in substantial growth in the size, depth, and
liquidity of the government bond market. The accomplishments include:
Lengthening the maturity profile of domestic debt and mitigating the refinancing risk.
Successful issuance of 9 Infrastructure Bonds, raising domestically US$2.6 billion
over a six-year period, to help close the existing infrastructure gaps;
Benchmark building by the re-opening of benchmark tenors, which has reduced bond
fragmentation;
A well-established and reliable yield curve that now extends to 26 years;
The emergence of a vibrant secondary market, largely attributed to issuance of more
liquid benchmark bonds, attractive infrastructure bonds and improvement in the
trading infrastructure.
In addition to providing a reliable channel of financing the government’s needs, Kenya’s
bond market has facilitated improvements in financial intermediation through better
financial infrastructure, products, and services. It has also catalyzed the emergence of a
local corporate bond market as an alternative to bank financing.
Let me also mention a number of other reforms that we are undertaking to further
revamp the growth of the domestic debt market, including; launching of over-the-counter
markets for government securities, introduction of electronic platforms for both primary
and secondary markets, and launching of repo facilities and short selling.

An important question relates to how infrastructure investment can be supported, to
become a key driver of long-term growth. Countries across Africa and the world are
experiencing huge infrastructure gaps, and governments are grappling with the challenge
of coming up with innovative solutions for the needed financing. To raise these
resources, governments have engaged in direct borrowing from other governments,
multilateral lenders, and the international market—e.g., by issuing Eurobonds, Sukuk and
Samurai bonds. Kenya has issued tax-free infrastructure bonds, which have drawn both
domestic and international investors. But these efforts fall short of the objective, and
alternative sources of long-term funding need to be sought.
On the one hand, domestic banks would need to step up their participation, but this is
constrained by legal and prudential limits on the proportion of banks’ lending as a share
of their core capital. Commercial banks would therefore need to enhance their capital
base, to remain compliant with the regulatory requirements. On the other hand, external
lenders are likely to be more concerned about the credit, liquidity and political risks that
these projects would carry, given their size and long duration. It is therefore important
that these projects have a clear and equitable contractual structure that optimally
allocates project risks across participants. More innovative solutions to deal with these
questions would be highly beneficial.
Mobile financial Services Revolution
A very exciting area of focus for Kenya and other similarly-situated countries is mobile
financial services (MFS), where the Central Bank has played a critical role in promoting
financial inclusion through the regulation of these services. Specifically, the CBK
facilitated the rollout of innovative products driven by mobile phone technological
platforms that are integrated with banking platforms. A pilot “test-and-learn approach”
was adopted, allowing innovations while ensuring that necessary safeguards were in
place to mitigate the potential risks. The CBK continues to engage with financial service
providers and telecommunication companies as they seek to introduce innovative
solutions or products in the market.
We have witnessed great success since 2007 when mobile money service providers
begun to operate. These have allowed banks to avail their services more conveniently
and cost effectively, which has not only revolutionized the delivery channels for
financial services, but has also enhanced the satisfaction from utilizing financial services.

Kenya has one of the fastest mobile phone service adoption rates in Africa. As at
December 2015, there were 37.7 million mobile phone subscribers (penetration of
88 percent). There were also 31.6 million mobile money service subscribers, and
143,946 mobile money agents.
Mobile financial services have boosted financial inclusion, with 75.3 percent of the
adult population now using formal financial services.
The range of financial services accessible on mobile phones is increasing, with new
innovations that reflect the benefits of a diversified financial system. Mobile
payments account for over 80 percent of the volume of payment transactions, but 7.4
percent of the total value of transactions.
Ladies and gentlemen, we are proud of two related products that will soon be fully
operational, through which public debt operations will leverage on the growth of mobile
financial services.
The first is Treasury Mobile Direct (TMD), which was rolled out in November 2015.
By offering a channel to access small denomination government securities through the
mobile phone, this product leverages mobile-phone technology to improve the efficiency
of the existing domestic debt issuance operations, in addition to increasing retail
investors’ participation in the primary auctions for government securities. The services
that will be provided under TMD include information dissemination, account status
inquiry, bidding for government securities, and payment/settlement through mobile
money platforms. TMD will facilitate the growth of government securities by broadening
significantly the investor base to retail investors.
The second product is M-Akiba. This is a critical government initiative, which seeks to
increase the public’s participation in government securities through the existing mobilephone money transfer services, and with a low minimum investment amount of US$30.
The first M-Akiba infrastructure bond will be launched shortly as the necessary
arrangements are in the final stages, and is expected to mobilize Ksh.5 billion (about
US$50 million). Retail investors will be able to register, bid and pay for government
securities through the existing mobile platforms. This will provide alternative investment
options to retail investors who have long been poorly remunerated especially for their
deposits held by banks.

These products will be transformational—in addition to promoting financial inclusion,
they will facilitate a change in the population’s savings culture, and ultimately lead to an
increase in national savings. However, as the digital platforms continue to evolve, there
are challenges and risks that need to be addressed. It is therefore important that countries
continue to share experiences and strengthen partnerships based on best practices to
address these challenges.
The State of the Banking Sector in Kenya
Finally, I would be remiss if I did not say a few words about the recent developments in
our banking sector. In the main, concerns have been raised following the placing of three
banks in receivership, since August 2015. We have underscored that the Central Bank’s
actions were necessitated by unique circumstances in each of these banks, and that these
were carried out in the interest of the depositors, creditors, and the wider public interest.
We have also indicated that the weaknesses revealed by these cases are not systemic and
the banking sector remains strong and stable. The capital-adequacy ratio stood at 18.8
percent in March 2016, well above the statutory minimum of 14.5 percent. The average
liquidity ratio rose to 39.8 percent in March 2016, above the statutory minimum of 20
percent and higher than 38.1 percent in December 2015.
Nevertheless, some challenges remain. For instance, interest rates spread remain very
high: The spread between the average commercial banks’ lending rate and deposit rate
stood at 10.3 percent in March 2016. Poor liquidity management and distribution remains
a key concern, for which remedial actions are being taken. Bank supervision is also being
strengthened urgently. The Central Bank remains committed to fostering banking system
stability and will continue to exercise its supervisory mandate in a fair and even-handed
manner. Importantly, we have seized the opportunity occasioned by these events and
ushered in “the new normal” in the banking sector, underpinned by the following:
Greater transparency, which is supported by accurate data.
Stronger governance, with clear demarcation of responsibilities, greater
accountability, fair market conduct, and stronger supervision.
Effective business models, aimed at strengthening the resilience of banks, reducing
costs, and supporting innovation.
*****

In closing, I wish to express our gratitude to the various institutions that have assisted
Kenya achieve the significant growth and deepening of financial markets. Specifically, I
wish to recognize; the World Bank, which has supported us through a range of projects,
the IFC, the IMF, and local stakeholders who have contributed useful ideas for
developing the domestic debt market.
I look forward to hearing of the experiences from other countries, and learning from your
insights on how to resolve the issues raised.
Thank you.