CENTRAL BANK OF KENYA
Keynote Address
By
PROF. NJUGUNA NDUNG’U
GOVERNOR
FINANCIAL STABILITY AND FINANCIAL INCLUSION
5TH JOINT CMA/CBK/RBA/IRA BOARD MEMBERS RETREAT ON
COLLABORATION AMONG DOMESTIC FINANCIAL SECTOR
REGULATORS
Leopard Beach, Mombasa
13th October 2011

Joint CMA/CBK/RBA/IRA Retreat, 13th – 14th October 2011
Chairpersons here present;
Board Members of Financial Sector Regulators here present;
Chief Executive Officers;
Colleagues;
Ladies and Gentlemen:
I am honoured by the invitation to address this gathering on financial inclusion
and financial stability, an increasingly topical issue. At the outset, I would like
to thank the Retirement Benefits Authority for hosting this 5th Joint Retreat for
the Board Members of Domestic Financial Sector Regulators.
Ladies and Gentlemen: At a time like this, a pertinent question begs an
answer: what does financial stability entail? While the concept cannot be easily
captured in a single word, a few attributes need to be demonstrated for a given
system to be described as financially stable. These include: public confidence
and trust in the institutional framework – owing to sound design of the
infrastructure; predictability; efficiency; sound ethical behavior by market
participants and competence of financial authorities, among others. To
paraphrase, financial stability may be said to be present in an economy when
the financial system functions as it is supposed to.
Financial stability in a given jurisdiction serves to instill confidence in users of
financial services. It encourages and facilitates productive economic activities
and thereby contributes to a society’s overall well-being and progress. The role
of regulators, in this regard, has historically been to oversee financial stability
using traditional performance indicators as a guide. These indicators include
conventional performance measures such as the quality of assets in institutions,
earnings and performance, liquidity and capitalization.
Ladies and Gentlemen: In our country’s history, the Kenyan financial sector
has on a number of occasions undergone severe tests of its stability, involving
failure of systemically important financial institutions, that have dented market
confidence in our financial system. As regulators, we have a fiduciary role to
maintain public confidence in the financial sector by addressing all factors that
would undermine the sector’s long-term stability, without which it would lose
its long-term relevance as a medium of economic interaction and payments
system. Maintaining public confidence entails ensuring that the sector keeps up
with all pertinent global developments to ensure it remains relevant to the
needs of the public from which it derives its mandate.
Ladies and Gentlemen: Alongside financial stability comes another topical
issue in development debates across the globe, financial inclusion. For the

Joint CMA/CBK/RBA/IRA Retreat, 13th – 14th October 2011
financial system to be relevant to society, it needs to ensure that as much of the
eligible target population has opportunity to access a variety of financial
services ranging from credit, savings and payments, transfers, pensions, capital
markets and insurance services. Inclusion is an essential pre-condition to
enhancing wealth creation and poverty reduction and ultimately broad based
economic development. The Consultative Group to Assist the Poor (CGAP)
defines financial inclusion as a “state in which all people who can are
able to have access to a full suite of quality financial services,
provided at affordable prices, in a convenient manner, and with
dignity for the clients”. These financial services are delivered by a range of
providers, most of them private, and reach everyone who can use them,
including disabled, poor, rural, and other excluded populations.
Ladies and Gentlemen: Why should we, as regulators, be concerned about
the levels of financial inclusion in our respective jurisdictions? Individuals and
households lacking adequate access to a full range of responsibly delivered,
affordably priced, convenient, formal financial services would be severely
constrained in participating fully in the economy. As an entity, the financial
sector would also face bleak prospects in terms of expansion and longevity,
which holds back overall economic development. But more importantly,
financial inclusion is supported by financial stability.
In Kenya, the proportion of the population totally excluded from formal
financial services, as revealed by the Finaccess 2006 and 2009 surveys, stood at
38.3% and 32.7% respectively. The proportionate reduction between the years
is largely attributable to the advent of mobile-based financial services which
have indeed revolutionized the provision of formal financial services and
availed these to the market affordably and conveniently. For us to bring costs of
financial services down, we need full inclusion.
Ladies and Gentlemen: Given the statistics above, as financial sector
regulators, we share common aspirations of making the financial sector more
stable, efficient and accessible. Though these objectives may at times appear
competing, they are for the most part complementary. Stability is a prerequisite for efficiency, while both are in turn required to raise inclusion. In
cognizance of this, the Central Bank, jointly with other players, has undertaken
several initiatives and reforms aimed at boosting overall inclusion. These
include:
Licensing of Deposit Taking Microfinance Institutions (DTMs),
focusing on the lower end of the market concentrated in rural and periurban areas. The licensed DTMs had 57 branches, 1.5 million deposit
accounts valued at Ksh.9 billion (USD90 million) and 0.53 million loan

Joint CMA/CBK/RBA/IRA Retreat, 13th – 14th October 2011
accounts with an outstanding loan portfolio of Ksh.15 billion (USD150,000)
as at the end of August 2011.
Rolling out Agency Banking, with over 8,000 agents being contracted by
7 banks countrywide and more than Ksh.17 billion worth of transactions
conducted through agents as at the end of August 2011 since roll-out in July
2010.
Implementation of Credit Information Sharing, with more than
900,000 reports on customers on credit applicants being requested by banks
as at 31st August 2011 since roll out just a year ago.
Introduction of Sharia Compliant Banking, with two institutions so
far offering exclusive Sharia products, with a growing market footprint.
Mobile-Based Financial Services, utilizing technological platforms to
enable the provision of innovative financial services. In just over 5 years,
over 15 million Kenyans have been integrated into the financial system
through this innovative channel.
Financial Education Initiatives under the Financial Education and
Consumer Protection Partnership (FEPP), which has commissioned four
pilot financial education projects through Equity Bank, Faulu Kenya, Plan
International and Mediae. These pilot projects aim to establish the feasibility
of different approaches to financial education in Kenya in order to inform
the development of a national strategy for financial education.
Owing to the above, there have been notable improvements in financial access
especially among the lower population segments, including the growth of bank
deposit accounts from 2.5 million to close to 14 million to date.
Ladies and Gentlemen: Beyond the local scene, the Central Bank has also
been active in international forums with a view to learning from others’
experiences. The Bank has been an active member of the Alliance for Financial
Inclusion (AFI), a global member-based network which provides an
international platform for policymakers in developing countries to learn and
share knowledge towards enhancing access to basic financial services for their
un-banked and under-banked populace. AFI has a membership from 81
developing countries in Africa, Asia and Latin America.
Through its membership of AFI, CBK was appointed as a non-G20 member of
the Global Partnership for Financial Inclusion (GPFI) in December 2010. GPFI
is a G20 initiative to propel financial inclusion through peer learning,
knowledge sharing, policy advocacy and coordination. Now that AFI is opening
its membership to associate members, I take this opportunity to urge fellow
financial sector regulators to consider joining this worthwhile forum, in order to
facilitate joint contributions towards greater inclusion in our local sector.

Joint CMA/CBK/RBA/IRA Retreat, 13th – 14th October 2011
In the same vein, I am pleased to note that both the CBK and CMA were
recently invited, and accepted to join the Regional Consultative Group for SubSaharan Africa of the Financial Stability Board (FSB). FSB is a global
association established to coordinate at the international level the work of
national financial authorities and international standard setting bodies and to
develop and promote the implementation of effective regulatory, supervisory
and other financial sector policies in the interests of financial stability. The
Association brings together national authorities responsible for financial
stability in 24 countries and jurisdictions, including regulators and supervisors.
Membership in the consultative forum will provide both the CBK and CMA with
an opportunity to contribute in key decision making and policy formulation
from a regional and global perspective for the benefit of our entire financial
sector. It will also create an avenue to contribute in shaping the development
and implementation of financial sector policies aimed at realizing financial
stability. I am sure that both the CBK and CMA will carry the voices of the other
domestic financial sector regulators.
Ladies and Gentlemen: The continuous evolution of the financial sector
towards greater sophistication and value provision requires the regulators to
move ahead in surveillance and vigilance to maintain the requisite stability and
efficiency. For regulators to remain effective in their mandate, they need to
remain in step with the financial services industry and its operating
environment. For this reason, continuous capacity building is necessary, as is
sustained cooperation between the different regulators to ensure coordinated
efforts towards financial stability and financial inclusion.
Thank you for your attention.