Njuguna Ndung'u: Microfinance transparency
Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the African
Microfinance Pricing Transparency Leadership Forum, Nairobi, 6 October 2011.
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Mr. Ives Terracol, Regional Director, Agence Française de Développment;
Mr. Chuck Waterfield, Chief Executive Officer, MicroFinance Transparency;
Distinguished Guests;
Ladies and Gentlemen:
It gives me great pleasure to be with you this morning during this important African
Microfinance Pricing Transparency Leadership Forum. Before I make my opening remarks,
let me take this opportunity to thank the organizers of this conference, MicroFinance
Transparency, for inviting me to share some thoughts on this pertinent topic. I would also like
to extend a warm welcome to all the participants who have travelled from other countries to
Kenya and to say "Karibu Sana". I hope you will take some time to enjoy our beautiful
country with its rich culture and diverse tourist attractions.
Ladies and Gentlemen, financial inclusion has been recognized now in development
debates and action across the globe. This is more so in developing and emerging
economies, which record the highest poverty levels and constitute majority of the world's
unbanked population. The drive to enhance financial inclusion is thus critical given that
increasing evidence shows that it is key in reducing the economic vulnerability of
households, promoting economic growth, alleviating poverty and sustainably improving the
quality of peoples' lives.
The push for financial inclusion is entrenched in Government of Kenya's Development
Blueprint, Vision 2030 and lies at the core of the Central Bank of Kenya's strategic actions
towards implementing this Vision. It is in this regard that the Central Bank, together with
market players, has embraced several initiatives and reforms aimed at enhancing the level of
financial inclusion. These include licensing of deposit taking microfinance institutions (DTMs)
and credit reference bureaus (CRBs); introduction of shariah compliant banking products,
mobile phone money transfer services and the agency banking model. These measures and
new institutions help in completing the financial infrastructure picture in Kenya that reflects its
market structures as well.
Ladies and Gentlemen, in effect, we have seen a significant decline of barriers to entry into
the financial sector, increased infrastructure distribution and innovative instruments targeting
the lower segments of the population. These have resulted in tremendous increases in the
levels, reach and depth of access to financial services. To highlight a few, bank accounts
have grown from 2.5 million to over 14 million in just over 5 years, while mobile money
transfer services have led to over 15 million Kenyans being integrated into the financial
system. The regulated microfinance industry has also grown tremendously with the licensing
of six Deposit Taking Microfinance institutions with 57 branches, 1.5 million deposit accounts
valued at Ksh.9 billion and 0.53 million loan accounts with an outstanding loan portfolio of
Ksh.15 billion.
Despite these remarkable developments in the Kenyan financial sector, we are cognisant of
the fact that there still remains great need within the Kenyan market for appropriate and more
affordable financial services. Given that this situation is not unique to Kenya, but applies to
most, if not all, African nations represented in this Forum, it is imperative that improving
access to financial services remains key in our development agenda. We need to solve
costs, barriers to entry, physical distance and market concentration problems.
Ladies and Gentlemen, as we undertake to enhance access to financial services as
regulators and policy makers, we must ensure that financial services are provided a
competitive market environment. Let us learn from developments in the microfinance sectors
in parts of Bosnia and India, that recently experienced crises. The challenges in these
countries were instigated by issues such as multiple lending and client over-indebtedness,
aggressive competition, erosion of credit quality standards, a lack of transparency in pricing,
a weak credit information sharing framework and inadequate regulation. Beyond these
challenges, currently the broader issue of transparent and responsible pricing is becoming a
concern for the global microfinance industry. Price is an incentive.
Transparent and responsible pricing is essential for stimulating growth, efficiency and
effectiveness of the financial sector. It is indeed a key ingredient for incentivising innovation,
enhancing informed decision-making by consumers and fostering the development of
healthy, vibrant and competitive markets. Transparency in pricing is critical because
consumers have the right to know the exact price of products in the market. Conversely,
nontransparent (or opaque) pricing, prevents consumers from making informed decisions
about borrowing. This ultimately reduces the ability of financial institutions to compete
effectively, free market forces to operate properly and the financial sector to develop
efficiently and sustainably.
Policies to entrench relevant consumer protection measures, including transparency and
truth-in-lending regulations combined with the promotion of competition and efficiency among
credit providers, can go a long way toward expanding the reach of sustainable finance,
particularly credit, while safeguarding consumer interests. We, as policymakers and
regulators, therefore, have to take up the responsibility of stimulating competition in financial
institutions and promoting innovation aimed at improving efficiency and lowering prices. We
must, however, also endeavour to put in place consumer protection measures to ensure our
consumers are not exploited. Financial institutions, on the other hand, should seek to
maintain transparency regarding interest rates charged on the borrowers. Further they
should adopt new technology to increase productivity and efficiency in their operations to
reduce these rates.
It is imperative that concerted efforts be put into educating financial clients. When clients are
financially informed they are empowered to demand safe, cost-efficient and quality financial
services at fair prices. This makes it necessary for service providers to competitively innovate
products suitable for their customers' needs and pockets.
Ladies and Gentlemen: the push to enhance consumer protection is also entrenched in
Kenya's Vision 2030 strategy which aims at improving transparency and increasing
competition in the financial sector to benefit customers and the overall economy. The Kenyan
constitution also has specific provisions on consumer rights. In this regard, the Central Bank
has initiated a number of reforms and initiatives including the amendment of the Banking Act
and Prudential Guidelines, publication of information on charges and lending rates and the
conducting of a series of studies and surveys to foster competition in the banking sector and
develop a disclosure regime for consumer interest rates. To complement these efforts, the
Bank also actively participates in financial education campaigns to aid consumers in making
better and informed financial decisions. In particular, the Bank is a pivotal member of a public
private partnership whose aim is to champion the development of a national strategy for
Financial Education and Consumer Protection in Kenya.
Effective consumer protection and financial literacy, especially with regards to price
disclosure, are key in ensuring that lenders behave responsibly and ethically; and
consumers, especially the poor, gain the capacity to use this information to make informed
decisions about financial services in order to enhance their economic wellbeing. Ladies and
Gentlemen, the practice of price transparency ultimately contributes to the health and
vibrancy of our financial markets, and enhances the extension of access to, and use of,
appropriate financial products and services.
As I conclude, Ladies and Gentlemen, I express my confidence that this workshop will
present an invaluable platform for African leaders in the microfinance industry and financial
sector to share their experiences on pricing transparency in the various jurisdictions
represented here. It will also present us with an opportunity to acquaint ourselves with the
global best practices on the same. We should remember that PRICE is an incentive and can
be a disincentive - it has to be appropriate. With these few remarks, I now declare this
workshop officially open and take this opportunity to wish you fruitful deliberations.
Thank you