Njuguna Ndung'u: Sustaining transformation and innovations
Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 3rd
ICPAK (Institute of Certified Public Accountants of Kenya) Financial Services Conference
"Sustaining transformation and innovations", Nairobi, 5 July 2011.
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Mr. Patrick Mtange, Chairman, Institute of Certified Public Accountants of Kenya;
Ms. Caroline Kigen, Chief Executive Officer, Institute of Certified Public Accountants
of Kenya;
Distinguished Guests;
Ladies and Gentlemen:
It gives me great pleasure to be here today to open this 3rd financial services conference. Let
me at the outset thank the Institute of Certified Public Accountants of Kenya for organizing
this forum and for extending an invitation to the Central Bank of Kenya.
Ladies and Gentlemen: The theme of this conference is "Sustaining Transformation and
Innovations". The choice of this theme is timely given the ongoing reforms in the Kenyan
financial sector.
Ladies and Gentlemen: Kenya's current development blueprint Vision 2030 envisages the
development and deepening of the financial sector. This will enable it to finance the
development agenda while ensuring financial inclusion. For this reason, ambitious targets
have been set of raising savings and investments to GDP ratio from 14% to over 30%. In
pursuit of this strategy, the Central Bank in collaboration with market players has initiated
several reforms geared towards creating an enabling environment and space for innovative
financial services. With these reforms, we anticipate the financial sector will be stable,
efficient and accessible. But also able to effect the necessary transformations. These
initiatives include:

Rollout of mobile phone financial services - The Central Bank has encouraged
the adoption of innovative technological platforms such as mobile phones to extend
the reach of financial services. Mobile financial services have in particular presented
Kenya with an opportunity to significantly upscale access to financial services cost
effectively. The Kenyan mobile financial services story has become a much
acclaimed global case study. To date, over 15 million Kenyans transfer about
Ksh.3 billion to each other daily with over one million transactions.

whose focus is the
Licensing Deposit Taking Microfinance Institutions (DTMs),
lower end of the market, which is concentrated in the rural and peri-urban areas.
The Microfinance Act, 2006 which empowers Central Bank to licence and supervise
DTMs, was operationalised in 2008. Formalizing the operations of DTMs is expected
to bring more people, especially those previously unbanked or underbanked, into
the realm of the formal sector not only through their lending activities but also
savings mobilization. This recognizes that in an economy with segmented markets,
different vehicles are required for particular segments of the economy or market. So
far 6 DTMs have been licensed with 1.35 million deposit accounts, 520,362 active
loan accounts and Ksh.9.4 billion in deposits.

Introduction of agent banking mechanism in May 2010 where banks were
allowed to engage third parties to provide certain banking services. The aim is
increased outreach of banks to the vast under-banked and unbanked Kenyan
populace by introducing "banking beyond branches". It also enables banks to
leverage on additional cost effective distribution channels to offer financial services.
We have seen agency banking take banking to the people unlike previously when
people had to go to the banks. So far 6,368 agents have been approved and are
delivering financial services to Kenyans.

Licensing credit reference bureaus to collect, collate, analyze and disseminate
credit information among credit providers. Credit information sharing provides credit
history (information capital) as an alternative form of collateral to the traditional
physical collateral, to secure credit facilities from banks. Individuals will also be able
to use their positive credit history to negotiate for better terms and conditions from
their banks. On the other hand, banks will benefit from the mechanism since it will
address the problem of information asymmetry that was used to raise a risk
premium on loans and by extension the problem of non-performing loans which has
in the past threatened the stability of the banking sector. The traditional problems of
moral hazard and adverse selection that hinder financial sector growth have been
minimized.
Ladies and Gentlemen: These innovations have seen our financial sector experience
transformation as evidenced by the following outcomes:

Exponential growth of bank branches from 740 in 2007 to 1,072 in April 2011.

Increase in the number of loan accounts from 1.2 million in 2007 to 2.1 million in
May 2011. The loan portfolio in the same period has increased from
Ksh.533.8 billion in 2007 to Ksh.1.05 trillion in May 2011.

Increase in the number of deposit accounts from 4.7 million in 2007 to 14 million in
April 2011. Deposit values have grown from Ksh.709.8 billion in 2007 to
Ksh.1.4 trillion in May 2011.

Increase in the automated teller machines (ATMs) from 1,012 in 2007 to 2,153 as at
31st March 2011.
Micro savings accounts operated through mobile phones have increased to over
700,000 with a deposit level of Ksh.737 million.
Ladies and Gentlemen: The structural transformation of Kenya's financial sector has not
been achieved without challenges. Key among these challenges is the need to balance the
goals of financial efficiency, stability and integrity on one side with financial inclusion on the
other. The role of the regulator in an economy like ours is also to develop the market and
balance out these challenges. The regulator should, and especially after the global financial
crisis, not look for avenues of more regulation but support transformation and innovation
through better regulation. What is better regulation? From Sir Andrew Crockett, it is a
regulatory regime that:

Can readily identify weaknesses and emerging vulnerabilities.

Is capable of analyzing risks and so adequately pricing risks.

Provides appropriate incentives (penalties) to induce prudent behavior in the market
place.
This will encourage innovations and strong institutions to develop in the economy.
Ladies and Gentlemen: The structural transformation experienced thus far is just but the
beginning. The Central Bank and other players have earmarked several other reforms which
are expected to take development of the financial sector to new frontiers. In addition, the
Central Bank has embraced financial education as a critical component of its financial
inclusion strategy. The consumers will then be equipped with knowledge to make informed
financial decisions and to analyze alternatives.
In the same token, Ladies and Gentlemen, as efforts progress towards a more developed
financial sector, there is need to ensure existence of adequate disclosure of information by
providers of financial services, efficient dispute resolution mechanisms, comparability of
offers and data protection. As financial institutions embrace innovations, there is need to
ensure that innovations have adequate consumer protection legislation. It is therefore
encouraging to note that the constitution promulgated last year makes provisions for
consumer protection. The constitution creates adequate space to build strong institutions to
implement these provisions which will define appropriate incentives and rules of the game to
encourage prudent behavior in the market.
Finally, Ladies and Gentlemen: While discharging your duties as accountants, auditors and
advisers of financial institutions, you play a critical complementary role to the Central Bank in
ensuring that such innovations are supported by sound internal controls of these institutions
not to undermine safety and efficiency of the financial system, but at the same time provide
enough room for innovation and development. Therefore, the Bank appreciates your role in
supporting the banking sector reforms. But now, we also require your support on new ideas
to introduce innovations in the financial markets to support and sustain its transformation as
the theme of this conference ambitiously shows.
It is now my honor and privilege to declare this conference officially
Ladies and Gentlemen:
open and to wish you fruitful deliberations.
Thank you