Njuguna Ndung'u: Strengthening regulatory frameworks in the finance
industry - a key enabler for private sector development
Keynote speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the
1st Annual Africa Banking and Finance Conference, Nairobi, 21 February 2011.
* * *
Distinguished Speakers,
Distinguished Guests,
Ladies and Gentlemen:
It gives me great pleasure to be here today at this inaugural African Banking and Finance
Conference. This is an appropriate forum for the financial sector in Africa to reflect on
pertinent developments affecting the sector globally and share experiences. But more
importantly dwell on solutions to structural constraints that hinder its' development.
To start with, let me extend my profound appreciation to the organisers for putting together
this forum, and to all participants for the honour of your presence. I take this opportunity to
welcome all those visiting Kenya for this Conference, and wish you all a delightful stay during
and after the conference.
Ladies and Gentlemen: My task this morning is to share with you some thoughts on
strengthening regulatory frameworks in the financial sector as a key enabler to private sector
development. The Financial Sector supports the development of the country through:

Resource mobilization and their allocation.
 Collating savings from savers and delivering them to investors.

The intermediation process.
The traditional regulatory environment delivered the appropriate structures for the financial
sector. But it was tried during the global financial crisis.
The global financial crisis brought out some very important lessons. We should not think of
more regulation but better regulation. What does better regulation entail?

A regulatory regime that can readily identify weaknesses and emerging
vulnerabilities.

A regulatory regime capable of analyzing risks and so adequately pricing risks.

A regulatory regime that provides appropriate incentives (penalties) to induce
prudent behavior in the market place.

A regulatory regime that encourages innovations and strong institutions to develop.
Where the regulator has the role to develop the market in the African countries we
live in.
The efficiency through which these roles are performed depends very much on the sector
and the regulatory technology in place.
The theme of this forum "Achieving Innovative Solutions Relevant
Ladies and Gentlemen:
for Africa's Banking & Finance Industry - Key Issues" is timely and weighty because it is only
through innovative solutions that African economies can move to the next level of
development frontiers. It is therefore my expectation that the diversity of the participants in
this forum will enable you to identify the various relevant innovations in the financial sector
that are consistent with the African Landscape and to drive development in the sector.
Allow me now to briefly share with you Kenya's experience on
Ladies and Gentlemen:
innovations in the banking sector. In pursuit of the financial sector's vision in the Kenya's
development blueprint, Vision 2030, CBK and the players have embraced a partnership
approach. Consequently, several initiatives have been undertaken over the last 4 years
aimed at the three envisaged goals of stability, efficiency and financial inclusion. These
initiatives include:-

Rollout of mobile phone financial services - Approval for banks to leverage on
mobile phone technology to present convenience and lower costs for their
customers without compromising quality of service. Through mobile banking,
customers are now able to perform their transactions "anytime anywhere". Mobile
money transfer has evolved from the initial concept of transferring money from one
individual to another to include other functions such as payment of utility bills, loans,
salaries and for deposits mobilization.

Introduction of agent banking mechanism in May 2010 where banks are 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. Agency
banking takes banking to the people unlike previously when people had to go to the
banks.

Licensing of credit reference bureaus to collect, collate, analyse and disseminate
credit information among credit providers. Credit information sharing provides an
opportunity for individuals and businesses to rely on their 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 and by extension the problem of non-performing loans
which has in the past threatened the stability of the banking sector. The traditional
challenges of the moral hazard and adverse selections can hinder financial sector
growth.

Licensing of deposit taking microfinance institutions (DTMs), whose focus is
the lower end of the market, which is concentrated in the rural and periurban areas.
The Microfinance Act, 2006, which empowers CBK 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 under banked, into the
realm of the formal financial sector not only through their lending activities but also
savings mobilization.
 Several modalities including establishment
Lowering the cost of doing business:
of three currency centers in towns outside the key Kenyan cities to lower cash in
transit costs for banks. CBK is also actively pursuing modalities of reducing the cost
of establishing branch networks for Deposit Taking Microfinance Institutions, in
addition to agency mechanism.
Ladies and Gentlemen: As a result of CBK's adoption of a new approach to regulating the
financial sector through dialogue with the players and acting as a development agent, the
Kenyan financial sector has experienced a structural transformation. This transformation is
evidenced by the following achievements:

Exponential growth of bank branches from 740 in 2007 to 1,063 as at end of 2010.

Increase in the number of deposit accounts from 4.7 million in 2007 to 12.8 million
as at end of 2010.
 Increase in the number of loan accounts from 1.2 million in 2007 to 1.8 million as at
2010.

Licensing of five deposit taking microfinance institutions with 41 branches as at
31st December 2010, which had opened 1.01 million deposit accounts with deposits
worth Kshs. 7.90 billion(USD 99m).

Increase in the automated teller machines from 1,012 in 2007 to 1,940 as at 31st
December 2010.

Banks contracting 8,809 agents by December 2010.

Mobile money transfers increased their total transactions to Kshs. 2.3 bn or
USD 29 m per day. Well over 15 million Kenyans have subscribed to mobile money
transfers since their roll out in 2007. This is expected to increase especially with the
confidence to be generated by the draft E-Money Regulations recently issued by
CBK.

Mobile phone financial services have generated micro-savings accounts (MKESHO)
to the tune of over 700,000 accounts with Kshs. 678m in deposits.
The structural transformation of Kenya's financial sector has not
Ladies and Gentlemen:
been achieved on a silver platter. There has always been the task of surmounting prevalent
challenges. Key among these is the need to balance the goals of financial efficiency, stability
and integrity on one side with financial inclusion on the other. The pursuit of these goals
requires delicate balancing given their importance. However, as already alluded, balancing of
these goals is made easier when regulators embrace their new role of being a market
developer in addition to their traditional regulatory role. A developing financial sector
increases efficiency and the regulator ensures stability.
Ladies and Gentlemen: The structural transformation experienced thus far is just but the
beginning. CBK and other players have earmarked several other reforms which are expected
to take the development of the financial sector to new frontiers. CBK has embraced financial
education as a critical component of its financial inclusion strategy. When consumers are
financially literate, they are able to make informed financial decisions. In this regard, CBK
and all the other financial sector regulators are members of the Financial Education and
Consumer Protection Partnership (FEP), a private-public partnership, spearheaded by the
Financial Sector Deepening Trust Kenya with an aim of developing a National Strategy for
Financial Education in Kenya.
On 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 regulators embrace innovations in their jurisdictions,
there is need to ensure that the innovations have adequate consumer protection safeguards.
Kenya's new constitution promulgated in August 2010 entrenches consumer protection in the
Bill of Rights and mandates Parliament to enact consumer protection legislation. But in
addition the constitution allows for strong institutions and protects them. Strong institutions
define appropriate incentives and the rules of the game to encourage prudent behavior. This
is good for the financial market to allow defined entry and orderly exit from this important
market.
Ladies and Gentlemen: As I conclude, let me reiterate that innovative solutions for
strengthened regulatory framework for a financial sector lie with the players. The regulators,
the regulated and market participants should think outside the box. They exist for each other
and it is only through their acceptance to promote, advise and partner that a smarter
regulatory framework is put in place that enables the private sector to prosper.
With these remarks, Ladies and Gentlemen, I take this opportunity to wish you fruitful
deliberations while I look forward to receiving the forum's report in due course for us to
consider the relevant innovative solutions tailored to our circumstances.
Thank you.