Patrick Njoroge: Kenya's experience and prospects in banking and
economic infrastructure development
Opening remarks by Dr Patrick Njoroge, Governor of the Central Bank of Kenya, at the
4th KBA (Kenya Bankers Association) Annual Banking Research Conference, Nairobi,
24 September 2015.
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Good morning! I am very pleased to be here at this opening of the 4th KBA Annual Banking
Research Conference. I am grateful to KBA for inviting me to this important forum and
appreciate the presence of all the participants.
This Conference's theme, Kenya's Experience and Prospects in Banking and Economic
Infrastructure Development is indeed relevant to our current context. This is because most
of the countries across Africa and the world are experiencing huge infrastructure gaps, and
Governments are grappling with the challenges of coming up with innovative solutions to
financing these investments. The importance of reliable infrastructure in raising the
economy's growth potential cannot be overemphasized. In most Sub-Saharan African
countries, the infrastructure deficit is in critical sectors such as energy, transportation, health,
water, sewerage, and telecommunications, and is a significant drawback to the continent's
economic performance.
Vision 2030, Kenya's development blueprint, gives prominence to infrastructure development
as a key driver of long-term growth. In recognition of the important role the private sector can
play, the Government is committed to creating an enabling environment to facilitate private
participation. With support from the World Bank, the Government initiated the Infrastructure
Finance and Public Private Partnership (IFPPP) Project and has put in place a supportive
legal and regulatory framework through the PPP Act, 2013 and the related Regulations,
giving private participation a central role in the Government's long-term development
strategy.
The complementary roles of the Government and private sector in infrastructure funding
were most recently highlighted at the UN's 3rd International Conference on Financing for
Development, held in July 2015 in Addis Ababa, Ethiopia. At this summit, participants
reiterated the vital roles both Governments and the private sector can play in infrastructure
delivery, sustainable development and poverty eradication. Involving the private sector, not
only eases the fiscal and administrative burden on Governments but also enhances
efficiency in the delivery of key public services. In this regard, Public-Private Partnerships
(PPPs) are an increasingly popular mechanism by which the private sector has been brought
in. PPPs are therefore among the options that have been sought by Governments to address
this funding challenge.
It is clear that there is interest in PPP projects in Kenya. As of July 2015, the National
Treasury had approved 71 projects in transport, energy, education, water, health, agriculture
and the hospitality sectors. Whereas many of these projects are still at the negotiation and
feasibility stage, a number have reached financial closure, with several banks participating
through syndicated lending. The 71 PPP projects so far identified present a pipeline of
investable opportunities for the Kenyan financial sector.
In addition, the Government's efforts in recent years to tap into other sources of infrastructure
finance, include:
• Direct borrowing from foreign governments and multilateral lenders such as the
African Development Bank (AfDB) to fund specific projects.
• Issuance of tax-free infrastructure bonds targeting investors to finance capital
projects.
• Issuance of a USD 2 billion sovereign bond (Eurobond) in 2014 to raise
development funds from the international market.
As of June 2015, the Government had raised approximately Ksh.250 billion through
infrastructure bonds, which have drawn both domestic and international participation. In a bid
to widen potential sources of funding even further, the Government is also considering Sukuk
and Samurai bonds as options for further sovereign bond issuance. These will further widen
investor participation and deepen the market.
There is clearly a case for participation in PPPs by banks and other private financial
institutions. However, there are a number of challenges that could arise from such
participation, which I would like to highlight for your consideration in this forum.
First, many infrastructure investments are long-term in nature, generating cash-flows many
years after project inception. However, the maturity of most bank deposits is short-term.
There is therefore a need for banks to manage this intermediation, taking a more long-term
view about the economy, which we flag as the single most-important constraint. Additionally,
alternate sources of longer-term funding could be sought. I am happy to note that banks in
Kenya have started to explore solutions such as collaboration with multilateral lenders and
development finance institutions to obtain long-term funding for infrastructure projects.
Secondly, given the huge scale and long duration of many infrastructure projects, lenders are
likely to find themselves exposed to significant credit, liquidity and political risks. It is
therefore vital that all project proposals be thoroughly and reliably assessed for their
economic, financial and technical viability before loans are disbursed. More importantly for
banks, projects should have a clear and equitable contractual structure that optimally
allocates project risks among participants. Such risks should be well-mitigated at the outset
to make projects bankable.
Thirdly, participation in infrastructure projects by banks would also be constrained by legal
and prudential limits on the proportion of banks' lending as a share of their core capital.
Given the considerable financial outlays involved in infrastructure projects, commercial banks
would need to enhance their capital base to participate in PPPs while remaining compliant
with regulatory requirements.
Finally, given the increased investments in infrastructure and the environmental implications,
I do hope that the studies lined up for discussion in this conference will give consideration to
the green economy (green growth) aspects. This proactive discussion by the Kenyan
banking industry will no doubt contribute towards adopting sustainable finance principles as
per the commitments of the Addis Ababa Financing for Development Summit earlier
mentioned.
In view of the large size, huge cost and complexity of infrastructure projects, I would urge
banks and other financial institutions to build the requisite legal and technical capacities to
evaluate the value for money of PPPs relative to traditional asset classes. This will assist in
identifying the potential risks and the risk mitigation to be put in place in advance before the
commitments are undertaken.
I take that the engagement you will have for the next two days will be an on-going
conversation and the research work arising from this conference's theme will inform future
research in the area. I am optimistic that the banking industry will continue to play an
important role in supporting the various sectors of the economy and in particular, the
challenge to address the nation's infrastructure gap. The Central Bank is committed to
creating an enabling regulatory environment that facilitates the banking sector to effectively
execute its intermediation function.
With those remarks, it is my honour to declare the 4th KBA Annual Banking Research
Conference officially open. I wish you fruitful deliberations.
Thank you.