Njuguna Ndung'u: Financial stability and financial inclusion
Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the
5th Joint CMA/CBK/RBA/IRA Board Members retreat on collaboration among domestic
financial sector regulators, Mombasa, 13 October 2011.
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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 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
mobilebased 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 pre-requisite 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 peri-urban areas. The licensed
DTMs had 57 branches, 1.5 million deposit accounts valued at Ksh.9 billion (USD90
million) and 0.53 million loan 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
unbanked 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.
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 Sub-Saharan 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.