Njuguna Ndung'u: Kenya - successes, challenges and future path
Keynote speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the
Kenya Institute of Bankers' (KIB) Annual Dinner, Nairobi, 25 November 2011.
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The Chairperson, Board of Directors, KIB;
Members of the KIB Council Here Present;
The Chief Executive, Management and Staff, KIB;
Chief Executive Officers of banks and financial institutions;
Distinguished Guests;
Ladies and Gentlemen:
I am pleased and honoured to join you this evening. I therefore take this early opportunity to
thank the Kenya Institute of Bankers (KIB) for inviting me to speak at this 2011 Annual
Dinner. This is a valuable opportunity to celebrate our successes, reflect on the challenges
during the year and chart our future path.
Ladies and Gentlemen: In many ways 2011 has been a challenging year given the global
and domestic shocks hitting the economy. The characteristic supply shocks - like fuel prices -
have affected negatively both domestic prices and output.
Despite the shocks, the economy has remained resilient and is expected to register a modest
growth of 5% in 2011 compared with 4.6% in 2010. Having endured the shocks buffeting the
economy, the Central Bank has focused its policy response on containing inflation and
stabilizing the exchange rate. The Central Bank tightened monetary policy by raising
gradually both the CBR and CRR to 16.5% and 5.25%, respectively. We have started to see
these measures bearing fruit: there are signs of easing in domestic demand pressures while
the exchange rate is stabilizing.
Ladies and Gentlemen: Even with the shocks hitting the economy and the policy responses
putting us on a tight rope, the banking industry performance in the first three quarters
surpassed expectations. Let me highlight some of these performance indicators;
 The industry's deposit base grew by an impressive 21% as at end October 2011
compared to October last year. Deposit mobilization efforts were boosted by the
new delivery channels introduced in the year, including the adoption of agency
banking that has taken root with more than 8,700 agents spread across the country.
 Branches of banks also continued to grow and by September 2011, bank branches
stood at 1,113. The banking sector now has a presence in each of Kenya's
47 counties, which provides banks with a vantage position to contribute to the
development agenda of the nascent Counties.
 The asset base hit the KSh.2 trillion mark in September 2011. This is mainly
attributed to the banks continued expansion of their lending portfolio through
introduction of loan products that suit the needs of different market niches. The
gross loans stood at KSh.1.2 trillion as at October 2011, a 35% increase from
October 2010.
Ladies and Gentlemen: The policy response to shocks has its pitfalls. Right now, the
concern is on interest rates and fear of non-performing loans rising. Some commercial banks
in November 2011 have revised their base rates to as high as 25%.
There is growing public concern on the rising lending rates and the wide interest rate spread.
Banks will, therefore, need to read the public mood and keep any increases to a minimum to
take into account the difficult circumstances that borrowers are facing.
We recognise that pricing of credit risk by banks had proved a major challenge in the past;
however, the introduction of credit information sharing in 2010 has minimized this challenge.
So far, over one million credit reports have been requested by banks and about 4000 by
bank customers. In this regard, the Central Bank has spearheaded reforms aimed at
lowering the cost of doing business. These include introduction of credit information sharing,
roll-out of agency banking and setting up of Currency Centres. Banks should therefore pass
on the cost savings from these initiatives to customers as you review lending rates.
On the National Payment Systems front, the retail payments system continued to evolve in
line with the payments system reform and modernization strategy. In particular, the Central
Bank in conjunction with the Kenya Bankers Association successfully implemented the
Cheque Truncation System that will eliminate the hitherto manual cheque clearing by
automating the entire clearing cycle. The benefits accruing from improvement in the national
payment system should be passed on to your customers.
I am glad to inform you that on 23rd November 2011, Parliament finally passed the National
Payments System Bill, 2011. The Bill seeks to provide for the regulation and supervision of
Payment Systems and Payment Service Providers. In particular, the Bill will enables Kenya's
payment system to comply with the Bank for International Settlement Core Principles and
give Central Bank enhanced legal and regulatory powers over the payment systems.
Ladies and Gentlemen: Looking into the future, the economic outlook for the next
12 months is positive given the current short rains that have improved the food situation in
the country; the Governments' concerted efforts in implementing Vision 2030 flag ship
projects and the current coordinated policy measures including monetary-fiscal policies
aimed at maintaining macroeconomic stability while boosting broad based growth.
On the financial sector front, the Central Bank in conjunction with the Government will scale
up reforms to enhance the sector's competitiveness, efficiency, access and stability as well
as making Kenya a financial hub in the medium term. The banking sector is also expected to
continue with its' excellent performance underpinned by regional expansion and lowered cost
of business as the various reforms take root.
Looking ahead for Monetary Policy, the priority is to reverse inflation and inflationary
expectations and exchange rate volatility to protect the economic growth base. Tight
monetary policy will be sustained until inflationary pressures have been reversed and the
foreign exchange market stabilized. From a historical perspective, we have seen the same
measures work and we still have confidence it will work in 2012. The Bank will also continue
with regular interactions with key stakeholders including market players to enhance the
effectiveness of the transmission mechanism of monetary policy and other policy strategy
actions.
In closing, Ladies and Gentlemen, let me thank you all for the support and cooperation in
developing the financial sector. I look forward to more fruitful collaboration and partnership
going forward and in addressing any challenges facing the sector. Lastly, let me end by
wishing you all a happy holiday season and fruitful 2012.
THANK YOU.