njuguna ndung ’ u : kenya ’ s ksh. 18. 5 billion infrastructure bond address by prof njuguna ndung ’ u, governor of the central bank of kenya, during the launch of the ksh 18. 5 billion infrastructure bond issue, nairobi, 28 january 2009. * 1. 0. * * background since 2001, the government pursued a deliberate policy action to restructure domestic debt, with a view to developing a vibrant bond market for generating long term finance. the success in lengthening the maturity profile of debt instrument has been phenomenon. several measures were instituted to facilitate development of a robust bond market ( a ) in 2003, the government lowered the cash ratio for commercial banks to release liquidity held with a view to reducing interest rates. ( b ) the government also streamlined its domestic borrowing cash plan in favour of bonds. as a result, the volume of treasury bonds rose from ksh. 80 billion in june 2001 to ksh. 318 billion by end december 2008. the proportion of long term debt to total domestic debt was reversed from 70 : 30 and now stands on average at 70 : 30. but what is needed now are bonds specific to projects of a developmental nature. infrastructure financing is one such target. the government organized the first ever infrastructure bond conference on october 27 - 28, 2008 at the kenya school of monetary studies. the ambition was to launch a series of infrastructural bonds to finance targeted projects and emulate other countries like : south africa, ghana, botswana, nigeria, malaysia, and singapore, among others have used capital markets to finance infrastructure projects. it is against this background that the government is launching this first infrastructure bond as a starting point. 2. 0. projects / sectors to be funded kenya aspires to be firmly interconnected through sophisticated network of roads, railways, ports, airports, and also provide water and sanitation facilities, and telecommunications as a key pillar of economic development in the vision 2030 blueprint. but the challenge is the huge capital outlay required, leading to the initiative we are starting today. this recognition of infrastructure provision has been recognized as an inhibition in competitive production due to heavy transaction costs. the targeted projects are well documented in the prospectus. we may in future allow a monitoring process for these projects to completion. 3. 0. the features of this infrastructure bond given the long term nature of the projects, the infrastructure bond will be of 12 years to maturity with face value of

. later, when the asian economies ran into problems, the capital flows reversed and serious financial turbulence broke out. a further way of achieving a high return was to take increased risks by debt financing and complex financial instruments. this created a starting point for so - called highly leveraged institutions. long term capital management was one extreme example. international banks engaged in lending directly to countries where the returns were high. at the same time, they lent capital to hedge funds that invested in the same countries. in some cases, moreover, the banks owned shares directly in these funds. there are grounds for saying that risk - taking was high in many cases. the good profits created a culture of deceptive security and stimulated further risk - taking. to this can be added the false sense of security that the new mathematical models imparted. they were seen to function well under normal circumstances but failed to do so when they were most needed, i. e. in turbulent times. domestic policies, institutions and rules, important factors behind crises … although several of these factors may have played some part in the run - up to recent financial crises, it is important to bear in mind that financial crises almost always originate in an unsuccessful domestic economic policy and in the structure and regulation of the domestic financial system. while modern international financial markets have possibly contributed to an earlier appearance of crises and to their spreading, a deregulated financial system with free capital movements as such is not the basic problem. it is striking that several countries most affected by financial turbulence in the 1990s were relatively new participants in the international financial system without having first established a sound domestic financial system and a sound economic policy. that conclusion also holds for my own country, sweden, which experienced a severe crisis in the early 1990s. one obvious insight is, and i quote fed chairman alan greenspan, “ that participation in the international financial system with all its benefits carries with it an obligation to maintain a level of stability and a set of strong and transparent institutions and rules if an economy is to participate safely and effectively in markets that have become highly sensitive to misallocation of capital and other policy errors ”. thus, emerging market economies must reform their domestic financial systems, just as we did in sweden after our crisis, if they want to enjoy the benefits of an open international financial system. accordingly, further progress in establishing a sound legal infrastructure, covering both bankruptcy procedures and effective corporate governance, would seem to be very high on the list of priorities. it is also important to understand