banking system remains the key plank to addressing the on - going and unfolding global financial crisis. this entails : first, enhanced capital requirements for banks, thereby reducing their vulnerability to sudden asset - price movements and ensure they have the resources to support any off - balance sheet exposures. we have also enhanced and are constantly monitoring commercial banks ’ liquidity positions, thereby reducing the chances of institutions being threatened by a reduction in financial market liquidity. this is made possible through improving the bank ’ s risk management capabilities, through better stress - testing of their market positions against possible adverse price movements. also to review the role of credit - rating agencies in the financial system. it is therefore gratifying to note in this regard that the recent passage of the finance act, 2008 has increased the minimum core capital for banks to kshs. one billion by the end of 2012. this measure we believe will strengthen the banking sector further and enable it withstand periodic local and global turbulences. we are currently engaging banks whose core capital is currently below kshs. 1 billion on their capital build up plans. secondly there is need to undertake reforms in the capital markets to restore investor trust and confidence. the reforms should also cover a reappraisal of the role and activities of investment banks which remain the weakest link in the financial sector and their regulatory structure in order to stem any downside risk to the banking system. the reforms will entail : - developing a comprehensive and enforceable regulatory framework and streamline the corporate governance in line with the international best practices and a thorough fit and proper vetting of directors and owners of these institutions. - re - assessing the use of the word “ bank ” by investment banks in kenya – there is potential to confuse the public with traditional banking. - increase capitalization requirements – capital adequacy, and institute risk management practices as well as improve disclosure requirements so financial market participants have better information. thirdly, the kenyan financial sector is regulated by various institutions, namely, the central bank of kenya, the capital markets authority, the insurance regulatory authority, and the retirement benefits authority. given the inter - dependence of financial markets, and contagion effects of risks emanating from any sector, there is need to begin thinking towards a financial services authority ( fsa ), which will coordinate financial sector - wide stability surveillance at the technical level. in addition, regional cooperation is critical in addressing financial risks arising from events outside our borders, and within the eastern africa region.

largely fuelled by an increase in loans and advances. • the total capital to total risk weighted assets ratio of the sector increased from 16. 7 % in november 2007 to 18. 1 % in november 2008. this ratio is an indicator of the capital adequacy of the sector. the minimum statutory ratio is 12 % and at slightly over 18 %, the sector has some cushioning to absorb losses. • the average liquidity of the sector which is the ratio of liquid assets to deposits and other short term liabilities stood at 37. 3 %. this was above the statutory minimum of 20 %. • the stock of non performing loans to gross loans decreased from 11. 4 % as at the end of november 2007 to 8. 4 % at the end of november 2008. the reduction is largely attributable to enhanced risk management practices by banks and npl recoveries. • the sectors profit before tax stood at kshs. 40. 2 billion for the eleven months ending november 2008. this is a 21 % increase from the kshs. 33. 2 bn registered over a similar period in 2007. the enhanced profitability was driven by interest income on loans and advances and foreign exchange dealing income. ladies and gentlemen : this performance notwithstanding, it is important to observe that the financial sector could be vulnerable to effects of the global financial crisis and economic recession, as individuals and firms are likely to struggle to repay debts, thereby resulting in a deterioration of the quality of loan portfolio, and profitability in the financial system. in particular, the central bank is cognisant that there may be a lag and perhaps second round effects of the crisis on the kenyan economy. we are therefore actively engaging banks to ensure that they have adequate capital buffers to withstand the current turbulences. we are also focusing on liquidity management strategies by banks to ensure that they can meet their obligations as and when they fall due. broadly speaking, there are three main areas of focus for kenyan monetary authorities to respond in dealing with the current global financial crisis, notably : ( a ) the need to continuously strengthen the regulation of the financial sector ; ( b ) a reappraisal of the role and activities in the capital markets and ( c ) the importance of strengthening coordination of regulatory authorities in kenya. in this regard, the following policy measures and actions are recommended to safeguard the confidence of credit markets and stability of the financial system in kenya. in the kenyan context, a highly enhanced regulatory and supervisory oversight of the