njuguna ndung ’ u : implementation of basel ii, risk management framework within banks and the prevention of financial crime address by prof njuguna ndung ’ u, governor of the central bank of kenya, at the opening of the 7th east african banking school, nairobi, 20 august 2007. * * * the chairperson, kenya institute of bankers ; representatives of financial institutions ; distinguished participants ; distinguished guests ; ladies and gentlemen ; it gives me great pleasure to be with you today and to address the participants at the 7th east african banking school. before i make some remarks, let me take this opportunity to thank the organisers of this workshop and the facilitators for inviting me to preside over the opening of this important workshop and to give a keynote address. on behalf of the central bank of kenya, and on my own behalf, please allow me to warmly welcome each and every one of you to nairobi, kenya. ladies and gentlemen, the financial sector is growing in dynamism and complexity to become very competitive. these developments require highly trained expertise and substantial resources to support such capacity building. the banking sector and our respective central banks must therefore invest heavily in capacity building. i would appeal to banks from partner states to continue supporting their respective institutes of bankers with adequate resources to enable them offer more courses that meet the growing demand in training. in kenya, we are pleased with the efforts the kenya institute of bankers ( kib ) is making to meet the growing demands of the financial sector in professional training. the central bank of kenya has continued to complement kib ’ s efforts in these endeavours through the kenya school of monetary studies. ladies and gentlemen, it is worth noting that the theme, “ banking in a globalised and complex environment ”, is very appropriate in this era of globalisation of banking business. however, before delving into this topic allow me, ladies and gentlemen, to recognise the important role kib has been playing in capacity building in kenya. currently, kib has 40 banks out of 42 banks as corporate members. i have also been informed that kib has approximately 7, 000 individual members, with 2, 300 actively pursuing courses leading to professional examinations. successful candidates at the lower level examination are offered a certificate in banking & financial services, whereas at a higher level, a diploma in banking and financial services is offered by the institute. therefore, kib provides examinations that enable successful candidates to be professionally qualified bankers. this underlines the significant contribution that

. towards this end, the central bank conducted a survey in 2004 that indicated gaps in risk management practices in kenyan banks. this led to the issuance of risk management guidelines by the central bank to guide banks in the development of risk management frameworks. the central bank, since may 2006, has been reviewing the risk management frameworks of all institutions. these frameworks will form the basis of future “ supervisory relationships ” between the central bank and each institution. more fundamentally, the risk based supervision approach will inculcate the requisite “ risk management culture ” in banks before basel ii implementation can be considered. the central bank recognises that the structure of banking institutions is increasingly evolving and becoming more complex due to business linkages with the non - bank financial associates, affiliates and subsidiaries. these linkages obviously affect the soundness of the banks in the conglomerate group. the central bank supervisory approach has traditionally viewed banks as “ stand - alone ” entities. in response to this, the central bank is developing a consolidated supervision framework, which will address the risks arising from the activities of the conglomerate. ladies and gentlemen, to achieve all these, the central bank has proposed comprehensive amendments to the banking act with a view to bringing it in line with international best practices and to meet the dynamic needs of the banking industry. in particular, some of the objectives of the review exercise include : • enhancing the independence of the central bank ; • expanding the “ permissible activities ” of banking institutions ; • introducing consolidated supervision ; and • establishing provisions for prompt corrective action. a robust legal and regulatory framework for the banking sector in kenya is part of the reform package that is intended to ensure a suitable environment for safe and sound banking. ladies and gentlemen, before i conclude, please allow me to pose a few challenges for the regional institutes of bankers. first, as you are well aware, microfinance is the provision of financial services to low income people and enterprises. the microfinance industry in our region has experienced major transformations over the past twenty years, growing from a fledgling concern dominated by a few donor and church - based ngos to a vibrant industry increasingly driven by commercial viability and sustainability. we challenge the institutes to tailor a curriculum that meets the requirements of this sector, which plays an important part in the financial market. second, regional central banks are currently enhancing their technical capacity to handle the challenges posed by the implementation of basel ii. basel ii implementation requires various skills like it experts, legal expertise, actuaries and banking