arisen in the context of the global crisis, executive pay and compensation practices in the financial sector have perhaps invoked the maximum public outrage. there has been wide spread criticism that incentives and pay packages were set inappropriately, encouraged irresponsible risk taking, were inconsistent with the firm ’ s capital bases and focused on short - term profit maximization. compensation for senior executives has been perceived to be excessive with little correlation to the long term performance of the institutions concerned. particularly glaring was the multi - million dollar payments and bonuses to the executives of failed firms which had received public funding. it is now widely acknowledged that the flawed incentives framework underlying banks ’ compensation structures in the advanced countries fuelled the crisis. banks entered the crisis with inadequate capital. the basel requirement of common equity was as low as 2 % of risk - weighted assets ( rwas ). banks did not calculate the risk - based capital properly. the basel capital rules favoured lower capital for the trading book and higher capital for the banking book. banks exploited this loophole and parked banking book assets in the trading book, indulging in capital arbitrage. similarly, capital requirement for mortgage loans was higher than capital requirement for mortgaged backed securities ( mbs ). this encouraged banks to securitize their mortgage loans through a special investment vehicle ( siv ) set up by them. banks offered liquidity supports to their own sivs which securitized the mortgage loans and enhanced the credit rating of such instruments. enhanced ratings require less capital. banks invested in such products requiring less capital. thus, there was an “ incestuous ” relation in keeping banking book assets in trading book, for which liquidity support was given by the bank to enhance its rating and reduce capital requirement. the growth of “ shadow banking ” system in the run up to the crisis was unprecedented. one estimate suggests that the size of shadow banking system was almost three times the formal banking system. this coupled with their dependence on the wholesale funding market compounded the crisis. supported by unprecedented innovation and engineering, the financial sector became too big in relation to the real economy, but the regulatory and supervisory system was found wanting. the regulators and supervisors did not look at system - wide build up of risk. they reposed faith in free markets and believed in self - correction of market excesses. but that did bis central bankers ’ speeches not happen. “ leaning against the wind ” was considered inappropriate. the credit rating agencies also did not perform their role as en

patrick njoroge : entrepreneurial initiatives in kenya speech by dr patrick njoroge, governor of the central bank of kenya, at the 4th annual citi micro - entrepreneurship awards ( cma ), nairobi, 27 october 2015. * * * i am delighted to join you today for this important celebration, the 4th annual citi microentrepreneurship awards ( cma ). i would like to thank the organisers of the awards ceremony, citibank n. a. kenya, and the association of microfinance institutions ( amfi ), for providing an appropriate platform to celebrate extraordinary entrepreneurs in kenya. i also take this opportunity to appreciate all award nominees and participants of this event. you are all winners as the efforts you individually and collectively make in providing services to your fellow citizens are hallmarks of outstanding service. i commend citibank for the concept of the cma awards, and for consistency in hosting them. the objectives of the awards are noteworthy – not just celebrating innovative contributions of micro - entrepreneurs in kenya, but also showcasing the effective role that microfinance plays in supporting poverty alleviation, social empowerment and economic development within the broader context of financial inclusion. financial inclusion continues to play a critical role in the global development agenda given that over half of the world adult population does not have access to basic financial services, and is essential for developing strong financial institutions, reducing poverty, and financing broader economic development. in fact, there is ample evidence that financial inclusion is key in reducing the economic vulnerability of households, promoting economic growth, alleviating poverty and improving the quality of peoples ’ lives. the extraordinary narratives shared today confirm this. i am privileged to have heard the wonderful success stories of transformative growth and development that are being feted today. with regard to micro - small - and medium - sized enterprises ( msme ’ s ), there is a direct correlation between msme development and financial inclusion efforts. msmes represent over 90 percent of private business and contribute more than 50 percent of employment and of gdp in most african countries 1. nevertheless, msmes face several challenges, including access to finance, which is often considered the most significant constraint for this sector. for instance, the world bank enterprise surveys indicate that 41 percent of smes in low income countries report that access to finance is a major constraint to their growth and development, compared with 30 percent in middle - income countries, and only 15 percent in high - income countries. 2 these