hezron o nyangito : impact of the global financial crisis on the kenyan banking system keynote address by dr hezron o nyangito, cbs, deputy governor of the central bank of kenya, at the kenya institute of bankers, eldoret, 16 january 2009. * * * mr stephen anjichi, executive director, kenya institute of bankers ; mr ben kamau, honorary chairman, kenya institute of bankers, eldoret chapter ; committee members of the kib eldoret chapter present ; distinguished guests ; ladies and gentlemen : i am honoured to be here this evening to join you on the occasion of the kenya institute of bankers ( kib ) eldoret chapter annual dinner. i take this early opportunity to sincerely thank the chairman and committee of the chapter for the invitation. at the central bank we welcome opportunities such as this one that enable us to exchange views on topical issues with industry practioners. given also that the year is still young, it is appropriate for me to wish you all a fruitful and prosperous 2009. mr. chairman : the topic that i was requested to speak on, “ the impact of the global financial crisis on the kenyan banking system ” is indeed topical and has engaged policymakers across the world since 2007. i will therefore first explore the genesis of the global financial crisis, then review its potential impact on kenya from a macro perspective and conclude by analysing its impact on the kenyan banking system. ladies and gentlemen : 2008 was indeed a historic year. aside from the domestic / political problems experienced during the first quarter of the year, the financial disruptions triggered by the us subprime mortgage market precipitated a global financial crisis, which has simultaneously affected all the major world economies including the united states of america, the european union, japan and china. by end of 2008 all these economies were in a recession. as you are already aware, the current financial crisis can be traced to a decade of low interest rates in the united states of america during the 1990s, which in turn spurred liberal lending practices by commercial banks to clients that had no ability to repay loans ( the so called sub - prime clients ), thereby compromising the quality of loans held by financial institutions. the widespread nature of lending to the sub - prime market, in turn, promoted a boom in the property market. however, as the us experienced an economic slowdown and rising interest rates during the past two years, sub - prime mortgage defaults began soaring

the financial system and the banking sector in particular. although household debt, as a percentage of disposable income, has been improving consistently since reaching a peak in the first quarter of 2009 and the ability of households to service their debt has remained strong given an extended period of low interest rates, the household sector is now faced by a rising interest rate cycle and higher cost of living. household wealth has increased strongly, however this was mainly as a result of a significant increase in the valuations of financial assets, possibly leaving consumers in a financially vulnerable position. house prices in south africa are fairly valued at present and do not present any risks to financial stability. equity market valuations, on the other hand, are currently at fairly elevated levels and a sudden and sharp correction in equity markets could reveal vulnerabilities that could have certain indirect negative effects on the financial system. south africa has been participating in the fsb ’ s monitoring exercise of non - bank financial intermediation activities, or shadow banking as it is commonly known, since 2012. although their share of total financial assets increased to about 18 per cent in the fourth quarter of 2013, non - bank financial intermediaries currently provide only about 11 per cent of total credit extension in the south african financial system. the optimistic outlook for some advanced economies continues to diverge from the more subdued growth outlook for emes amid persistent concerns over country - specific weaknesses. while leading indicators are pointing to the global recovery gaining strength in the second half of 2014, some constraints from both the fiscal and the monetary sides, as well as slow progress with structural reforms in some instances, remain a risk to a sustainable global recovery. a prominent exogenous risk to domestic financial stability is the effect that monetary policy normalisation in advanced economies and the us in particular could have on emes, including south africa. although normalisation has been discounted to an extent and forward guidance allows markets to anticipate policy moves better, the timing and magnitude of interest rate increases and their effects on capital flows and financial markets remain uncertain. another important global development, not reported on in the fsr, is the results of the european central bank ’ s comprehensive assessment of bank balance sheets and stress testing announced recently. twenty five banks failed the assessment and need to raise bis central bankers ’ speeches €25 billion of new capital. twelve banks have already covered their shortfalls in the year to september. the ecb expects the in - depth review of the largest banks to boost public confidence