njuguna ndung ’ u : growing agriculture through finance remarks by prof njuguna ndung ’ u, governor of the central bank of kenya, at an interactive forum on “ growing agriculture through finance ”, at the kenya school of monetary studies, nairobi, 17 march 2010. * * * deputy prime minister & minister for finance, hon. uhuru kenyatta ; minister for agriculture, hon. william ruto ; us government representative – deputy chief of mission, mr. lee a brudvig ; ceos of commercial banks present ; resource persons ; distinguished participants ; ladies and gentlemen : it gives me great pleasure to be with you this morning, and to welcome you all as we deliberate and exchange views on this crucial matter of growing agriculture through finance. the agricultural sector is the livelihood of many in kenya. the sector contributes directly about 24 % of gdp, 65 % of the country ’ s export earnings and employs about 80 % of kenya ’ s labour force, directly and indirectly. but more important, food security is the most critical and cuts across all other developmental objectives. the policy paradigm that supports this sector is indeed the cornerstone of our development blueprint. it is tempting to say that financing agriculture will rely on the financial sector in totality. the subject is broader than this and this is what we want to generate via dialogue this morning. but what is not in doubt in financing agriculture is the presence of long - term funds as well as appropriate avenues to develop crop insurance. small - holder farmers have done well in increasing quality production and adoption of high yielding varieties, but have done poorly where they are not supported by cooperatives to market and create buffers for them. that is, they have been failed by lack of supporting agricultural infrastructure. a policy to support agricultural infrastructure should focus on : – financing production – crop insurance / crop finance – financing processing – investing in storage – investing in distribution and marketing networks – complemented with an appropriate credit policy. in this way, the farmer can participate in the market fully. this is what will ensure food security and stability of domestic prices – food is now accounting for 36 % of the consumer price index ( cpi ) basket – an important tool to fight national inflation. to that extent, increased agricultural productivity, particularly in food helps reduce food inflationary pressure that also feeds to the national inflation. in addition, gdp growth in this country is determined by growth in this sector. from the central bank side, our support in this initiative is important

assets, properties, shares, etc. a consistent monetary policy ensuring price stability will in fact also strike a reasonable balance of interests of these groups. however, monetary policy ultimately safeguards the interests of the most vulnerable households most affected by high inflation. currently, we can see that lending to individuals and businesses is ongoing. mortgage lending, our top priority, is growing at a record pace. lending rates throughout last year and in the first half of this year were influenced by the government ’ s subsidised mortgage programme. the government ’ s support for housing lending has by now become more targeted. it has to be targeted for us to avoid a situation where accelerated growth of property prices ( their growth in the primary market was accelerated precisely by the subsidised programmes ) will continue to reduce housing affordability for households. mortgage rates are slightly higher now than at the time of the subsidised programme, but their growth over the same period is still below inflation. this is due to the fact that long - term rates are primarily shaped by inflation rather than a current key rate. banks are aware that we will return inflation to target, which is exactly what they are guided by when formulating their interest rate policy. therefore, there is no contradiction between the affordability of mortgage loans and the tightening of monetary policy currently needed and that we are implementing. on the contrary, monetary tightening works to constrain the growth of mortgage rates. they have risen far less than inflation. unsecured consumer lending is rapidly expanding too. banks often lure people with belowinflation rates — which may seem like an excellent offer. the borrower thinks : i take a loan for repairs and buy all the construction materials today, or else tomorrow they will be more expensive ( indeed, prices have grown rapidly in this market ) so i will end up overpaying less than if i bought the materials later. this is a typical situation. the same logic works with regard to other goods. and borrowers end up getting ripped off by a loan rate with an additional loan agreement attached, or through tied products forced on them. we are fighting this practice. fines for misselling need to be raised. banks should calculate the full cost of credit in such a way as to make all hidden fees visible to borrowers. it is an absolute priority for us protecting individuals ’ rights in their interaction with financial providers. now that inflation is above target, our action may even be tougher than before. it is important that