njuguna ndung ’ u : achievements, challenges and reform initiatives for the banking sector in kenya keynote address by professor njuguna ndung ’ u, governor of the central bank of kenya, at the kenya institute of bankers ’ annual dinner, nairobi, 20 november 2009. * * * chairman, kenya institute of bankers ; distinguished members of the council here present ; distinguished guests ; ladies and gentlemen : 1. i am pleased to join members of the banking fraternity for the kenya institute of bankers ( kib ) annual dinner. this event has over the years become the premier event for kenyan bankers to toast to their successes, ponder on the challenges in the year and more importantly reflect on opportunities in the coming year. i must therefore salute the chairman and council of the kenya institute of bankers for consistently organizing this forum over the years. i am honoured to be the one to deliver the keynote address at this important dinner. i will keep my remarks brief, as i do not want to stand between you and the festivities that follow tonight. 2. the year has been a challenging one not just for the banking sector but also for the economy at large. the global financial crisis that escalated in 2008 drove down our efforts through second and third round effects. however efforts by all players to stimulate the economy dampened the effects of the crisis in kenya. globally, efforts by governments have stemmed the crisis and the green shoots of recovery are beginning to sprout. 3. ladies and gentlemen : on the monetary policy front, the central bank conducted a procyclical monetary policy in the year with a view to stimulating private sector credit and economic growth. the monetary policy committee ( mpc ) lowered the central bank rate ( cbr ) from 8. 5 percent to 7. 75 percent and the cash reserve ratio ( crr ) from 6. 0 percent to 4. 5 percent between december 2008 and september 2009. these efforts managed to lower and stabilize short - term interest rates. the reduction of the cash reserve ratio induced banks to expand credit to the private sector and thus stimulate economic growth. analysis of the banking sector indicators shows that gross loans to most sectors increased in absolute terms. 4. but the cost of credit and interest rates spread remain high. the spread is a major challenge in the banking sector because it acts as an impediment to expansion of credit and development of financial intermediation and signals inefficiency in the sector. we need to come together, the market and the regulators

from 1 october 2009, value capping was effected with all payments above kshs. 1 million being made through the real time gross settlement system ( rtgs ). this initiative will enhance the security and efficiency of high value payments. let me at this juncture thank banks, government ministries and other market players for their support in implementing value capping. the central bank will continue working with all concerned players to educate the public on value capping and to address implementation bottlenecks that may arise. 8. whilst initiatives to modernize the payment system continue, we remain cognizant of the cash based nature of our economy. the central bank is therefore reviewing currency management to ensure availability of “ clean money ” at a reasonable cost to kenyans. the bank is, in conjunction with the kenya bankers association ( kba ), exploring the establishment of currency centres. these centres are expected to reduce the operational costs incurred by banks in moving cash to existing central bank branches. this move is also expected to support the provision of “ clean ” notes and coins to kenyans across the country. pilot currency centres identified jointly with kba in nyeri, meru and nakuru are expected to be operational very soon once modalities are finalized. 9. ladies and gentlemen : as i draw to a close, let me briefly highlight developments in the bond market with regard to infrastructure bonds. the central bank successfully raised ksh. 18. 5 billion for the government through an infrastructure bond in february 2009. this bond has not only facilitated financing of the government ’ s infrastructure program but also set the pace for the issuance of similar bonds by corporate entities. 10. the recent successful bond issuances by kengen and safaricom are illustrative of this trend. the success of these bonds undoubtedly would not have been possible without the support of the banking sector. we look forward to this continued support including the recently launched second government infrastructure bond. this, coupled with automated trading in the nairobi stock exchange will be important for a vibrant bond market. 11. ladies and gentlemen : these developments are in line with core mandates of the central bank and also the policy drive provided by the vision 2030 blueprint. finally, as we draw towards the festive season, let me wish you happy holidays and a rewarding 2010. thank you and god bless you.