BANKING AND FINANCE IN KENYA: BANKING AND FINANCE IN KENYA: INSTITUTIONAL SET UP; STRENGTHS INSTITUTIONAL SET UP; STRENGTHS

AND WEAKNESSES; AND AND WEAKNESSES; AND OPPORTUNITIES AND AREAS FOR OPPORTUNITIES AND AREAS FOR

REFORMREFORM

A PRESENTATION TO THE MALTA-COMMONWEALTH TRAINING WORKSHOP ON BANKING AND FINANCE FOR SMALL

STATES, MALTA

CENTRAL BANK OF KENYA11TH TO 19TH APRIL 2011

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CONTENTCONTENT� Kenya� Structure of the Banking & Financial

Sector in Kenya.� Central Bank of Kenya- Role.� Composition of the banking sector� Banking Sector Challenges. � National Payment System.� Financial Access in Kenya.� Strengths- Kenyan Banking & Financial

Sector.� Weaknesses- Kenyan Banking &

Financial Sector. 2

KenyaKenya� Location: Eastern Africa, Coast of Africa.� Capital: Nairobi.� Population: Approx. 40 million.� Area size: 582,646 sq.Kms� Currency: Kenya Shilling (Kshs) (5th April

2011- US$1=Kshs 82).� National Languages: English & Kiswahili� Inflation rate: 9% (March 2011)� Political system: Unitary State with

multiparty democracy.

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Structure of Kenyan Banking & Financial Structure of Kenyan Banking & Financial Sector(1)Sector(1)

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DFIsKPOSB

Structure of Kenyan Banking & Structure of Kenyan Banking & Financial Sector (2)Financial Sector (2)� The SACCO Societies Act, 2008

paved way for the establishment of the SACCO Societies Regulatory Authority (SASRA).

� SASRA in charge of SACCOs licensed under SACCOS Act.

� Currently over 4,000 cooperative societies.

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Central Bank of Kenya(CBK) Central Bank of Kenya(CBK) –– RoleRole� Core mandate-Price and Financial

System Stability.

� Key Secondary functions:-◦ Formulation and implementation of

foreign exchange rate policy. ◦ Provision of an efficient national

payments system; and ◦ Acts as banker, advisor and fiscal

agent of the government.

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Central Bank of Kenya(CBK) Central Bank of Kenya(CBK) ––Legislations under its purview (1)Legislations under its purview (1)� Central Bank of Kenya Act.

� Banking Act.

� Microfinance Act.

� Building Societies Act

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Central Bank of Kenya(CBK) Central Bank of Kenya(CBK) ––Legislations under its purview (2)Legislations under its purview (2)

Banking Act Deals with:• Licensing of banking institutions.• Supervision of institutions• Liquidation and winding up• Penalties• Other supervisory and prudential issues

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Overview of KenyaOverview of Kenya’’s Financial Services s Financial Services

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• Kenya’s Financial Services comprises: Banks, Insurance Companies, Brokerage Firms, Pension Funds, Microfinance Institutions and Saccos.

• Financial services currently contributesi) 5.4% of GDPii) potential to contribute as much as 8% to

15% of GDP.iii) potential to increase formal sector

employment beyond the current share of 1%.

• Has been growing faster than the overall economy

Banking sector developmentsBanking sector developments

Items Year 2010 (February)

Year 2011(February)

% of change

Structure of the balance sheet

USD17.8 Billion USD 22.3 Billion 25.4%

Loans & Advances USD9.8 Billion USD12.2 Billion 23.7%

Deposit Liabilities USD13.8 Billion USD16.7 Billion 21.2%

Capital & Reserves

USD2.3 Billion USD3.1 Billion 30.2%

Non-performing Loans

USD0.8 Billion USD0.7 Billion 6.5%

Profitability USD0.12 Billion USD0.15 Billion 33.9%

Liquid Assets USD7.0 Billion

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Potential in the Banking Sector Potential in the Banking Sector –– Deposits, Deposits, Loans & BranchesLoans & Branches

� Huge potential to mobilize deposits and support further increase in demand for credit.

� Huge potential for expansion to rural and peri-urban areas.

� As demonstrated by increase in Deposit accounts from 2.6 million in 2005 to 12.8 million in

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Banking Sector Challenges(1) Banking Sector Challenges(1)

� Segmented markets: Weakens policy transmission.

� Weak and strong banks: Pricing of products.

� Growing customer sophistication: Technological changes.

� Regulation lagging innovation.

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Initiatives to overcome the Initiatives to overcome the Challenges Challenges � Credit Reference Bureaus(CRB’s)- 2nd

Febr.2009.� Cost of Credit disclosures e.g. Annual

Percentage Rate(APR)-Study done.� Amendments to accommodate new

financial products –Islamic products, electronic financial products.

� Adoption of Risk Based Supervision.� Enhanced minimum capital requirement –

progressively to Kshs 1 billion($10m) in 2012 (Kshs. 350m(2009)-Kshs. 500m(2010)-Kshs. 750m(2011))

� Agent Banking 13

Kenyan National Payments System Kenyan National Payments System (1)(1)� Types of payment systems in Kenya:-◦ Large Value Payment Systems:-� Kenya Electronic Payment and

Settlement System (KEPSS) -RTGS

◦ Retail Payment Systems:-� Nairobi Automated Clearing House.� ATM Switches (Kenswitch and

Pesa Point). � Securities payment and settlement

systems - CDS and CDSC for Government & NSE securities

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Kenyan National Payments System Kenyan National Payments System (2)(2)� Types of payment systems in Kenya:-◦ Retail Payment Systems:-� Cross-border money transfers

including Western Union and MoneyGram.

� Mobile Payments including mobile phone (M-Pesa, YuCash, Airtel Money, etc) and internet banking.

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Kenyan National Payments System Kenyan National Payments System (3)(3)� Challenges:-◦ Lack of Operational legislation-National

Payments System(NPS) Bill in process of enactment. ◦ Rapid technological changes-mobile financial

services.◦ Institutional capacity-especially in the public

sector.

� Way forward:-◦ Enactment of enabling legislation-NPS Act.◦ Issuance of Guidelines on retail transfers and e-

money.◦ Continued payments system modernization –

cheque truncation.◦ Capacity building. 16

Financial Access in Kenya(1)Financial Access in Kenya(1)

� FSDTrust (Kenya)/other stakeholders-FinAccess studies-2006 & 2009.

� Latest released on 10th June 2009-Increased formal financial access rate to 23% from 19% in 2006.

� The total usage banks, Insurance, MFIs & Saccos increased from 26% to 41%; contributed by increase in usage of these services.

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Financial Access in Kenya(2)Financial Access in Kenya(2)� Overall Access and usage of different

providers:

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StrengthsStrengths-- Kenyan Banking & Financial Kenyan Banking & Financial Sector Sector (1) (1)

� Efficient and less costly infrastructure.� Healthy competition.� Growing middle class spurring economic

development.� Diaspora inflows.� Public confidence in the banking and financial

system.� Risk-based approach to bank supervision.� Availability of many delivery channels, ATMs,

agents, POS, branches, internet banking, agent banking.

� Finacial stabilty. 19

StrengthsStrengths-- Kenyan Financial Sector Kenyan Financial Sector (2) (2) � Financial hub- Kenya is the leader in the

financial sector in the East African Region.� Experienced Human Resource pool-

Replicated in East African Region � Specialisation – Closer attention to each

subsector by the Regulators.� Effectiveness –close focus to a defined

set of licensees-better risk identification and management.

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StrengthsStrengths-- Kenyan Financial Sector Kenyan Financial Sector (3) (3) � “Leaders effect”- the advanced regulator

offers the rest advice and capacity building – secondments, board representations etc.

� Diversity-Products and players – Overall market vibrancy boosted -Makes Kenya a financial hub in the Eastern and Central African region.

� Liberalised market – price controls in Kenyan financial sector is a thing of the past. This attracts foreign investors and creates some degree of efficiency in price determination. 21

WeaknessesWeaknesses-- Kenyan Banking & Kenyan Banking & Financial Sector Financial Sector (1)(1)

� Fraud.� Insecurity-robberies, theft, carjackings,

hijacking.� Level of technological literacy in rural areas

still low� Financial education low particularly in the

rural areas.� Transport system poor in rural areas.� Few branches in rural areas.� Insufficient cash flow in rural areas.� Other pressing social concerns-drought,

famine, banditry, pastoral normadism, 22

WeaknessesWeaknesses-- Kenyan Banking & Kenyan Banking & Financial Sector Financial Sector (2)(2)� Potential of disharmony among the

Regulators – players offering services across the subsectors-conglomerates.

� Level of supervision/ regulation vary across subsectors- room exists for arbitrage – products registered in the weakly regulated subsector though its features fits another subsector.

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WeaknessesWeaknesses-- Kenyan Banking & Kenyan Banking & Financial Sector Financial Sector (3)(3)� Unregulated “financial services”-

Though innovation is ahead of regulation, the lapse of time from innovation should be minimal-pyramid schemes(disguised as SACCOs & Investment Co.s), mobile financial services, SACCOs(low capacity),lease Co.s, premium financing Co.s,

� Absence of a detailed consumer protection law-varying levels of consumer protection clauses in the subsector laws. 24

Reform Initiatives & Opportunities Reform Initiatives & Opportunities (1)(1)� Convergence in level of supervision-

consolidated supervision underway among the Regulators- may make it possible to understand and monitor risks of conglomerates.

� Information sharing on areas of mutual concern –MoUs being entered - share information on potential risk on a confidential basis.

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Reform Initiatives & Opportunities Reform Initiatives & Opportunities (2)(2)� Comprehensive Amendments- Banking

Act(to meet international best practices-Basel Core Principles); Capital Markets Act(strengthen supervisory and enforcement power).

� Financial Regulators Technical Committee- previously for CMA,RBA & IRA- CBK joined in - 2009- Periodic Forums held to share supervisory developments and aspects of concern.

� Move to regulate most financial services – SACCOs Act, credit only microfinance business.

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Reform Initiatives & Opportunities Reform Initiatives & Opportunities (3)(3)� Tighten control, supervision and

vigilance over the financial sector- All regulators have or in the process of adopting Risk Based Supervision-including enhancing disclosures and foreclosures -to restore confidence.

� Adoption of New products– CBK has continued to embrace new innovations (3rd party ATMs, Islamic products, mobile financial services, etc).

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AREAS FOR REFORM (1)AREAS FOR REFORM (1)

� There is a drive to build strong institutions in the sector with requisite capacity to drive the process-both for the regulators as well as the market.

� Consolidation is one method of building strong institutions - can serve their clientele well and can withstand shocks better.

� Close coordination and information sharing among the regulators is the starting point to effective supervision of the financial sector.

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AREAS FOR REFORM (2)AREAS FOR REFORM (2)

� Financial education be upscalled.� Financial inclusion necessary for a

bigger market.� Creation of more income generating

activities particularly for the majority youth who are unemployed.

� Improving security.� Lowering cost of banking products.� National Payment Systems Law to

streamline payment and money transfer activities.

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END

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