DEVELOPMENTS' IN KENYA’S FINANCIAL ECOSYSTEM AND CONTRIBUTION TO NATIONAL GROWTH

AND DEVELOPMENT

Presentation by the Central Bank of Kenya During the 5th Financial Services Sector

Conference Organized by ICPAK– at KSMS

June 14, 2017

OUTLINE

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Structure of the Kenyan Financial Sector.

Vision 2030.

Banking Sector Reforms.

Banking Sector Reforms – Outcomes.

Economic Impact of the Financial Sector.

Key Supervisory imperatives and ongoing initiatives.

Strengthening Banking Sector Supervisory Practices.

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Structure of the Kenyan Financial Sector

Ministry of

Finance

Central Bank of

Kenya (1966)

Capital Markets

Authority (1989) Retirement Benefits

Authority (1995)

Development Financial Institutions e.g.

KPOSB, AFC,KIE, ICDCI, KTDC

Insurance Regulatory

Authority (2007)

Commercial Banks(42);

Mortgage Finance Co’ s

(1); Forex Bureaus (77);

Microfinance Banks

MFBs(13); CRBs (3);Rep.

Offices(8), Money

Remittance (17)

Securities Exchanges;

CDSs; Custodians; IBs;

CISs; IAs; Stock

Brokers; FMs; Stock

Dealers; Listed Co.s;

CRAs and VCFs

RBSs; Pension

schemes; NSSF;

Administrators; FMs;

Custodians

Insurance Co’s ; Insurance

Brokers ; Insurance Agents;

Assessors & Adjustors;

Health Management Co’s

Ministry of

Co-op. Devt

&Marketing

SACCO Societies

Regulatory

Authority (2009)

Sacco Societies

with Front Office

Service Activity (FOSAs)

Kenya’s Financial system has registered significant progress over the last 10 years thro’: Strengthened regulatory framework – independent authorities with specific

mandates; Increase in the of number of players (intermediaries); and Roll-out of various customized services and products.

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Vision 2030

• Economic Recovery Strategy for Wealth and EmploymentCreation (2003 – 2007):- focused on the financial sectorreforms to facilitate improved access to financial services andefficient intermediation of financial resources.

• Vision 2030: Kenya’s economic blueprint (2008 – 2030) – Aimis to transform Kenya into a middle-income country by 2030.

• Focusing on Economic; Political; and Social pillars that define

responsibilities and enablers.

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Vision 2030

Financial Sector Goal in Vision 2030: “To create a vibrant and globally competitive financial

sector, driving high levels of savings and financing Kenya’sinvestment needs.’’

Establish Kenya as a “Regional Financial Services Centre.’’

Some of the Banking sector initiatives in Vision 2030 include:- Transformation towards stronger large-scale banks. Credit Referencing. Deeper penetration of banking services. Formalizing microfinance Institutions (Microfinance Banks). Expanding reach of microfinance Institutions (Microfinance

Banks).

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Banking Sector - Broad Initiatives

Amendments to Banking & Microfinance Acts to facilitate:- Agency Model– banks and Microfinance Banks to use third parties to

offer financial services - 2010. Credit Reference Bureaus – to promote use of information capital as

collateral and avoid loading ‘risk premium’ on borrowers due toinformation asymmetry - July 2010.

Introduction of Shariah Compliant Banking, 2005 - 3 fully fledgedshariah compliant banks are in operation.

Allowing Microfinance Banks to use marketing outlets as places ofbusiness – from April 2012.

Legislation of:- Microfinance Act, 2006 – to support financial inclusion initiatives. AML Act, 2009 – to enhance stability and integrity of the financial

sector. National Payments Systems Act, 2011- to enhance sound and safe

payments system.

These initiatives have been undertaken to foster the liquidity, solvency andproper functioning of a stable market based financial system.

Increased Outreach: 43.1 million deposit accounts with 41.7 million being micro accounts. Net loans have increased from Ksh. 396.1 billion in 2006 to Ksh. 2.18 trillion in December 2016, extended to key sectors of the economy (trade, manufacturing, real estate, construction & building, tourism and transport).

Mobile Financial Services: Close to 160,000 agents, over 32 million customers; 456.7 million transactions valued at Ksh. 1.2 trillion as at December 2016.

Licensing of Microfinance Banks (MFBs): 13 MFBs with 113 branches, 0.87 million number of deposit accounts valued at Ksh. 40.2 billion; 0.87 million number of loan accounts with an outstanding loan portfolio of Ksh. 48.7 billion in 2016.

Expansion of Branch Network of Commercial Banks: Increased from 575 in 2006 to over 1,541 well distributed across the country as at December 2016.

Agent Banking: 18 banks with 53,833 agents; 104.2 million transactions valued at over Ksh. 743.2 billion as at December 2016. 5 MFBs with 2,068 agents.

Enhancement of Core Capital for Commercial banks: Strong banks can weather shocks better –Ksh.250 million in 2008 to Ksh.1.0 billion as at December 2012. In addition, banks were required to have 2.5% capital conservation buffer from 2015 - a buffer for losses during periods of financial and economic stress.

Credit Reference Bureaus: Over 16 million reports requested by banks as at December 2016 since roll-out in July 2010.

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Banking Sector: Outcomes

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Banking Sector: Outcomes

Overall access: 75.3% of Kenyans are now formally included from 26.7% in 2006; over 50% increase in the last 10 years.

This initiative has gone a long way in enabling SMEs access capital, grow businesses, increase economic activities, increase incomes and reduction of poverty levels.

Source: 2016 FinAccess Household Survey

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Economic Impact of the Financial Sector

• Economic growth requires adequate, affordable, and easily accessiblecredit.

• Diversification of the Kenyan economy is supported by newtechnologies and institutions.

Over the last decade and in line with Vision 2030, Kenya’s financialsector has undergone significant transformation, notably: -

Significant decline of barriers to entry to the financial sector. The introduction of innovative solutions and instruments targeting

lower segments of the population. Increased infrastructure distribution across the country.

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Economic Impact of the Financial Sector

Increased lending to various economic sectors, SMEs andindividuals totalling 7.8 million loan facilities (over Ksh 2.2 trillionas at December 2016).

Increased commercial banks’ payable tax from Ksh 6.9 billion in2006 to over Ksh 51.0 billion in Dec. 2016.

Increased commercial banks’ income after tax (return toshareholders) from Ksh 18.9 billion in 2006 to over Ksh 103 billionin December 2016.

Engagement of over 53,000 specific bank agents. Direct employment of over 33,000 staff by the commercial banks

excluding the other intermediaries. Serving over 43 million depositors (corporates and individuals). Commercial Banks facilitate trade thro’; provision of liquidity; guarantee payments (international trade); and payments and settlement of trade obligations.

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Economic Impact of the Financial

Sector

Banks have spearheaded the use of technology in provision

of financial services.

Digital Financial Services is now an integral part of everyday

life with increased demand for digital finance and non-cash

based transactions.

Increased demand for usage of digital finance and non-cash

based transactions.

Low-income households and vulnerable groups have usedmoney transfer platforms to expand their social networks.

Low income groups can also diversify risk thereby enhancingtheir resilience to unexpected negative shocks.

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Key Supervisory imperatives and

ongoing initiativesCBK’s main supervisory concerns include:

• The proper functioning of a market-based financial system – to ensure the sector’s operational continuity.

• Prudential soundness and proper risk management (Adequate capitalization, liquidity and asset quality).

• Stronger governance, with clear demarcation of responsibilities, greater accountability, fair market conduct, and stronger supervision.

• Strong consumer protection and transparency.

• Effective business models, aimed at strengthening the resilience of banks, reducing costs, and supporting innovation.

• Integrity of the financial system – putting in place measures to prevent abuse of the financial system from ill-intentioned users.

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Strengthening Banking Sector Supervisory

Practices

Currently CBK supervisory initiatives focuses on three key pillars: -

i) Increased transparency on the operations of the commercial banks-to instill public confidence:

• Requiring banks to provide;

– timely, accurate, relevant and sufficient disclosures of qualitative and quantitative publication of quarterly and annual audited financial statements on newspapers and their websites.

– details of their significant shareholders, who own more than 5% or more shareholding, on their websites.

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Strengthening Banking Sector

Supervisory Practices

ii) Stronger governance models in banks to safeguard the depositors’ funds through:-

Re-vetting directors and senior officers of banks when they are under any disciplinary action or for any violation of the law or suspected malpractices.

Suing shareholders and directors of banks for any violations of the stipulated legal and regulatory frameworks as well as negligence in exercising their fiduciary duties.

Strict enforcement of the legal and regulatory framework by levying monetary penalties and requiring banks to take administrative actions on culpable members of staff.

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Strengthening Banking Sector

Supervisory Practices

Besides requiring bank shareholders, directors and management to undertake their responsibilities;

CBK has also directed external auditors to expand their scope of work to ensure that they fully confirm adherence to the legal and regulatory frameworks. For instance: -

In 2015, external auditors were directed to review the effectiveness of ICT systems of all banks; and

In 2016, external auditors were directed to review all the insider facilities in line with the provisions of the Banking Act.

Based on the auditors’ findings and recommendations, CBK took appropriate action on the banks that were non-compliant.

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Strengthening Banking Sector

Supervisory Practices

iii) Effective business models to ensure resilience

Continued resilience of banks can only be realized when banks assure themselves of the soundness of their business models.

CBK is now requiring banks to include in their business models: -

maintenance of a capital conservation buffer of at least 2.5 percent above the minimum stipulated capital ratios effective 1st January 2015.

Preparation of Internal Capital Adequacy Assessment Planning (ICAAP) to guide institutions in capital planning. In November 2016, CBK issued a Guidance Note to the banking industry on the preparation of ICAAP.

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Strengthening Banking Sector

Supervisory Practices

Development of effective business models has necessitated some banks to consider inviting strategic investors to bring on board the necessary competence and skills to effectively compete in the market.

Banks that are currently compliant with all prudential requirements have commenced the process of building their capital and liquidity buffers to act as cushions in times of economic down turns.

Banks have also embraced ICT in their operations, not only as a business enabler but avenue for innovation to enhance customer experiences and reduce cost of banking to their customers.

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Other Reforms to Strengthen the

banking sector

Other ongoing reforms include: -

• Increased monetary penalty from KSh 5 million to KSh 20 million through the Finance Act, 2016.

• Enhanced information technology (IT) audits to interrogate information in the systems.

• Effective January 2017, the credit information sharing mechanism has been expanded to bring onboard utility companies as well as Savings and Credit Cooperative Societies (Saccos).

– Increased credit providers in the credit information sharing mechanism will enrich the credit bureaus databases, which form a good basis for introduction of improved credit scoring thus quick and more realistic credit pricing.

• CBK has partnered with the Kenya Bankers Association (KBA) to enhance the transparency of cost of credit pricing through effective disclosure of Total Cost of Credit (TCC), Repayment Schedule (RS) and Annual Percentage Rate (APR).

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Thank You.