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CBK Newsletter

INSIDE THIS ISSUE

Issue 2 16th March, 2011

CENTRAL BANK OF KENYA Keeping you informedCBK NEWSLETTER

Word from the Governor1

Launch: Kenya Policies for Prosperity2

Financial Inclusion6

Changes in Economic Perception9

Government Bonds12

CBK and the Constitution18

PatronGovernor

Deputy PatronDeputy Governor

Chairman, Editorial BoardStephen Mwaura

EditorSamson Burgei

Assistant EditorNancy Sang

Editorial BoardJoseph Mutava, Peter Gatere, JoyceYego, Cappitus Chironga, Daniel Ndolo,Kate Kittur, Evans Muttai, Dr. RoselineMisati, Samuel Tiriongo, Juliet Ongwaeand Peter Kitonyo

ReviewersMatu Mugo, Dr. Dulacha Barako,Chris Gacicio, Isaya Maana

Layout & PhotographyAntahnas MutindaNathan Kiawa

Contact us through:editor@centralbank.go.ke

The CBK Newsletter is publishedquarterly by Communications Office,Central Bank of Kenya, Haile SelassieAve., Nairobi.

Ease of access to financial servicesis a key contributor to a country’seconomic growth. In realisation of

this,Kenya has been makingcommendable progress in fostering anenabling environment for financialinclusion and deepening financial accessto the majority of its citizens. Indeed, theresults of the Financial Access(FinAccess) Surveys, conducted in 2006and 2009 can attest to this. The surveysrevealed that the number of unbankedpopulation aged 18 years and abovedropped from 23 percent in 2006 to 18percent in 2009. During the same period,the proportion of adults accessing financialservices from Microfinance Institutions(MFIs) and Savings and CreditCooperative Societies (Saccos) more thandoubled, from 8 to 18 percent whereasthe proportion of adults accessing informalfinancial services dropped. In addition, thenumber of deposit accounts haveincreased from 4.7 million in 2007 to 12.8million in 2010. Of these accounts, 11.25million are micro accounts (Ksh. 100,000and below are fully covered by DPF).These developments indicate that theinitiatives instituted towards broadeningand deepening financial inclusion arebearing fruits.

I strongly believe that it was in recognitionof our efforts that the Alliance forFinancial Inclusion (AFI) chose Kenya tohost its inaugural Global Policy Forum(GPF) in Nairobi in September 2009. Itwas not only an honor to the Central Bankof Kenya to co-host the Forum, but also asign of confidence in Kenya’s buddingfinancial sector. CBK is also the currentChair of AFI’s Steering Committee andwas further recognized in December 2010by being invited as a non-G20 partner tojoin the Global Partnership for FinancialInclusion (GPFI). The GPFI will promoteand co-ordinate cross cutting FinancialInclusion efforts in G20 and non-G20

countries.The Central Bank will continue topromote measures within the law toensure that financial services reacheven more people. The key initiativesthat have been implemented include:licensing of MFIs, introduction ofagent banking, operationalization ofcredit reference bureaus, promotionof the use of mobile phone channels,modernization of the national paymentand settlement system, to name but afew.These developments are in linewith the broader government financialsector policy initiative that hinges onthree pillars: Access, Efficiency andStability aimed at achieving Kenya’sVision 2030 goals.

The Central Bank in partnership withother players, including AFI and theGPFI, will continue to spearheadappropriate policy reforms andinterventions for the financial sectorto progress the country towards amore financially included populationenjoying the attendant benefits ofgrowth and prosperity for all.

Prof. Njuguna Ndung’u, CBS

Word from the GovernorFINANCIAL SERVICES FOR ALL

CENTRAL BANK OF KENYA

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CBK Newsletter

C B K N E W S

His Excellency The President, Hon. Mwai Kibaki,officially launched the volume ‘Kenya:Policies for Prosperity’ on 9th February, 2011

at the Kenyatta International Conference Centre.Speaking at the launch, His Excellency the Presidentnoted that the book ‘complements Vision 2030 byevaluating policy options that would ensure a prosperousKenya, adding that ‘it was a rich source of information,debate and analysis on the challenges and strategicchoices confronting Kenya.’

‘Kenya: Policies for Prosperity’, a first in a newseries Africa: Policies for Prosperity, is acollaborative effort between the Central Bank of Kenyaand the Center for the Study of African Economies,Oxford University, geared towards developing analyticalcapacity at the local institutional level as well asproviding a variety of policy options that support Vision2030.

The Book’s authors are drawn from a pool of accreditedlocal and international researchers and edited by CentralBank Governor, Prof. Njuguna Ndung’u and OxfordUniversity Professors, Paul Collier and ChristopherAdam.

Addressing participants at the Launch, the Governornoted that Central Bank of Kenya had benefited

‘Kenya: Policies for Prosperity’ Book Launched

From R to L: His Excellency the President, Hon. Mwai Kibakiposes with the editors of the book, Prof. C. Adam, Prof. P.Collier and Prof. N. Ndung’u during the launch.

immensely through capacity building and networkingwith world renowned economists. An important lessonlearned, the Governor added, was that ‘collaborativeresearch between policymakers and academics ensuresformulation of practical solutions to practical problems.’Spanning 17 chapters, the Book which draws lessonsfrom Kenya’s recent experiences, focuses on threebroad themes namely:- strategic choices that willsupport growth and unlock the country’s potential;macroeconomic policies including monetary, fiscal andtrade policies; and the environment for private sectormarket activity, including multi-sectoral analysis andthe role of institutions in protecting the markets andsafeguarding democracy.

The Book, published by Oxford University Press, canbe ordered online through www.oup.co.uk or throughits local office, Oxford University Press, East AfricaLtd., Nairobi, Tel: 273 20 41/2 – 9.

‘Collaborative research between policymakersand academics ensures formulation ofpractical solutions to practical problems.’

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CBK Newsletter

“Every time you see growth in the market, watchwhat is happening to the unit cost”, the Governor,Prof. Njuguna Ndung’u said during the launch of

draft regulations for the electronic retail transfers andelectronic money issuers on 3rd February, 2011. TheGovernor pointed out that usually transaction costsdecline when the market grows.

These regulations are intended to ensure that E-MoneyIssuers and Payment Service Providers conduct theirbusinesses prudently and in accordance with theprovisions of relevant legislations including the CentralBank of Kenya Act.

The Governor noted that, in the last four years sincethe establishment of mobile phone money transferservices, four mobile phone operators have alreadylaunched the services and have enrolled over 15.4million customers. They have recruited 39,449 agentswhile total transactions have soared to Ksh.2.45 billiona day and Ksh.76 billion a month on average as atDecember 2010. This depicts a very productive marketfor electronic money transfers.

These Regulations will be reinforced by the NationalPayments System Bill, currently awaiting enactmentby Parliament. This will enable Kenya’s paymentsystem to comply with the Bank for InternationalSettlements (BIS) Core Principles and Central Bankresponsibilities while at the same time giving CBKspecific and enhanced powers over regulation ofpayment systems in Kenya.

CBK Releases Draft Electronic Payment Regulations

Mr. J. Kitili, Director, Banking Services & Risk ManagementDept. waves the draft regulations after the launch. Looking onare Messrs D. Porteous, the Governor, Prof. Ndung’u and S.Mwaura .

The first global meeting focusing on savings asa function of financial inclusion was held inSeattle, USA on 16th - 17th November, 2010.

The forum discussed innovative ways of reaching thepoor through banking beyond branches and leveragingon technology.

At the forum, the Governor, Prof. Njuguna Ndung’u,shared Kenya’s experiences in promoting financialinclusion through frameworks that balance innovationand safety. He also underscored the role of financialinclusion in creating safe havens for the poor to save,accumulate assets and uplift their living standards.

Also at the forum were heads of government,representives from banks and technology providers aswell as international development bodies .

GlobalSavings Forum

Launch of GPFI inSeoul, Korea

The G20 Global Partnership for FinancialInclusion (GPFI) was launched in Seoul, Korea

on 10th December 2010.

The formation of the GPFI was one of the keyresolutions by G20 leaders at the November 2010Seoul Summit to promote financial inclusionparticularly for poor households and Small andMedium Enterprises. CBK was invited to becomea non-G20 partner of the GPFI.

At the launch, Governor, Prof. Njuguna Ndung’udelivered a speech on behalf of non-G20 partnersof the GPFI. In his remarks, the Governor said “Iam sure that the GPFI will serve as a highlyeffective platform unfolding the convening powerof the G20 and encouraging the G20 and non-G20members together to take global financial inclusionto the next level”.

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CBK Newsletter

Let Credit Information Work for You

In the Kenyan context, a Currency Centre is anestablishment set up to provide currency services tothe population around it. These centres are set-up by

the Central Bank of Kenya in conjunction with the KenyaBankers Association.

The need to introduce currency centres resultedfrom the desire to minimise risks of currency transportationand to cut down on operational costs which would bepassed on to customers. The creation of Currency Centrestherefore means that commercial banks do not have totransport cash over long distances to the four CBK locationsof Nairobi, Mombasa, Kisumu and Eldoret Branches as oftenas they did in the past. Further, the establishment of thecurrency centres is expected to support the Central Bank’sclean money policy which aims at ensuring that currencynotes in circulation in the country is clean.

The pioneer Centre in Nyeri which was set up inDecember 2009 has seen the number of banks using thefacility steadily grow from one in January 2010 to twelve byDecember 2010. Volume of transactions has also been onthe rise and currently about 7 percent of all CBK’s physicalcurrency transactions with commercial banks are in Nyeri.Data available at CBKindicate that more deposits thanwithdrawals (negative currency in circulation) occur in theNyeri region and therefore the Centre is a perfect choice ofcatchment for old currency.

The second of these Centres was opened in Nakuruon 16th December 2010 and has since been providing cashrequirements to at least five commercial banks in Nakuru

and its environs. The currency centre is intended to servethe 23 commercial banks and their branches represented inthe Nakuru region.

CBK and KBA are currently working on finalisingthe set up of a third currency centre in Meru. Currencycentres apart from providing currency services to thepopulation, also work towards achieving the objective offinancial inclusion through reductions in transaction costsassociated with provision of financial services.

Prof. Ndung’u plants a tree at the newly opened NakuruCurrency Centre. Banks are expected to translate thebenefits from lower transaction costs into cheaper creditand better service delivery.

Credit Information comprises a person’s historyrelating to borrowing from lenders. Creditinformation sharing, in the Kenyan context,

therefore refers to the exchange of customers’ creditinformation amongst institutions, licensed under theBanking Act, through licensed Credit ReferenceBureaus (CRBs). The lenders submit customers’ creditinformation to the licensed CRBs who collate it andgenerate credit reports, which are then made availableto the lenders, at a fee, for their use when appraisingapplications for credit facilities. Credit informationsharing reduces the incidence of non-performing loansby reducing lack of information on customers andfacilitates borrowing particularly by Small and MediumEnterprises (SMEs). SMEs can use the informationcapital held by CRBs as collateral for loans as opposedto the traditional use of physical collateral such as landtitle deeds and motor vehicle log books.

Following the launch of the banking sector CreditInformation Sharing initiative in Kenya on 31st July2010, all lenders were required to submit data on NPLsto licensed CRBs on a monthly basis. As at 31stDecember 2010, one CRB, CRB Africa had been

licensed and the application for the second one,Metropol CRB was at advanced stages of review. Thetotal number of credit reports submitted to CRB Africasince rollout was 3,102,735 and credit reports requestedby the banks and customers were 284,722 and 434respectively. The CRB regulations place strictrestrictions on the use and application of confidentialinformation. CRBs and banks are prohibited fromsharing information with unauthorized third parties. Thepenalty admissible for breach of confidentiality isKsh.500,000 and Ksh.1 million for CRBs and banks,respectively.

Moving forward, the CBK in partnership with KenyaBankers Association and other players will endeavorto ensure that the credit information sharing mechanismis not only robust but is also extended beyond thebanking sector to include other credit providers suchas Deposit Taking Microfinance Institutions, SACCOs,Development Finance Institutions and UtilityCompanies, among others. It is only when all creditproviders are part of the credit information sharingmechanism that the potential benefits of creditinformation sharing will be optimized.

The Dawn of Currency Centres

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CBK Newsletter

NEWS IN PICTURES

From L - R: Ms J. Ikunyua, Asst. Director, DPFB, Evelyn Kilonzo(BSD) and Mr. N. Koome (RBA) listen keenly to presentationsat the Financial Education Strategy retreat organized by theFinancial Education and Consumer Protection Partnership(FEPP) held in Naivasha in October 2010.

Prof. Njuguna Ndung’u (centre) and other dignitaries at the2nd AFI Global Policy Forum in Bali, Indonesia.

Some members of staff from Reserve Banks of Malawi andZambia on a Financial Education tour in Kenya. The groupvisited a Pilot Project organised by Faulu Kenya in Kayole,and funded by FSD.

The Governor, Prof. Njuguna Ndung’u (seated right) andCBK Bank Secretary, Mr. K. Abuga sign the Memorandumof Understanding (MOU) for the collaboration of FinancialSector Regulators, on 31st August, 2009.

Business editors of local media houses listen keenly to pro-ceedings during their meeting with the Governor, Prof.Ndung’u to discuss expansion of Financial Literacy in thecountry.

CBK Directors wait for the Chief Guest at the CBK standduring the Nairobi International Trade Fair in September,2010

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Most poor people in the world lack access to sustainable financial services and the challenge to Governmentsis normally how to address the constraints that exclude people from full participation in the financialsector. In the last few years, a number of international development organizations as well as policymakers

in developing countries have been increasingly emphasizing the need to build more inclusive financial systemsas an essential part of the development agenda.

According to the United Nations, the bottom billion people around the world do not have access to formalfinancial services like savings accounts, credit, insurance, and payment services. Further, more than half thepopulation in developing countries and more than 80 percent of households in most of Africa are financiallyexcluded. Financial inclusion therefore aims at providing timely delivery of various financial services at anaffordable price to these financially excluded households and micro, small, and medium-sized entrepreneurs.Through increased access to savings accounts and other financial services, the poor can build financial security,manage risks against adverse shocks such as illness or natural disaster, and even invest in new businessopportunities. Improving access to finance also plays a crucial role in promoting economic growth and reducingpoverty.

Improving financial accessIt is worth noting that microfinance was an initial effort to reduce poverty by improving access to finance forthe poor. Microfinance Institutions (MFIs) usually extend small loans to the poor who have no collateral orcredit history and cannot borrow from mainstream financial institutions. However, microfinance alone cannot

expand financial access for the poorand therefore building an inclusivefinancial system is a morecomprehensive effort towardsfinancial inclusion. This effortemphasizes that formal financialinstitutions such as banks have animportant role to play in expandingfinancial access to the poor. It alsostresses the importance ofgovernments’ role in creating a properenvironment to facilitate increasedfinancial access.A well-functioning financial system isa crucial part ofdevelopment,promoting economicgrowth and reducing poverty.Financial institutions and marketsmobilize savings, provide paymentservices, allocate resources andtransform risk by pooling andrepackaging it. When a financial

market functions well, funds will likely be allocated to the most productive users, which will contribute toeconomic growth and poverty reduction. However, when the market does not function properly, it loses growthopportunities.

A financial system becomes more efficient and functions better when it is more inclusive. As a financial systembecomes more inclusive, it provides more growth opportunities to more individuals and entrepreneurs. However,when the financial system serves only a limited segment of the population, the society is likely to lose opportunitiesto grow.

Barriers to financial accessIn order for policymakers to understand the impact of access to financial services and design effective policiesto improve access, it is important to measure access and identify the barriers to access. Identifying these

Women sew clothes at a local industry funded by SMEs through loansPhoto by NMG

MAIN FEATURE

Financial InclusionThe Bridge To Growth And Prosperity

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CBK Newsletter

Client withdraws money from an ATM using mobile phone.Photo by NMG

barriers is an important part of measuring access. Major barriers include limited geographical access to a bank,lack of appropriate documents (e.g., drivers licenses), and account fees of minimum balance requirements.

By having access to financial services, poor households obtain reliable tools for managing their money. Sincethe incomes of poor households are unstable, their need for reliable financial services is greater than that ofricher households. On the other hand, when a firm has access to external finance, it is likely to grow faster.Moreover, by having access to finance, small firms can allocate assets more efficiently, and can increaseinnovation. By contrast, when small firms face difficulties in obtaining external finance, they lose opportunitiesto grow and innovate.

Governments can contribute to improving access to finance through appropriate policies and legislation. However,experience suggests that not all government policies are helpful and governments’ direct intervention could becounterproductive. Although reforming institutions and building infrastructure can take a long time, governmentscan improve access to finance relatively fast by prioritizing certain institutional reforms and focusing on specificinfrastructure. In particular, reforming information infrastructure such as building credit registries and improvingdebt recovery procedures tend to generate fast results in improving access to finance. It is noteworthy thatgovernments can improve access by providing legislation and regulations that would allow market participantsto use innovative technologies (e.g., the Internet and cell phones) to reduce the cost of providing financialservices significantly.

Mobile phone banking

While banks invest substantial amounts of money for infrastructure and personnel under the traditional branch-banking approach, mobile phone banking allows banks to provide financial services at reduced costs. Kenya’smobile phone payment services is a good example of how using modern technology with government’s supportivepolicies and proper regulation can provide financial services to millions of poor people at low costs. (Thegovernment’s appropriate policy actions made this impressive success possible). First, the government createda favorable environment to expand the mobile phone market. Second, it engaged the private sector in its policy-making process to make sure that government will provide support for service providers and to evaluate possiblerisks to financial stability. Third, the government strategically chose to allow technological innovations beforeenacting appropriate legislation in order to expand access to finance.

Allowing new products into the market in the absence of relevant legislation may compromise financial stability.However, the government successfully balanced access with stability by carefully monitoring the market andenhancing oversight capacity to ensure that financial stability was maintained.

Governments can also improve access by facilitating competition. As competition intensifies, incumbent financialinstitutions are likely to extendservices to new markets and trynew, cost-effective technologies inan effort to find new ways toincrease profits. However, it is alsoimportant to make sure throughregulatory measures, that intensecompetition would not result inreckless and improper lendingpractices.

While governments’ role in creatingan appropriate environment tofacilitate access is important, thescope of their direct interventionis limited, and direct interventionprograms require carefulmonitoring.

http://www.uiowa.edu/ifdebook/faq/faq_docs/Financial_Inclusion.shtml

Ref:

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CBK Newsletter

Q and A

Financial Inclusion explainedQ: What is Financial Inclusion?

Ans: The Centre for Financial Inclusion defines Financial Inclusion as a state in which all people who can usefinancial services have access to a full suite of quality financial services, provided at affordable prices, in aconvenient manner, and with dignity for the clients. Financial services are delivered by a range of providers,most of them private, and reach everyone who can use them, including disabled, poor, and rural populations.However, according to the World Bank, nearly three billion people in developing countries have little or noaccess to formal financial services that can help them increase their income and improve their lives.

Q: Why Financial Inclusion?

Ans: Financial inclusion aims at drawing the "unbanked" population into the formal financial systems so thatthey have the opportunity to access a variety of financial services ranging from credit, savings and payments totransfers and insurance services. In addition, according to the United Nations, in order to achieve the objectiveof economic growth, it is imperative that infrastructure is developed together with increased financial inclusion.A country cannot tackle poverty and foster economic growth when the majority of its people have limited accessto financial services. Therefore, to achieve equitable economic growth and development, it is necessary that themajority of a nation's people have access to appropriate and affordable financial services and products in orderto enhance their quality-of-life and ultimately economic development.

Q: What is the Central Bank doing about Financial Inclusion?

Ans: In recognition of the importance of financial inclusion towards realisation of desired economic growthand poverty alleviation, the Central Bank of Kenya and other players have undertaken several policy andregulatory reforms aimed at enhancing the level of financial inclusion in Kenya. The key initiatives which havebeen implemented to this end include:-

• The licensing of deposit taking microfinance institutions, whose primary focus is the low income householdsand Small and Micro Enterprises, that are concentrated in the rural and peri-urban areas. CBK has grantedlicences to Faulu Kenya, Kenya Women Finance Trust, REMU and SMEP to carry out nationwide deposit-taking microfinance business. UWEZO DTM has been licensed to offer community microfinance servicesin Starehe Division, Nairobi.

• The implementation of the Agent Banking Guidelines in May 2010 allowed Commercial Banks to partnerwith third parties like shops, petrol stations and chemists to offer specified banking services on their behalf.This is aimed at increasing the outreach of banks to most corners of the country at a reasonable cost andwithout compromising the quality of banking services. Six banks have been granted approval to rollout theiragency networks.To date the Central Bank has approved over 6,000 agents.

• The licensing of CreditReference Bureaus, which provide an opportunity for individuals and businesses torely on their good credit history as an alternative form of collateral, unlike the traditional physical collateral,to secure credit facilities from banks.

• Promotion of the use of technology enabled financial services using platforms such as M-pesa, Zap, Pesa-pap and YuCash.

• Promotion of consumer education and awareness campaign initiatives in order to enhance financial literacy.CBK is a member of the Financial Education and Consumer Protection Partnership whose objective is todevelop a comprehensive National Strategy for Financial Education for Kenya.

• Amendment of the Banking Act to include provisions that permit banks to launch innovative products thatserve the diverse needs of the Kenyan populace. These include amendments that facilitated Shariahcompliant banking and the operation of current accounts by mortgage finance companies.

MAIN FEATURE - Q & A

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CBK Newsletter

Since September 2009, the Monetary PolicyCommittee (MPC) has been conducting bi-monthly market surveys. This idea arose from

interactions with monetary policy committees in othercountries. Those committees had benefited frominformal surveys which provided insights into thebusiness communities’ perceptions with respect tovarious significant macroeconomic aggregates.

Initially, the survey instrument only covered thecommercial banks but by December 2009, it extendedto cover private sector non-bank firms. Initially, also,the commercial banks did not regard the surveyseriously and hence did not provide adequate andconsistent answers to questions. This was observedboth from the extent of coverage of the banking sectorand from the designation of the officers completingthe questionnaire. This soon changed when the banksrealised that the MPC was serious in its analysis ofthe questionnaire, pointing out internal contradictionsand hence misleading information. The next majorimprovement in coverage arose from the bi-monthlymeetings of the MPC being held in the CBK’s branches.The branches then undertook to assist in accessingthe business community in Mombasa, Kisumu andEldoret.

The major areas of interest obviously were inflationand economic growth expectations. These two areasparticularly, relate to the MPC’s mandate in managing

inflation and supporting economic growth. At asecondary level, the health of the Kenyan currencyinternationally, as depicted by strengthening orweakening of the Kenya Shilling against the US dollar,was also of interest and hence expectations in this areawere also elicited. Clearly, the way in which growth isenhanced and inflation is controlled arises frommovements in interest rates and private sector credit.Expectations with respect to these two were alsosurveyed.

The survey implicitly was based on a market for privatecredit since potential crowding out by governmentborrowing was seen to be a threat by the private sector.It was at this point that the interaction between thebanks, as potential lenders, and the non-bank privatesector firms, as the potential consumers of credit, wereanalysed. If both the banks expected to expand lendingand the non-bank private sector to expand borrowing,then expectations with respect to changes in interestrates could tell whether the quantitative expectationswere likely to be frustrated or fulfilled.

The eight surveys which have been conducted alsoallow the MPC to see in what way perceptions andexpectations have been revised. Initially, in September2009, most of the banks foresaw a rise in inflation butby November 2010, the majority had reviewed theirprojections. Much the same story can be told withrespect to the non-bank private sector. The growthexpectations story is even more spectacular, 68 percentof the banks considered a 2-3 percent growth in 2010

Changes in Perceptions of the Economy:The Monetary Policy Committee (MPC) Market Surveys

Governor adressing press after the Monetary Policy Committeemeeting in January 2011

At a secondary level, the health of theKenyan currency internationally, asdepicted by strengthening orweakening of the Kenya Shillingagainst the US dollar, was also ofinterest and hence expectations in thisarea were also elicited.

MONETARY POLICY

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Table 1: Changes in Perceptions/Expectations (% of Banks)

Inflation Ksh/USD Exchange rate Economic Growth %

Increase by 1-2%

Remain at the same

level

Decline by 1-2% Strengthen Remain

the same Weaken 2-3 3-4.4 4.5-5 5 Above 5

Sep -2009 60 24 16 48 28 24 68 24

Nov-2009 33 30 37 45 48 7 56 22

Jan- 2010 14 45 41 50 32 18 41 59

Mar-2010 15 60 25 50 32 18 40 60

May-2010 16 44 40 24 20 56 24 76

July-2010 25 62 14 21 28 51 17 69 14

Sep-2010 38 44 18 68 9 23 9 82 9

Nov - 2010 42 46 12 61 33 6 3 12 39 46

as likely, now, over 80 percent have forcast= a 5percent growth as most probable. Once again, thenon-bank private sector has shown the sameexpectation. Perhaps not changing their minds, but thatonce more information was made available, theconclusions and expectations changed.

When one looks at the responses with respect tointerest rate expectations, which has been the keyvariable of interest to the MPC, the commercial banksinitially expected rates to fall and then as they broughtthem down they reported revised expectations that theywould remain stable, suggesting a slower rate ofreduction in the interest rates. These gradual ratedeclines, which were noted in both base rates andlending rates, were associated with an expectation ofan over 10 percent increase in private sector lending.This coincided more or less with what the privatesector foresaw as their demand.

This bi-monthly survey is a live instrument and thequestionnaire is constantly improving. It has allowedthe MPC to talk to the CEOs of banks and, on thebasis of their own submissions – the forms are now

being filled by very senior bank officials – questiontheir interest rate spread and exchange rate forecasts.

Table 1 shows that expectations for higher economicgrowth in 2010 and a strong exchange rate have beenmaintained. Generally, inflation has been expected toremain low and stable for the remainder of 2010. Butthe proportion of respondents who are expectinginflation to rise has continued its upward trend sinceJanuary 2010. Similarly, Table 2 shows that non-bankprivate sector firms have maintained their expectationsfor higher economic growth, low and stable inflation,and a strong exchange rate. A lower proportionanticipates an increased demand for credit. Overall,these surveys have enabled the MPC to track theimprovement in confidence in the performance of theeconomy.

In conclusion, the one success that the MPC has hadin the market is to coordinate expectations. This hasallowed the market to process information providedcorrectly and also to understand this vital subject ofmonetary policy, and its transmission mechanism to theeconomy.

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I n f la t io n K s h /U S D E x c h a n g e r a t e

E c o n o m ic G ro w t h % D e m a n d fo r C re d it

I n c r ea s e b y 1 -2 %

R e m a in a t th e s a m e le ve l

D ec lin e b y 1 -2 %

S tr en g the n

R e ma in th e s a m e

W ea ken

2 -3

3 -4 .4

4 .5 -5 5

A b o ve 5

D e c lin e

R e ma in th e s a m e

I n c r ea s e b y 1 -1 0 %

I n c r e a s e b y 1 0 -2 0 %

S e p -2 0 09 6 0 2 4 1 6 4 8 2 8 2 4 6 8 2 4

N o v -2 0 09 2 0 2 0 6 0 2 2 7 8 9 0 1 0

J a n - 2 0 10 1 8 6 4 1 8 3 0 4 0 3 0 7 3 2 7 1 7 1 7 6 6

M a r -2 0 10 3 8 5 2 1 0 1 9 4 8 3 3 8 6 1 4 3 3 1 7 5 0

M a y -2 0 10 4 5 1 8 3 7 2 8 4 3 2 9 5 5 3 3 3 9 1 5 3 0 2 5 3 0

J u l-2 0 10 2 8 2 8 4 4 2 6 2 1 4 8 1 7 6 6 1 7 7 3 3 3 3 2 7

S e p -2 0 10 4 2 3 2 2 6 4 2 2 1 3 2 1 6 2 1 6 3 7 4 7 4 6

N o v -2 0 10

3 5 3 6 2 9 6 1 3 3 6

1 9 5 0 3 1 2 3 4 6 2 3 8

Table 2: Changes in Perceptions/Expectations (% of Non Bank Private Sector)

The inaugural Monetary Policy Forum was held on10th August, 2010 at the Kenya School of MonetaryStudies. The Forum, organised by the Central Bankof Kenya (CBK) and Kenya Bankers Association(KBA), brought together key stakeholders from thepublic sector, media, academia, research institutions,and financial and real sectors to discuss monetarypolicy issues, banking sector developments, financingof private sector activities and also develop publicawareness on financial services. It also provided aplatform to obtain feedback on the impact of monetarypolicy decisions by the Monetary Policy Committee(MPC) on commercial banks and the real sector. Thetheme of the Forum was "Lubricating the EconomicEngine with Adequate and Affordable Credit".

In his opening remarks the Governor, Prof. NjugunaNdung'u said such public forums provide importantavenues for bringing together key stakeholders todiscuss how monetary policy affects them, to learnabout banking sector developments and the

First Monetary Po l i cy Forum

opportunities they present. "In addition, he said sucha forum helps in the understanding of how financesupports private sector activities and sensitizes thepublic on the range of financial services".

Stakeholders agreed that in order to achieve theobjectives of the Forum and in view of the currentfavourable macroeconomic conditions, and improvedliquidity conditions following easing of the monetarypolicy stance by the MPC, commercial banks shouldlower their lending rates further to enhance credituptake by the private sector. The high cost of creditwas highlighted by the private sector as a key obstaclefor the sector to contribute fully to the country's growthtarget. It was also observed that credit uptake by theprivate sector could be enhanced by increasing accessto financial services. Commercial banks wereencouraged to be more transparent by disclosing thelevel of bank charges to the public.

click here to read the full report

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The Kenya Government Bond Programand Market Development

The on-going construction of Thika Road, Nairobi, fundedby proceeds from the infrastructure bond.

Photo by NMG

FINANCIAL MARKETS

Over the years, the Central Bank of Kenya in liaisonwith stakeholders in the financial sector has put in placea number of key initiatives that have seen tremendousgrowth of Kenya’s bond market. The Bank has workedclosely with the Market Leaders Forum (MLF), aconsultative group consisting of among others securitiesdealers, investment bankers, Treasury, the Central Bankand the Capital Market Authorities.

To begin with, lengthening of the maturity of securitiesin the domestic debt portfolio was the initial task to beaccomplished. Prior to 2002, government domesticdebt component of public debt consisted mainly of shortterm instruments, a source of significant refinancingrisk. In fact, the composition of Treasury bills to bonds

in the portfolio stood at 70:30. This necessitatedformulation of a deliberate policy action to restructurethe portfolio by lengthening the maturity of instrumentsthus substantially minimizing refinancing risksassociated with short-term debt and contributing todevelopment of a vibrant secondary market for bonds.Certain reforms were introduced to create demand inlong term bonds including the lowering of the cash ratiofor commercial banks to release liquidity therebyreducing short term interest rates, streamlining thedomestic Borrowing Cash Plan in favour of bonds andthe liberalization of the pension sector.

The process began with the phased introduction ofmedium to long term bonds in the market, a step that

saw successful issuance of bonds of up to 15 yearsmaturity before 2008 and the first 20-year in June 2008.Indeed, the first 25-yr bond offered to the market inJune 2010 and reopened a month later received verypositive market uptake. In February 2011, the CBKsuccessfully issued the longest bond in the market, 30year, dubbed ‘Savings Development Bond’ (SDB). Asa result of this effort, the ratio of Treasury bills to bondsin the debt portfolio has since reversed from 70:30 in2001 to 23:77 so far while average maturity of allsecurities in the portfolio grew from about 8 months in2001 to 5 years 4 months by February 2011. Thisdevelopment is a perfect reflection of market maturityand successful achievement of the initial objective setout in the pursuit of bond market development.

The issuance of medium to long term bonds alsoprovided the much needed impetus to develop a liquidbond market and a reliable yield curve, a keybenchmark tool for guiding future issuances of financialsecurities as well as pricing other financial productslike corporate bonds, mortgages and commercial loans.

Milestones

Building on the growth of the bond market achievedfrom the foregoing, the Central Bank of Kenya togetherwith the MLF adopted and began the implementationof benchmark bonds program to improve liquidity atthe secondary market and firm up the yield curve.Benchmark Bonds are securities characterized by highcredit quality, least default risk, and reasonably largein volume. They are generally highly liquid, have mostdepth i.e. most widely held by various investors, havethe narrowest bid-offer spreads, preferably lowest yieldand therefore carry the potential of active trading inthe secondary market.

Benchmark bonds are bonds against which othersecurities or interest rate products are priced orreferenced. Consequently, benchmark issues form thebasis for deriving a benchmark yield curve. Theprogramme which took off in 2007 began with theidentification and adoption of 2, 5, 10, 15 and 20 year

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CBK Newsletter

maturities as benchmark tenors for issuance along thematurity spectrum. The implementation of theprogramme entailed issuance of large size bonds oftenors identified in order to build liquidity and promoterobust secondary market trading. The Bank hasconsistently and successfully issued bonds in thesetenors and employed strategies identified in theprogramme to ensure build up of liquidity around eachbond issued.

One of the strategies that have received notable marketsupport since inception in April 2009 is the reopeningof benchmark bonds to increase both the volumes andthe holders for enhanced trading. Bond reopeninginvolves increasing the outstanding amount of apreviously issued bond. It involves offering additionalamounts of the same instrument, which bears the samefeatures of an existing outstanding bond, except forthe issuance date and possibly, the offer price or yield.About 9 bonds have been reopened so far with allreopening auctions oversubscribed.

Active secondary bond market is critical for successfulmobilization of domestic resources by governmentthrough borrowing and to investors as an exit

mechanism in accordance with their investmentpreferences. Other strategies in the pipeline under thebenchmark bonds programme include but not limitedto conversions, switches/exchanges, consolidations andpotential buy-backs. These strategies are aimed ateliminating the fragmentation problem in the marketwhere small illiquid bonds are retired or switched tobenchmark bonds to build liquidity and enhance trading.Another milestone that has contributed to market growthto levels seen today is the introduction of new productsaimed at diversifying the range of products from theconventional treasury securities for market deepeningand development. In FY2008/2009 budget speech, theGovernment began to tap into the bond market to financeinfrastructure projects that require huge capital outlayfor long term funding and as a way of promoting publicaccountability and transparency on the use of proceedsfrom long term project specific bonds.

In February 2009, the government through the CBKlaunched the first ever Infrastructure bond (IFB) tofinance key economic and social infrastructure aroundthe country. This bond was very successful attracting145% subscription which was a reflection of hugemarket buy-in and sense of patriotism by the citizenryin ownership of the country’s development agenda.

Geothermal energy: One of the projects to benefit from the proceeds of Infrastructure Bond.

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CBK Newsletter

All other IFBs issued so far were oversubscribed withthe last single issue of Ksh 31bn in August 2010 takenup at 118% subscription. In taking this move,government set a precedent for other public agenciesand private sector to make use of the strength of theirbalance sheets and tap into the local capital market toraise funds to finance their long term projects throughissuance of infrastructure bonds. The Kenya ElectricityGenerating Company (KenGen) was one such entitythat took up the challenge and successfully issued itsfirst Ksh 25b PublicInfrastructure Bond(PIBO) in November 2009which was heavilyoversubscribed.

In recognition of marketmaturity as a reflection ofability to process availableinformation for pricediscovery, the CBK recently started the issuance ofmarket determined coupon bonds (as opposed to presetcoupon bonds) beginning with maturities up to 10 years.This move has helped minimize the costs associatedwith bonds servicing by government, created anopportunity for price discovery and promoted marketefficiency.

In diversifying the range of products, the Bank alsointroduced the 364-days Treasury bill in August 2009.This paper has not only added to the range of moneymarket instruments but also promoted development ofthe money market yield curve and as a benchmark forpricing one year money.

It has attracted great popularity mainly from thecommercial banks. In providing investment products tothe retail sector, the government through the CBKlaunched the debut 30-year Savings Development Bond(SDB) in February 2011 aimed at promoting a savingsculture among the Kenyan population in line with the tenetsof Vision 2030, which was received with a lot of success.In addition, the bond was a platform for stimulatingpersonal economic empowerment by providing analternative investment instrument that is safe and securewhile delivering solid and dependable returns.

The issuance of the 30-year SDB came at anopportune time when Kenya had entered into a new

constitutional dispensation which reflects fortifyingpublic confidence and contribute towards determiningthe country’s future growth and economic development.

At the secondary market level, key initiativesundertaken include the Introduction of AutomatedTrading System (ATS) for Treasury bonds in November2009 that saw increased trading of bonds as a result ofmarket efficiency and confidence. Transaction cyclewas in effect reduced to T+3. Annual bonds turnover

at the NSE increasedfrom Ksh 108Bn in 2009before introduction ofATS to Ksh 484Bn in2010, after theimplementation of theATS.

Investing ing o v e r n m e n t

Securities - Central Depository for GovernmentSecurities (CDS) Account a key prerequisite.

It is a requirement that those who wish to invest inGovernment Securities open a CDS account at theCentral Bank of Kenya (CBK-CDS) or at its branchesand currency centres. Investors outside Kenya canopen CDS account as nominees through CBKauthorized agents including commercial banks, stockbrokers, investment banks and advisors licensed by theCapital Markets Authority.

Opening a CBK-CDS account is free of charge. Inorder to invest, investors MUST fill in application formsfor preferred bonds or Treasury bill (available on http:// w w w. c e n t r a l b a n k . g o . k e / s e c u r i t i e s /ApplicationForms.aspx) or from the Head office inNairobi or branches in Mombasa, Kisumu or Eldoretor at any the currency centres in Nakuru, Meru andNyeri. CBK has also partnered on a pilot basis withfive commercial banks namely Kenya CommercialBank, National Bank of Kenya, Equity Bank, Co-operative Bank of Kenya and Kenya Post OfficeSavings Bank to facilitate the opening of CDS accountsand placing of applications for Treasury bills and bonds.

Benchmark bonds are bonds against which other securities or interest rate products are priced or referenced.

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What others said about Infractructure Bonds...

“The future is very bright for tworeasons: they enable thegovernment to raise long-termfunds which will help implementseveral projects that areenvisaged in the Vision 2030.Secondly, it offers saversattractive interest rates therefore

being an excellent investment opportunity”.

Mr. James Murigu, Director, Metropol Africa

“Market players actively participated in explaining tothe market, via the media, the rationale for theinfrastructure bonds, demystifying the bond andtechnical terms associated with them. This third-partyendorsement by market players was critical in gettingpublic to buy-in, creating ananticipatory and positivesentiment around the issues,and in keeping the issue firmlyin the public eye”.

John Ngumi,Investment Banking Director,CfC Stanbic Bank Ltd.

“Is there investors’ appetite for theinfrastructure bonds? The firstinfrastructure bond of Ksh.18.5billion issued in February 2009 wasoversubscribed by 45 percentwhile the second issue of Ksh.18.5billion in December 2009 wasoversubscribed by 138 percent. InMarch 2010, the governmentissued Ksh.14.5billion. This was oversubscribed by 143percent. In August 2010, the government offered Ksh.31.6billion that was oversubscribed by 18 percent. Consideringthe significant investor participation in those issues, it isclear that the infrastructure bond is very popular withinvestors and will continue being a preferred investmentavenue”.

Mr Peter Wachira, Senior Investment Manager,Pinebridge Investments

“By issuing InfrastructureBonds, the Governmenttook the first step in settinga benchmark for otherissuers to come into themarket. This has createdpublic awareness onalternative investmentchannels thus deepening thecapital markets. Safaricomand Kengen issued theirfirst public Infrastructure Bonds to a resoundingsuccess, an indication of a ready market for the Bondsand the priority granted to infrastructure by the public.The Government recognizes that capital markets playa pivotal role in raising capital through a well developedbond market to meet increasing demand ofinfrastructure development from both the private andpublic sectors. Bonds also act as a pricing benchmarkfor similar bonds issued by other public and privatesector players. As a way forward, it is expected thatthe Bond program will continue with enhancedparticipation of more public entities”.

Mr Charles Kairu, Senior EconomistMinistry of Finance

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CBK Newsletter

The regulators of the Kenyan financial sectorstepped a level higher to formalize linkagesamong them. This includes sharinginformation and developing more effectiveapproaches of dealing with issues of mutualinterest within the sector. These issues includesupervision of players, registration andlicensing of players, consumer protection andcompensation, research and capacity building.

Currently, there are five independent sectoralregulators in the Kenyan financial sector,namely; the Central Bank of Kenya (CBK)oversees the banking sector, the CapitalMarkets Authority (CMA) supervises thecapital markets, the Retirement Benefits

Financial Sector Regulatorscollaborate

Authority (RBA) manages the pensions andother forms of retirement schemes, theInsurance Regulatory Authority (IRA) runsthe insurance sector and the newly establishedSACCO Societies Regulatory Authority(SASRA) oversees SACCOs with FrontOffice Service Activity (FOSAs)

Need For Collaboration

Though the regulators have previously sharedinformation and collaborated on a need-tobasis, there was no formal agreementsupporting their collaboration. It is with therealization that collaboration can assist in the

From L-R: Mr. S. Makove, CEO, IRA; Prof. N. Ndung’u, Governor, CBK; Mr. J. M’Igweta, Chairman, RBA, Mr. M.Cheserem, the then Chairman, CMA; Mrs. S. Kilonzo, CEO, CMA; Mr. E. Odundo, CEO, RBA and Mr. S. Mainda,Chairman, IRA, respond to journalists after signing the Memorandum of Understanding on 31st August, 2009.

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CBK Newsletter

effective performance of their respectiveduties of promoting a safe, sound and stablefinancial system that CMA, CBK, IRA andthe RBA entered into a Memorandum ofUnderstanding (MOU) on 31st August 2009.

Further, the response for continuedconvergence among the players in thefinancial sector became inevitable with therecognition that risks emanating from eitherof the sub-sectors has the potential to affectthe safety, soundness and stability of theentire financial sector.

In addition, the importance of collaborationbetween financial sector regulators was

Since the signing of the MOU, the financial sectorregulators have realized some key achievements.These include secondments and attachment of staffamongst the regulators for knowledge exchangeand capacity building; amendment of the respectivelegal frameworks to support the collaboration;harmonization of financial sector licenses to expireon 31st December of each year and jointparticipation at the Eldoret, Kisumu, Mombasa andNairobi Agricultural Society of Kenya (ASK)Shows.

All the regulators have since joined the FinancialEducation and Consumer Protection (FEP)spearheaded by the Financial Sector DeepeningTrust (FSD) Kenya with the ultimate aim ofdeveloping a National Strategy on financialeducation for Kenya; The regulators hold semi-annual Joint Board of Directors Retreats duringwhich the directors of the four regulators reviewprogress in the collaboration efforts and decideon their action plan.

A glimpse of the financial regulators ‘village’ during thejoint participation at the Nairobi International Trade Fair.

Achievements

“Individual commitment to a groupeffort - that is what makes a teamwork, a company work, a society

work, a civilization work”.

Vincent Lombardi

reinforced by the recent global financial crisiswhich was partly blamed on loose regulationof players heavily involved in financialinnovation and having cross sector operations.

The MOU formed the basis of strengtheningthe financial sector regulators’ collaborationin the cross-sector supervision of financialinstitutions and cooperation in other mattersof mutual interest. Currently, plans areunderway for SASRA to be a signatory tothe MOU.

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CBK Newsletter

The morning of 27th August 2010 ushered in a newdawn for Kenya. At exactly 10.27 a.m., thousands ofKenyans gathered to witness the promulgation of anew Constitution. Kenyans had earlier approved theInstruments of Promulgation through a peacefulReferendum held on 4th August 2010.

With the thousands in attendance looking on, PresidentMwai Kibaki signed the Instruments of Promulgationand declared Kenya’s new Constitution operational.

So what is new for the Central Bank?The New Constitution has brought with it a number ofpositive elements for the Central Bank, as containedin Article 231 of the new law.

Perhaps the most prominent provision for the Bank isthat the new supreme law has re-established the Bankas a constitutional institution. This is significantbecause it has created a new sense of perpetuity forthe Bank, given that constitutional bodies are not easyto decimate. The provision has also underscored thepremier status of the Bank as a national institution.The new Constitution has emphasized on the

independence of the Bank. The new independence islaudable as international best practice favours fullindependence of Central Banks.

The new Constitution has further restated the corefunctions of the Bank thereby insulating the Bank fromthe risk of political interference. This is unlike before,

when the functions were only placed in an Act ofParliament that is easy to amend.

Another major development in the new Constitutionrelates to the features of currency notes and coins.Going forward, the new law allows currency notesand coins to bear images that depict Kenya or anaspect of Kenya but not the image of any individual.Your wallets will therefore soon host refreshed visitorsfeaturing natural and man-made symbols of the nationbut steering clear of human images.

In effect, the new Constitution has placed the CentralBank on an elevated pedestal that can only serve toenhance attainment of its statutory mandate and inturn spur economic development in the country.

Central Bank and the New Constitution

The President declaring Kenya’s New Constitution Photo by PPS

WHAT’S NEW?

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CBK Newsletter

The Kenyan currency has a long history.In Africa and the rest of the world, in the olden days,trade was carried out by a barter system. This wasconsidered a reasonably efficient method when mostlybasic necessities were exchanged. Goats or sheep,for example, were exchanged for grain or in the caseof people from Ukambani who exchanged honey forfood grown in the highlands of Mt. Kenya. Thrivingof the barter system of trade was predominantlydependant on the availability of goods for goods.

The system later developed to the use of cowrie shellsand beads. Cowrie shells were rare ornAamentalartefacts and therefore formed a sustainable qualityproduct for exchange. The same case applies to the

beads which were greatly desired among the Kenyancommunities.

The entry of what is commonly considered as realcurrency in Kenya can be traced back to 1800 - 1850when the Maria Theresa Thalers were introduced inthe Kenyan coast. The Thalers were famous silvercoins used around the world in the 18th and 19thCentury and used by Indian, Greek and Europeanmerchants at the Eritrean and Kenyan coasts. Thefirst Thalers were minted around 1741 and namedThalers after the beautiful Empress Maria Theresa

who ruled Austria, Bohemia and Hungary (AustrianEmpire) from 1740 to 1780. The Thaler was the mostpopular and only acceptable silver currency amongthe Arabs.

Despite the Thaler’s popularity in the East AfricanCoast, it was not able to penetrate upcountry and theIndian Rupee was used for payment of Indian workersduring the building of the Kenya-Uganda railway in1896 and managed to move inwards becomingacceptable by the African population who in variousmother tongues called it different names such as“Rupia” or “Pesa”.

The Indian Rupee was abolished after Kenya becamea crown colony in 1920 when the Imperial BritishEast Africa’s (IBEA) mandate was terminated.

The East African Currency Board (EACB) was thenestablished to oversee the issuance of currency in theregion, which saw the introduction of the East AfricanFlorins.

Some of the items used in barter trade

1905 Five Rupees

1850 Maria Theresa Thaler

Evolution of the Kenyan Currency

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CBK Newsletter

1920 One Florin Coin

In January 1922, the shilling equivalent was introducedin all the three East African countries and by June1923, the shilling was firmly established as officialcurrency in Kenya, Uganda and the then Tanganyika.

Kenya began printing and minting its own currency in1966 under the mandate given to the Central Bank ofKenya that was established in the same year.

1921 EACB 100 Shilling Note

The initial issue of Kenya shilling notes were in thedenominations of 5, 10, 20, 50 and 100 shillings, allbearing the portrait of the First President of Kenya,H.E. Mzee Jomo Kenyatta in the front, and diversescenes of economic activities in Kenya at the back.

First Kenyan banknotes

In 1979, following the death of H.E. Mzee JomoKenyatta and the subsequent inauguration of H.EDaniel Toroitich Arap Moi as the second Presidentof the Republic of Kenya, new notes and coins withnew security features were issued to commemoratethe events and usher in a new era by including thePresident’s portrait.

The new Constitution Section 231(4) requires thatnotes and coins may bear images that depict Kenyaor an aspect of Kenya but should not bear the imageof any individual. Central Bank will therefore in thenear future be expected to replace the currentgeneration of notes and coins with new currencybearing these new features. And, given the intricateprocess of amending the Constitution, we can beassured that these features will be with us forgenerations to come.

“Everyday do something thatwill inch you closer to a

better tomorrow”.Doug Firebaugh

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CBK Newsletter

ECONOMICS MADE EASY

What is inflation?Mention the word inflation andthere are as diverse mentalimpressions of what it is as thenumber of people in the audience.It is therefore worthwhilepresenting, for publicunderstanding, financial andeconomic subjects in simple termsin order to converge publicunderstanding of this topic.

Inflation is the continued (orsustained) general increase in theprices of items and services that thepeople of a given country use overa given period of time e.g when theprice of maize flour which wasoriginally costing Ksh.54 increasesto Ksh.70.

Inflation occurs when financialand economic changes, actual orexpected, cause the demand forgoods and services to go abovethe existing supply at existingprices. It also occurs when supplyfalls below demand for goods andservices e.g when there is demandfor sugar yet the supply is low.

What influences inflation?

In Kenya, inflation is mainlyinfluenced by changes in foodsupply, petroleum and other fuels,transport and communications.Changes in the general price levelare influenced by the amount ofgoods and services available andthe amount of money in theeconomy. Other factors that affectinflation include: drought, floods,wars, crop diseases, politicalupheavals, or other unique eventstake place.

CBK has an inflation target of 5percent plus or minus 2 points.Overall month on month inflationwas 5.4 percent as at January 2011.This indicates that Kenya is withinthe inflation target.

Government agencies conducthousehold surveys to identify abasket of commonly used consumergoods and services and track, overtime, the prices of these items. Acommon price for all baskets isderived and it is referred to as theConsumer Price Index (CPI).

How does this affect theconsumer?

Even though inflation sometimesleads to short-term gains, inflationeventually disrupts normaleconomic activities. When pricesof the goods and services that webuy increase, our ability to buy themis reduced and we can only buyfewer of the same. This forcespeople of lower income to use lessquantity or substitute with poorquality food items or adjust theirbudgets accordingly. This mayaffect their nutrition and healthstatus, such that their laborproductivity is reduced.

High inflation also affects thosewho earn fixed incomes such aspensioners. A parent will keep aclose observation on the changesin fees in schools where his/herchildren attend. Likewise, highinflation limits investments bybusinesses and can also limitemployment of labor. Investors

track inflation in order to knowwhere to invest their wealth. Policymakers and economists trackinflation to decide how to manageor change economic policy orstrategies. Quite often, duringperiods of high inflation, businessspending decreases, consumerspending decreases and stock andbond prices usually depress rapidly.

Inflation is controlled mostly bycentral banks which control theavailability and cost of credit. Thevolume of money in circulationinfluences the cost of money(interest rates). A central bankwould track inflation in order todecide whether to make moremoney available to the public, bymaking it more affordable, or tomake less money available, bymaking it more expensive. Bymaking these adjustmentsinflationary pressures are partiallyoffset. A central bank controls theamount of money in circulation tomatch the expected economicgrowth. Control of money incirculation to influence price levelsis called ‘Monetary policy’. Forthese reasons, we need to havelow, stable and predictable inflationlevels to support economic growth.

High inflation adversely impacts the price of basic foodstuffs

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CBK Newsletter

“The Central Bank of Kenya is optimistic thatthe financial inclusion gap will be significantlynarrowed, through usage of DTMs bringingKenya closer to achieving the Vision 2030

objective of economic growth, developmentand financial stability.

The Central Bank reiteratesits commitment to the development of an all

inclusive financial system to servea majority of the Kenyan

populace and remains ardentin formulating policies that support innovation in

the financial sector”.Central Bank Governor, Prof. Njuguna Ndung’u

After Licensing The Fifth Deposit TakingMicrofinance (DTM) Institution

– Remu DTM Limited

Word for word

“We, Leaders of the G20, are united in ourconviction that by working together we can

secure a more prosperous future for thecitizens of all countries. Today, the SeoulSummit delivers: the Seoul Action Plan

composed of comprehensive, cooperative andcountry-specific policy actions. The Plan

includes our commitment to: The FinancialInclusion Action

Plan, the Global Partnership for FinancialInclusion

and a flexible SME Finance Framework, all ofwhich will significantly contribute to improving

access to financial services and expandingopportunities for poor

households and small and mediumenterprises”.

The G20 Seoul Summit Leaders’ DeclarationNovember 11-12, 2010

Upcoming eventsBusiness Community VisitsThe Central Bank of Kenya (CBK), Kenya Bankers Association (KBA) and the Kenya Credit InformationSharing Initiative (KCISI) will jointly undertake sensitization forums (Business Community Visits) in Kisumu,Eldoret and Mombasa in February and March 2011. The visits are aimed at sensitizing the customers andstaff in these towns, and the general public on the benefits of credit information sharing including full filereporting.

Housing Finance Course by Wharton SchoolA Housing Finance course targeted at Sub-Saharan Africa will be held at Kenya School of MonetaryStudies (KSMS) in 11-15th April, 2011. The course will be run by the Wharton School which is part of theUniversity of Pennsylvania.

“Together with the central bank we areworking on a process of financial inclusion by

mainstreaming into the formal sector somepeople who are actively engaged in the

informal sector. This will allow us to capture alot of people who are not being included in theformal statistics that we are currently using.”

Finance Minister, Uhuru Kenyatta At AfricanFinance Ministers News Conference During IMF-World Bank Annual Meetings

“Get to know counterparts in other countries sothat it will open up and expedite communication

channels that, in turn, will help you learn from eachothers’ experiences in the march toward greater

financial inclusion”.

Alfred Hanning, Executive Director, AFI in hisopening remarks during the The 2010 AFI Global

Policy Forum

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