Central Bank of Kenya
A presentation by
PROF. NJUGUNA NDUNG’U
GOVERNOR, CENTRAL BANK OF KENYA
at
THE 18TH JOSEPH MUBIRU MEMORIAL LECTURE,
Speke Resort, Commonwealth Resort, Munyonyo
FINANCIAL INCLUSION TO DEEPEN AND DEVELOP FINANCIAL MARKETS IN
THE EAST AFRICAN COMMUNITY(EAC)
26th November 2010
Financial Inclusion


Central banks should develop a comprehensive financial inclusion package
Financial inclusion has benefits:
◦
◦
◦


In honor of Governor Joseph Mubiru, this is what he started and this is what we
need to accomplish for all EAC countries
We have lived with policy mistakes; it is time to look for sustainable solutions:
Some examples:◦
◦
◦
◦

Poverty reduction through savings and credit → financial access
Monetary policy transmission → Mechanism improves
Developing and deepening the financial markets
Monetary policy cannot work effectively when a large proportion of the population is
excluded from the market
Financial inclusion for the poor will solve the poverty problem sustainably
Failure to build strong institutions to support the markets
Build capacity for future growth through finance
The regulator in Joseph Mubiru would have advised today:◦
◦
◦
◦
◦
Be an Advisor to the market
Cultivate partnership with the market. (PPP is not a new phenomenon, you can see)
Develop the market and its supporting institutions and initiatives
Regulate the market for easy entry and orderly exit; liberalization of the financial markets is
within some predefined beacons
So, for this memorial lecture, I would wish that we fulfill these four but important pillars to
grow our financial markets
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Financial Inclusion and Poverty
Reduction

Increased access to financial services to the poor can:
Provide a safe haven for their meagre savings - some are
target savers – have investments to make at a predetermined time in future

Widen their economic opportunities

Increase their asset base through increased savings and
access to credit

Reduce their vulnerability to external shocks: Savings for
consumption smoothing

Savings-investments cycles are important for sustainable
growth and economic wellbeing. This is where capacity for
growth is enhanced
3
Status of Financial Inclusion in EAC
Countries
Access
Strands
Population
(millions)
Adult
Population
(millions)
Kenya
38.6
2009 Census
Uganda
32.3
2010 est.**
Tanzania
Rwanda
Burundi*
41
2010 est.**
10.7
2010 est.**
9.5
2010 est.**
18.7
13.2
22.3
3.7
4
Formal
22.6%
18%
12.4%
14%
N/A
Formal other
17.9%
3%
4.3%
7%
N/A
Informal
26.8%
17%
27.3%
26%
N/A
Excluded
32.7%
62%
56%
52%
N/A
Sources: FinAccess 2009, FinScope 2007- 2009
* No data available, however, Burundi is planning for a FinScope study to be carried out soon.
** Source: www.cia.gov/library/publications/the world. factbook
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Status of Financial Inclusion in EAC
Countries--
Low access to formal financial services by the adult populace in
the EAC

Broadly, access to informal financial services is relatively high

Access is skewed towards males

Females tend to utilise informal financial services

Exclusion levels are higher in rural areas than in urban areas

More than half of the adult population in the region is excluded
from any financial service – Kenya’s position is relatively better

This does not reflect a good picture for EAC economies and their
future capacity to grow

This is why the theme of this lecture is important
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Financial Inclusion has Challenges in
the Region

Supply-side barriers - Entry conditions and minimum
balances, high transaction costs, lack of proper risk
assessment criteria and information asymmetry, lack
of appropriate products/ institutions

Fear of loss - especially with bank failure histories

Demand-side barriers - Low income base, chronic
unemployment, lack of permanent income flows or
employment, inhibiting cultural values, low levels of
education and financial literacy

Physical distances to the financial markets - banks
and non-bank financial institutions
6
Available Solutions

Commercial banks branch networks: Let us make them
easier to operate and open

Mobile phone financial services: leverage on technology
for cost effective financial services:

Presents an opportunity to increase the level of financial inclusion
through the use of mobile telephones

Prevalence of mobile telephones has been recorded to be three times
the number of bank account holders

Mobile money transfer service is currently offered in almost all the
EAC countries
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Available Solutions…

Deposit Taking Microfinance Institutions
◦
◦

Credit Reference Bureaus
• Reduced information asymmetry
•
•

Focus on rural and peri-urban areas where financial inclusion is lowest
Make them conduits to reach the remote and disadvantaged areas with
lower investment costs
Build information capital – That should change the collateral technology
in use in EAC countries
Solution to Non-Performing Loans problem? – That is credit risks
Deposit Protection Insurance
◦
Re-examine the structures of the deposit insurance schemes
◦
Unified deposit insurance scheme or ‘silo’ schemes?
◦
This provides protection and confidence in the market and financial
inclusion is sustainable
8
Expansion of Branch Network of
Commercial Banks: Some Outcomes
Number of Bank Branches – Kenya, Tanzania and Uganda
•The growth is evident
•But more needs to be done
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Kenyan Banks Expansion to the EAC Region
Name of Bank
Number of Bank Branches in:
Kenya
Kenya Commercial Bank
(KCB)
Equity Bank
Diamond Trust Bank
Fina Bank
NIC Bank
Commercial Bank of Africa
(CBA)
I&M Bank
[1]
[2]
[3]
Tanzania
Uganda
Rwanda
Burundi
169
11
13
9
-
116
32
15
16
19
10
3
5
43
15
5
-
9
-
2
-
16
3
-
-
-
KCB has another 11 branches in Southern Sudan
Equity Bank has 3 branches in Southern Sudan
I&M Bank has 14 branches in Mauritius through its subsidiary Bank One
Limited
The region should develop strong indigenous banks to serve the region
in totality
They will support and facilitate trade in the region
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But we Need to Continue Searching
for More Solutions


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Increase of core capital of commercial banks
◦ Need for strong and well capitalised players
◦ Capital base to provide buffer to withstand shocks
Agent Banking
◦ Reduced costs - fixed and operational for establishing
bank branches
◦ No compromise in quality-But reach/easy and cost effective
access is important
Consumer Protection
◦ adequate disclosure of information,
◦ efficient dispute resolution mechanisms,
◦ comparability of offers,
◦ data protection and effective delivery security,
◦ Public-private sector financial literacy initiatives.
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Financial Inclusion Has Had Some
Successes

Growth in Mobile Money Transfers - Kenya
As at September 2010
 M-Pesa transferred Ksh 68.02
billion equivalent to US$ 841
million with 28.45 million
transactions
 Per day transactions-Ksh.2.3 bn or
USD 29m
 Average value per transaction Ksh
2,391 equivalent to US$ 29.6 per
transaction
 Transaction Cost at Ksh. 30-35 or
USD 0.38-0.44 per transaction.
 M-Pesa remains a low value
payment system: targets the
bottom population
This seems to be corroborated with other two pieces of evidence in the same period:•Accounts in the banking sector have increased
•Currency outside banks as a ratio of broad money has declined
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Financial Inclusion Successes…
Growth in Deposits, Loans & Advances
13
2.50
2.45
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
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Oct-10
Financial Inclusion has Macroeconomic
Implications: Kenyan Case (1)
Velocity of Money
2.40
2.35
2.30
2.25
2.20
2.15
2.10
2.05
2.00
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Financial Inclusion has Macroeconomic
Implications: Kenyan Case (2)
Currency outside banks as a ratio of M3 and Reserve Money
0.65
0.13
0.125
0.6
0.12
0.55
0.11
0.105
0.5
0.1
COB/M3
COB/RM
0.115
0.095
0.45
0.09
0.085
0.4
0.08
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Financial Inclusion has Macroeconomic
Implications: Kenyan Case (3)
Money Multiplier = M3/RM
6.50
6.30
6.10
Money Multiplier
5.90
5.70
5.50
5.30
5.10
4.90
4.70
4.50
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Financial Inclusion has Macroeconomic
Implications: Kenyan Case (4)
40,000
Excess Reserves in Commercial Banks (Ksh Million)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
0
• Excess liquidity in the banking system is a new phenomenon and without any monetary
overhang
• This is an outcome of financial inclusion mostly driven by micro accounts
• A structural transformation seems to be emerging in the financial system
• This excess liquidity has implications on its pricing structure as well as room to finance
investment
• If excess liquidity is increasing and inflation is stable and declining; something
will have to give way: the price of credit
• But also excess liquidity means that the capacity for banks to increase credit to
private sector has increased
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Implications for Monetary Policy (1)

Declining velocity - an indication of financial depth

Rising multiplier - an indication of financial innovation

Currency outside the banking sector as a ratio of Broad Money
has declined - a signal for less money being held in “unsafe”
places

These outcomes then portend a challenge to the current
monetary policy framework:


Velocity movements may imply unstable money demand

The relationship between reserve money and broad money is unstable and
unpredictable – multiplier unstable

Excess liquidity in the banking sector is a new phenomenon
Monetary policy framework; Target broad money via reserve
money as an intermediate target – Totally inadequate
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Implications for Monetary Policy (2)

Structural transformations in EAC
•
Implementation of the Common Market Protocol.
•
Establishment of an East African Community Monetary Union
(EAMU).
•
Significant innovation uptake
•
Financial institutions are also rapidly branching out into many
economies in the region

There is need to consider the conduct of monetary policy
given these developments

Financial innovations have implications on monetary
policy transmission
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Conclusion

What Joseph Mubiru would have wanted to see for Uganda
and the EAC is welfare benefits of financial inclusion

Financial access is a sure way of sustainable poverty reduction

Financial infrastructure has changed and we now have to use a
combination of financial inclusion solutions for immediate
results

The central banks should be the agents of this change; the
structural transformation; but we need to manage it to deepen
and diversify the financial markets in EAC - as Governor
Joseph Mubiru would have wished

This way we can meaningfully say that financial development
will support economic development and will finance
investments for economic development
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THANK YOU
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