AGRICULTURAL DEVELOPMENT IN
THE FINANCIAL INCLUSION AND
FINANCIAL STABILITY AGENDA
Presentation by
PROF. NJUGUNA NDUNG’U
GOVERNOR
CENTRAL BANK OF KENYA
at the
Conference on Revolutionising Finance for Agri-Value Chains
Nairobi, 14-18 July 2014
Wednesday, 16 July 2014
CORE MANDATES OF CENTRAL BANKS
1.
2.
3.
4.
Price stability
Fostering solvency and stability of deposit taking financial
institutions
Support the development agenda of the government
An effective and efficient national payments and
settlement system
These core mandates revolve around financial inclusion in the
public policy development agenda:
 Financial inclusion – create and develop the market
 Financial stability – Protect the market
 National payments system – Promote efficiency of the
financial sector and the market in general
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FINANCIAL INCLUSION AND FINANCIAL STABILITY:
COMPLEMENTARY POLICY COMPULSIONS
They feed into each other and complement each
other: Market development and market protection
 This is why we need facilitative regulatory and
supervisory structures:

 Ensures that the formal financial system delivers
affordable financial services to the population:
 With greater efficiency
 Without compromising safety and soundness
 But also reach out to poor segments
market/population
of
the
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE

Supporting inclusive finance can then be
summarized in 6 major areas that seem to have
worked in the last 10 years:
1. The payments infrastructure and, more so, for small
holder farmers and SMEs
2. The platform of safe-haven for savings by small
holders, SMEs and individual households

This allows savings to be used to smooth future
consumption and escape cycles of shocks –



be they from weather conditions or exogenous shocks in
the macro-economic sphere
They are also target savers: Savings investment cycles
allow them to accumulate capital
The deposit insurance mechanism safeguards this platform
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE…
3. Central Banks as agents of Market Development
Central Banks should encourage banks and microfinance
institutions to innovate and cover all market segments. This will
allow the financial market to grow and deepen. This is because:
◦ Small holders and SMEs are small participants in the market that
has peculiar characteristics: work in highly segmented markets and
in different ecological and poverty trapped regions.

The questions to ask then are:
◦ What products would they prefer?
◦ What financial infrastructure is appropriate to them?
◦ What delivery mechanism of financial services is appropriate to
them?
◦ How do we make sure they fit in the financial ecosystem?
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE…
4. Micro and Macro Prudential Supervision
◦ Central banks and policymakers are increasingly focusing on
the implications of regulation for equitable growth
 As they become more aware that incorporating considerations of
fairness into financial sector policy goes hand in hand with the
promotion of stability
 Developments in the recent years have ensured that the pursuits of
financial inclusion and financial stability are no longer policy
options but policy compulsions
◦ So, questions such as the extent to which small holders and
SMEs due to their size, nature and location, pose any
challenge to financial stability and financial integrity become
increasingly important.
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE…
4. Micro and Macro Prudential Supervision…
◦ Financial inclusion allows us to think about market creation and
development
◦ Financial stability and financial integrity allows us to implement
measures to protect the market
 This is where micro and macro prudential supervision comes in to
help the market to grow
◦ But also once Central Banks support strong financial institutions
in the market, then a combination of better regulation and
strong institutions will safeguard the financial market – stability
and integrity: strong institutions of the regulator as well
 Financial Action Task Force (FATF) — a standard setting body (SSB)
— has recently explicitly acknowledged financial exclusion as an
important risk in its efforts to combat money-laundering and
terrorist financing
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE…
5. Promotion of Financial Inclusion for Poverty Reduction
◦ Central Banks promote financial inclusion as a credible public
policy that will support poverty reduction sustainably
◦ This allows financial services to be accessible and credible to
the SMEs, small holder farmers and households in general
◦ Central Banks also ensure supply side protection:
 Central banks are playing an active role in promoting financial
education among consumers, ensuring fair treatment by financial
institutions - consumer protection
 Allowing for financial education to take root improves allocative
efficiency of financial resources
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE…
6. ICT – Provides us with Two Platforms:
I.
A Platform for Financial Services:
 This is where money transfer, payment of goods and services,
savings and credit provision take place efficiently and
effectively: This is where mobile phones have become an important
instrument to effect financial services and accessibility; also cost
effective
 This is also where traditional banking services have improved
and become efficient
 This efficiency has also worked to solve physical distances to
financial service points and also costs of accessing financial
services
 Central Banks in this region have been instrumental in this
development in the last seven years
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ROLE OF CENTRAL BANKS IN INCLUSIVE
FINANCE…
6. ICT – Provides us with Two Platforms:…
II. A Platform for Information Search and Market
Efficiency
 SMEs and small holder farmers are able to gather
information on goods in the market, market prices in
different locations and even high yielding varieties in the
market
 Credit rating agencies promoted by Central Banks have
used similar platforms to gather, analyse and disseminate
information to protect the market and build confidence on
borrowers
10
Percent
70
63
60
47
50
51
37
40
33
31
31
30
25
22
20
39
15
9
10
0
Formal Prudential
Formal Nonprudential
2006
2009
Informal
Excluded
2013
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Source: Central Bank of Kenya, 2013
PROGRESS IN ACCESS TO FORMAL
SERVICES BY LOCATION
Formal
Total
35.2
Informal
26.7
Excluded
31.7
50.8
Urban
Rural
Formal Other
7.8
29.2
33.1
FinAccess Survey 2013
9.7
25.3
4.3
15.8
30.4
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OUTCOMES - EXPANDING BRANCH NETWORKS,
MICRO FINANCE INSTITUTIONS
•
Branch network
increased by 2.7 times
between 2005 and
2013
•
Growth driven by
competition and
declining barriers to
entry
•
Faster growth in rural
areas
1600
1400
1200
1000
800
600
400
200
0
353 405
452
537
181 170 288 350
2005
2006
2007
2008
620
578
418
2009
urban
447
2010
rural
792
723
490
2011
554
2012
825
608
2013
• 236 % — rural
compared to 134%
— urban
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PROGRESS IN BANK USE IN RURAL AREAS
Bank Use - Rural Areas
Currently Use
2013
29.6
2009
29.9
2006
10.5 4.1
Used to have
21.9
Never Had
48.6
16.4
53.6
85.5
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OUTCOMES OF THE SUPPORTIVE
ENVIRONMENT BY THE CENTRAL BANK

In the real sectors, the inclusion initiatives:
◦ Are generating incremental output on the supply side, and;
◦ Incremental employment and income on the demand side to
absorb the incremental output

In the financial sector, the inclusion initiatives:
◦ Are diversifying the asset bases of the lenders
◦ Amassing deposits and reducing cash outside banks
 Can lead to intermediation of greater amounts of domestic
savings, leading to the strengthening of investment cycles and
thereby greater stability
 Improved monitoring of the integrity of the financial system
 Massive economic rent generated by the financial sector: daily
mobile phone transactions in 2013 are worth KSh.5.2 Billion
(US$61.3 Million)
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OUTCOMES OF THE SUPPORTIVE
ENVIRONMENT BY THE CENTRAL BANK…
External
Shock
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TIMES HAVE CHANGED….
Albert Einstein
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Types of financial inclusion ICT service
THANK YOU
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