BANKING AND FINANCE IN KENYA:
INSTITUTIONAL SET UP; STRENGTHS
AND WEAKNESSES; AND
OPPORTUNITIES AND AREAS FOR
REFORM
A PRESENTATION TO THE MALTACOMMONWEALTH TRAINING WORKSHOP
ON BANKING AND FINANCE FOR SMALL
STATES, MALTA
CENTRAL BANK OF KENYA
11TH TO 19TH APRIL 2011
1
CONTENT
Kenya
Structure of the Banking & Financial
Sector in Kenya.
Central Bank of Kenya- Role.
Composition of the banking sector
Banking Sector Challenges.
National Payment System.
Financial Access in Kenya.
Strengths- Kenyan Banking & Financial
Sector.
Weaknesses- Kenyan Banking &
Financial Sector.
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Kenya
Location: Eastern Africa, Coast of Africa.
Capital: Nairobi.
Population: Approx. 40 million.
Area size: 582,646 sq.Kms
Currency: Kenya Shilling (Kshs) (5th April
2011- US$1=Kshs 82).
National Languages: English & Kiswahili
Inflation rate: 9% (March 2011)
Political system: Unitary State with
multiparty democracy.
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Structure of Kenyan Banking & Financial
Sector(1)
DFIs
KPOSB
4
Structure of Kenyan Banking &
Financial Sector (2)
The SACCO Societies Act, 2008
paved way for the establishment of the
SACCO Societies Regulatory
Authority (SASRA).
SASRA in charge of SACCOs
licensed under SACCOS Act.
Currently over 4,000 cooperative
societies.
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Central Bank of Kenya(CBK) – Role
Core mandate-Price and Financial
System Stability.
Key Secondary functions:◦ Formulation and implementation of
foreign exchange rate policy.
◦ Provision of an efficient national
payments system; and
◦ Acts as banker, advisor and fiscal
agent of the government.
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Central Bank of Kenya(CBK) –
Legislations under its purview (1)
Central Bank of Kenya Act.
Banking Act.
Microfinance Act.
Building Societies Act
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Central Bank of Kenya(CBK) –
Legislations under its purview (2)
Banking Act
Deals with:
• Licensing of banking institutions.
• Supervision of institutions
• Liquidation and winding up
• Penalties
• Other supervisory and prudential issues
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Overview of Kenya’s Financial Services
•
•
•
Kenya’s Financial Services comprises: Banks,
Insurance Companies, Brokerage Firms,
Pension Funds, Microfinance Institutions and
Saccos.
Financial services currently contributes
i) 5.4% of GDP
ii) potential to contribute as much as 8% to
15%
of GDP.
iii) potential to increase formal sector
employment beyond the current share of
1%.
Has been growing faster than the overall
economy
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Banking sector developments
Items
Year 2010
(February)
Year 2011
(February)
% of change
Structure of the
balance sheet
USD17.8 Billion
USD 22.3 Billion
25.4%
Loans & Advances USD9.8 Billion
USD12.2 Billion
23.7%
Deposit Liabilities USD13.8 Billion
USD16.7 Billion
21.2%
Capital &
Reserves
USD2.3 Billion
USD3.1 Billion
30.2%
Non-performing
Loans
USD0.8 Billion
USD0.7 Billion
6.5%
Profitability
USD0.12 Billion
USD0.15 Billion
33.9%
Liquid Assets
USD7.0 Billion
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Potential in the Banking Sector – Deposits,
Loans & Branches
Huge potential
to mobilize
deposits and
support further
increase in
demand for
credit.
Huge potential
for expansion
to rural and
peri-urban
areas.
As
demonstrated
by increase in
Deposit
accounts from
2.6 million in
2005 to 12.8
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million in
Banking Sector Challenges(1)
Segmented markets: Weakens policy
transmission.
Weak and strong banks: Pricing of
products.
Growing customer sophistication:
Technological changes.
Regulation lagging innovation.
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Initiatives to overcome the
Challenges
Credit Reference Bureaus(CRB’s)- 2nd
Febr.2009.
Cost of Credit disclosures e.g. Annual
Percentage Rate(APR)-Study done.
Amendments to accommodate new
financial products –Islamic products,
electronic financial products.
Adoption of Risk Based Supervision.
Enhanced minimum capital requirement –
progressively to Kshs 1 billion($10m) in
2012 (Kshs. 350m(2009)-Kshs.
500m(2010)-Kshs. 750m(2011))
Agent Banking
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Kenyan National Payments System
(1)
Types of payment systems in Kenya:◦ Large Value Payment Systems: Kenya Electronic Payment and
Settlement System (KEPSS) RTGS
◦ Retail Payment Systems: Nairobi Automated Clearing House.
ATM Switches (Kenswitch and
Pesa Point).
Securities payment and settlement
systems - CDS and CDSC for
Government & NSE securities
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Kenyan National Payments System
(2)
Types of payment systems in Kenya:◦ Retail Payment Systems: Cross-border money transfers
including Western Union and
MoneyGram.
Mobile Payments including mobile
phone (M-Pesa, YuCash, Airtel
Money, etc) and internet banking.
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Kenyan National Payments System
(3)
Challenges:◦ Lack of Operational legislation-National
Payments System(NPS) Bill in process of
enactment.
◦ Rapid technological changes-mobile financial
services.
◦ Institutional capacity-especially in the public
sector.
Way forward:◦ Enactment of enabling legislation-NPS Act.
◦ Issuance of Guidelines on retail transfers and emoney.
◦ Continued payments system modernization –
cheque truncation.
◦ Capacity building.
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Financial Access in Kenya(1)
FSDTrust (Kenya)/other stakeholdersFinAccess studies-2006 & 2009.
Latest released on 10th June 2009Increased formal financial access rate
to 23% from 19% in 2006.
The total usage banks, Insurance,
MFIs & Saccos increased from 26% to
41%; contributed by increase in usage
of these services.
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Financial Access in Kenya(2)
Overall Access and usage of different
providers:
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Strengths- Kenyan Banking & Financial
Sector (1)
Efficient and less costly infrastructure.
Healthy competition.
Growing middle class spurring economic
development.
Diaspora inflows.
Public confidence in the banking and financial
system.
Risk-based approach to bank supervision.
Availability of many delivery channels, ATMs,
agents, POS, branches, internet banking,
agent banking.
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Finacial stabilty.
Strengths- Kenyan Financial Sector
(2)
Financial hub- Kenya is the leader in the
financial sector in the East African Region.
Experienced Human Resource poolReplicated in East African Region
Specialisation – Closer attention to each
subsector by the Regulators.
Effectiveness –close focus to a defined
set of licensees-better risk identification
and management.
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Strengths- Kenyan Financial Sector
(3)
“Leaders effect”- the advanced regulator
offers the rest advice and capacity
building – secondments, board
representations etc.
Diversity-Products and players – Overall
market vibrancy boosted -Makes Kenya
a financial hub in the Eastern and
Central African region.
Liberalised market – price controls in
Kenyan financial sector is a thing of the
past. This attracts foreign investors and
creates some degree of efficiency in
price determination.
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Weaknesses- Kenyan Banking &
Financial Sector (1)
Fraud.
Insecurity-robberies, theft, carjackings,
hijacking.
Level of technological literacy in rural areas
still low
Financial education low particularly in the
rural areas.
Transport system poor in rural areas.
Few branches in rural areas.
Insufficient cash flow in rural areas.
Other pressing social concerns-drought,
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famine, banditry, pastoral normadism,
Weaknesses- Kenyan Banking &
Financial Sector (2)
Potential of disharmony among the
Regulators – players offering services
across the subsectors-conglomerates.
Level of supervision/ regulation vary
across subsectors- room exists for
arbitrage – products registered in the
weakly regulated subsector though its
features fits another subsector.
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Weaknesses- Kenyan Banking &
Financial Sector (3)
Unregulated “financial services”Though innovation is ahead of
regulation, the lapse of time from
innovation should be minimal-pyramid
schemes(disguised as SACCOs &
Investment Co.s), mobile financial
services, SACCOs(low capacity),lease
Co.s, premium financing Co.s,
Absence of a detailed consumer
protection law-varying levels of
consumer protection clauses in the
subsector laws.
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Reform Initiatives & Opportunities
(1)
Convergence in level of supervisionconsolidated supervision underway
among the Regulators- may make it
possible to understand and monitor
risks of conglomerates.
Information sharing on areas of
mutual concern –MoUs being
entered - share information on
potential risk on a confidential basis.
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Reform Initiatives & Opportunities
(2)
Comprehensive Amendments- Banking
Act(to meet international best practicesBasel Core Principles); Capital Markets
Act(strengthen supervisory and
enforcement power).
Financial Regulators Technical
Committee- previously for CMA,RBA &
IRA- CBK joined in - 2009- Periodic
Forums held to share supervisory
developments and aspects of concern.
Move to regulate most financial services
– SACCOs Act, credit only microfinance
business.
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Reform Initiatives & Opportunities
(3)
Tighten control, supervision and
vigilance over the financial sector- All
regulators have or in the process of
adopting Risk Based Supervisionincluding enhancing disclosures and
foreclosures -to restore confidence.
Adoption of New products– CBK has
continued to embrace new innovations
(3rd party ATMs, Islamic products,
mobile financial services, etc).
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AREAS FOR REFORM (1)
There is a drive to build strong
institutions in the sector with requisite
capacity to drive the process-both for
the regulators as well as the market.
Consolidation is one method of
building strong institutions - can serve
their clientele well and can withstand
shocks better.
Close coordination and information
sharing among the regulators is the
starting point to effective supervision
of the financial sector.
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AREAS FOR REFORM (2)
Financial education be upscalled.
Financial inclusion necessary for a
bigger market.
Creation of more income generating
activities particularly for the majority
youth who are unemployed.
Improving security.
Lowering cost of banking products.
National Payment Systems Law to
streamline payment and money
transfer activities.
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END
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