Global Symposium on Innovative

Financial Inclusion: Inclusive Financial Systems for the Future

Njuguna Ndung’u

September 21st 2006

BNM –Kuala Lumpur

Progress on Financial Inclusion in Kenya: 2006-2016

2

15.0

21.0

32.4

42.3

11.7

20.1

34.5

33.0

32.1

26.8

7.8

7.2

41.3

32.7

25.3

17.4

2006

2009

2013

2016

Kenya

Formal prudential Other Formal Informal Excluded

Financial Services Access Touch Points Across

Comparators 3

The Evidence - Regional Comparison with Kenya

88

83

75

57

54

48

42

2

3

7

16

31

12

30

10

13

17

27

15

40

28

Mauritius 2014

South Africa 2015

Kenya 2016

Tanzania 2013

Uganda 2013

Nigeria 2014

Rwanda 2013

Formal Informal Excluded

4

These Financial Inclusion Outcomes relate to

Success of Financial Innovation in the market

New products, new market players, new distribution

channels and efficient electronic platforms have emerged.

Supporting policy reforms, the knowledge base and the risk

mitigation processes have supported the market.

M-Pesa type of products that are mobile phone-based have

created a platform for financial services in Kenya.

The success of bringing the unbanked to be banked and

solving the barriers to entry problem in the formal financial

system

This is now dubbed Digital Financial Services revolution.

The Digital Financial Services - Frontier

Innovations in 4 Generations – In Kenya First Generation – Technological platform for payments and settlement – Trust

accounts in specific banks that developed into transactions platforms

supported by a network of Telco Agents.

o Other commercial banks, MFIs and SACCOs have since integrated with this platform.

Second Generation –Telcos and Banks moved to the next stage and partnered

to develop Virtual savings accounts – now a technological platform to manage

micro accounts – A virtual banking service has developed.

Third Generation: Transactions and savings data used to generate credit scores for use as the basis to evaluate and price micro credit.

o Changing and transforming the costly collateral technology that for years formed the

major obstacle in the credit market development, especially in Africa.

Fourth Generation: Developments in cross-border payments and international

remittances.

Some Supporting Policy Profiling: sound regulatory and supervisory framework, financial innovations, diversification of products, prudent risk management, and a stable macroeconomic environment

Measures to enhance Financial Inclusion

•Introduction of mobile phone money transfer services in 2007 - enhanced financial inclusion – it is now possible to save and borrow from a bank through the mobile phone platform. It has thus provided a platform for efficient financial services – Kenya has become a global leader in this respect.

•The enactment of the National Payments System Act, 2011 has provided a regulatory framework for the evolving payments systems including the adoption of mobile phone platforms as well as the roll out of various innovative products

•The introduction of Agency Banking in May 2010 has propelled growth in the levels of formal financial inclusion by facilitating banks to provide banking services to their customers in a cost effective manner.

•The operationalization of microfinance banks through enactment of the Microfinance Act, 2006 and the subsequent Microfinance (Amendment) Act, 2013 has enhanced the outreach of financial services targeting mainly the SMEs which are key drivers of the country’s growth.

Measures to reduce the Cost of Doing Business in the Banking Sector

•The Credit Information Sharing platform which was launched in July 2010 has enabled banks to extend more credit to productive sectors by tackling information asymmetry and lack of physical collateral.

•The introduction of value capping and cheque truncation has enhanced the efficiency in payments and clearing systems.

•The opening of Currency Centres in key towns has saved banks from cash-in-transit costs and related risks.

•The role-out of the East African Payments System in November 2013 has enhanced trade in the region through facilitation of faster cross-border transfers.

•The introduction of the Kenya Banks’ Reference Rate in July 2014 will promote transparency by banks with respect to the cost and pricing of their products.

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005

2006

2007

2008

20

09

2010

2011

2012

2013

2014

2015

20

16

Microfinance

Act

No objection to

‘M Pesa’ launch

National

Payment System Act

No objection to

‘M Pesa’ pilot

Payments

regulation commenced

Mobile based

KYC

Agency banking introduced

Credit

information

sharing

Kenya’s Financial Inclusion Journey (FSD Kenya)

Impact on Financial Inclusion?

First, accessibility to financial services – Transactions is the entry to banking services.

Second, commercial banks and microfinance banks have been provided with a ready platform for managing micro-accounts – personal savings have increased.

Banks have built huge mountains of deposits that has given them power to intermediate in the market and the capacity to grow.

Third, has lowered cost of financial services both at the transactions cost level and time to visit the bank, the physical distance level.

In Africa, a trip to the bank to transact - to deposit, transfer or to withdrawal money is a very expensive affair both in time and physical distances. In short it has helped to lower barriers to entry into the banking sector.

Finally, Supported SMEs – First, is accessibility of financial services, second, the ease of transactions – SMEs are transactions heavy and finally, the credit facilities developed within the ecosystem.

Micro savers and Micro Investors have an

efficient platform to save and transact

2012 2013 2014 2015 June

2016

Mobile Phone Financial Services

Accounts (Million)

21.06 25.35 25.24 31.64 40.38

Agents Providing the Services (read

employment?)

76,912 113,130 123,703 143,946 156,349

Virtual Savings Account – M-Shwari

(million)

- 5.03 12.46 13.00 15.20

Cumulative Deposits – KSHS Billion

67% of depositors and savers in the 18-34

Age category

174B 274B 373B

A Platform for Micro Accounts in the Banks

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2.14 2.88

4.12

5.80

8.00

12.03

14.76

16.65

22.66

29.55

0.41 0.45 0.60 0.63 0.66 0.78 0.89 0.97 1.09 1.14

No

. of

de

po

sit

acco

un

ts in

mill

ion

s

Kenyan Banking Sector - Growth in Deposit Accounts 2005 - 14

Micro Accounts (< Kshs 100,000 / $ 1,075) Other Accounts

M-Pesa Type of Products - FinTechs

M-Pesa products are FinTech products – A platform of financial services --

Financial inclusion and lowering transactions costs opens the floodgate for

potentially game changing opportunities:

o a transactions platform for unbanked and banked in Kenya

o Supports the national retail payments evolution and revolution – Transactions per day

are now close to 7.5% of annualised GDP

o Supported banks as a platform to manage micro accounts – Virtual savings

accounts and an evolution of credit market development

o Supported micro insurance and investments in securities market

o Supported government targeted social protection program

o Expansion of regional payments system

o Enforcement of policies to support AML/CFT

o Better environment for forward-looking monetary policy to replace years of financial

repression and reactive policies

Will Financial Inclusion Lead to Inclusive growth

and sustainable Poverty Reduction?

We have evidence of financial inclusion and increasing savings by formerly

unbanked with appropriate products for them – M-Shwari, KCB M-Presa, M-

Pawa in Tanzania, etc

Are these savings for consumption smoothing (ride over negative shocks) or is there evidence of increased investments? We may need more data points?

But economic vibrancy provides opportunities for investments – do we have

economic growth sustained for long periods to increase the supply of investment opportunities?

Fintech – a major disruptive force - may be required to provide a way forward

for a massive resource channelling from micro-savings to investments products

that promise high returns.

But sustainable to change the terrain to from financial inclusion to inclusive

growth and sustainable poverty reduction.

More discussions on policy design? Thank you!