Prof. Njuguna Ndung’uGovernor

Central Bank of Kenya

August 5-9, 2012.Mombasa, Kenya

Central Bank of KenyaCentral Bank of Kenya

Need to build confidence in the strength of financial institutions and markets for:Effective and efficient financial

intermediationOptimal allocation of resources – savings to

investment.Productive investments that generate

employment, income and wealth Recent experience demonstrates that

when mutual confidence is lost, serious repercussions on financial system stability occur

Globally risks to financial stability are rising and are challenging to the macroeconomic environment

However, financial systems in Africa have remained strong despite being small and less integrated globally

2

The Global Financial Crisis (GFC) of 2007-2009 was caused by housing bubble in the US-Subprime Mortgage Market and ineffective regulation of new financial products (securitized assets and derivatives, the so called – toxic assets). The results were: Global economic slow-down; Public finance bail-out actions created huge

budget deficits. Consequently, public sector debt rose rapidly;

Slow-down in GDP growth in emerging markets (second round effects) due to contracting demand for exports; reduced remittances; reduced FDI and ODA from developed economies;

Subdued growth in industries and firms in emerging markets dependent on these exports and inflows implied losses of jobs and income;

Increased currency wars; Natural resources-dependent economies adversely

affected due to drastic fall in export prices, e.g. copper, diamonds.

3

Lessons from GFC of 2007 – 2009: The financial crisis revealed weaknesses in

regulatory capabilities while we, in Africa, stepped up regulation and surveillance.

But the emerging wisdom is that we need to build a system of BETTER Regulation, and not MORE Regulation: What does this entail:

1) A Regulatory System that can readily identify weaknesses and emerging vulnerabilities

2) A Regulatory System that is capable of analyzing and adequately pricing risks

3) A Regulatory System that provides appropriate incentives (and from the regulator – penalties) to induce prudent behaviour in the market place

4) A Regulatory System that will support development of strong institutions that can withstand shocks and give confidence to the market: strong institutions of both the regulated and the regulator – that define appropriately the rules of the game

4

The contribution of financial institutions can firstly be shown through indicators relating to access to finance

Secondly, stock market indicators from Africa show noteworthy development

These indicators will help us identify what is necessary to build a strong financial system that answers questions on what drives the development and deepening of the financial sector

We need to recognize that African economies are dominated by segmented markets. Different market segments will require different instruments delivering diversified financial services.

5

6

KEYFormal –use a bank, Post Bank or insurance product.Formal other–do not use any formal product, but use services from non-bank financial institutions such as SACCOs and MFIs. Informal–do not use any formal/formal other products but use informal financial service providers such as ASCAs, ROSCAs and groups/individuals other than family/friends.Excluded–use no formal/formal other or informal financial services.

FinScope Zambia (2009) and FinAccess (2009)

Three billion people in developing countries lack access to formal financial services – the bulk of these are in Africa We need more Financial Inclusion

The role of the stock market in the global and African markets has grown over time The market capitalization/GDP ratio was 147.4% in 2010 in SSA The stock turnover ratio has also grown over the years and stood at

36.8% in 2010 These indicators may be associated with higher levels of

investment and employment creation in the respective countries

Role of the NSE in Kenya: Facilitates trading in government securities; Provides market platform for private sector debt; Is a source of long-term finance; Has contributed to the success of the Infrastructure Bond in Kenya.

7

There are Internal and Regional/International MeasuresInternal Issues:

Supportive Legal & Regulatory Frameworks Regulators to play a developmental role in

expanding financial inclusion and providing space for innovation for different instruments to reach all market segmentsMobile Phone Financial Services: Mobile phones used

for money transfers, ATM payment transfers and bank accounts money transfers (deposit, withdrawal, check account balance, etc.)

Deposit Taking Microfinance Institutions (MFIs)Agent Banking – Using non-bank outlets as financial

service providers Strengthen Banks’ core capital and risk

management practices Support other financial infrastructure

developmentsExtend credit-based financial identity through Credit

Reference Bureaus (CRBs) Enhance Consumer Protection and Financial

Education

8

Regional/International coordination and cooperation:

Cross border collaboration and coordination of financial sector regulatory and supervisory authorities to monitor cross-border risks to regional financial institutions

Standard setting bodies assist in the identification and regulation of systemically important institutions

Entrench macro-prudential supervision capturing entire financial sector (financial institutions, markets, infrastructure, non-bank financial institutions) and balance sheets of households and enterprises across borders

Support home-grown innovations that improve functioning of Africa’s financial systems

Integrate regional capital markets as well as cross-listing as alternative vehicles to mobilize finance.

9

The financial institutions in EAC have harmonized policies to ensure stability and soundness

The regional central banks have, as top of their agenda, been pursuing quick wins to facilitate trade and show early benefits: Currency convertibility to facilitate trade

Partner State Central Banks have opened currency reciprocal accounts for all EAC Central Bank currencies

An MOU for currency repatriation has been developed Operational guidelines on currency repatriation were

developed by November 2011 Payments system

o Establishing uniformity in payments platforms for intra-regional trade and capital account transactions

o Implementation of an integrated East African Payments System (EAPS) was operationalized in 2011 Testing of EAPS ongoing

o Governors have signed the agreement for Establishing, Implementing and Participating in the East African Payments System

10

Developing and deepening the financial sector in Africa is crucial for jobs and wealth creation Africa needs to generate and accumulate capital for investment

Innovations have expanded financial inclusion and lowered transaction costs: Financial inclusion is compatible with sustainable poverty reduction

Allowing space and incentives for prudent behaviour produces effective competition that develops the market with appropriate institutional design

Encourage coordination, cooperation and the practice of macro-prudential supervision by regulatory authorities across borders for early identification and mitigation of risks to the financial system to ensure its stability and the proper intermediation of Africa’s financial resources

Developed and deeper financial markets will support monetary policy and its transmission to the real sector The monetary policy transmission process links monetary

policy to the ultimate objective – in this case fighting inflation High and volatile inflation distorts decision making for

investment, savings and production – and ultimately leads to slower economic growth

11

12