Opening up Africa to Africa: The Role of the Financial Sector A Presentation during the Fourth Africa Governance, Leadership and Management Convention at the Leisure Lodge Resort, Kwale by Prof. Njuguna Ndung’u, CBS Governor, Central Bank of Kenya September 4, 2013

Outline Background – Africa Growth profile, challenges, and Role of the Financial Sector Financial Development in Africa – Some Indicators Kenya’s Experience: Expansion of Kenyan banks into the region and supporting regulatory framework Evolution of mobile phone financial services The role of the capital markets Lessons learnt and opportunities for growth of the financial sector Next Steps...

1. Africa Growth Profile, Challenges, and Role of the Financial Sector a) Background: Africa has witnessed improvement in its economic growth performance and policy environment over the years: The average growth rate in Sub-Saharan Africa (SSA) was 5.4 and 4.9 percent in 2011 and 2012, respectively, up from a growth rate of 0.3 percent during 1990-2002 The business environment has improved in recent years – the legal and regulatory frameworks, governance and accountability, rule of law, policy reforms, and incentives and support for business have been enhanced But growth is still below the rate of 7 percent per annum required for Africa to achieve the MDGs There are binding constraints: infrastructure gaps, institutional failures that prevent private sector investments to expand The financial sector should play a leading role in driving economic growth through investments

1. Africa Growth Profile, Challenges, and Role of the Financial Sector... b) Challenges to Economic Growth: Inadequate physical, institutional and technological infrastructure – this increases the cost of doing business Financial and capital markets still shallow – access to financial services remains low The generally small national markets do not encourage exploitation of economies of scale Progress towards development of regional markets has been slow or limited - physical infrastructure as well as range of products in the market

1. Africa Growth Profile, Challenges, and Role of the Financial Sector... c) Role of the Financial Sector: Mobilise savings to finance investment; establish competition; and, screen and monitor investments and investors thereby making available ex-ante information Adequate and appropriate products in the market to diversify and deepen financial markets Facilitate trade leading to diversification and reduction of risks which inhibit doing business Stabilise macroeconomic prices to enable economic agents to plan over the short, medium and long term horizons Effective and efficient payments and settlement systems at the national and regional levels

2. Financial Development in Africa Notable Financial Inclusion Initiatives in the Continent Financial inclusion remains low in developing countries: nearly 88% are financially excluded compared to developed economies, e.g. US (9%) and Germany (4%) In Sub-Saharan Africa (SSA) only 24% of the adult population has an account at a formal financial institution (World Bank, 2011) In the East African Community (EAC), Kenya has made significant strides – about 35% had an account at a formal financial institution (2013 Fin-Access Survey) from 23% in 2009 Main factors behind low financial inclusion in SSA: Costs; access/distance to financial markets; lack of traditional collateral; stringent requirements for opening and maintaining accounts; high transaction costs and lack of appropriate products; improper risk assessment criteria and information asymmetry Low incomes and lack of permanent income flows or employment; low education and financial literacy levels and cultural, religious and social barriers Potential for growth in financial services remains high given the significant proportion of population excluded from financial services Kenya - 2009: 23+18=41% - 2013: 35+32=67% Financial Inclusion Success Story Source: Various FinScope and FinAccess Surveys (2009- 2013)

Stock Market Capitalisation (% of GDP) 2. Financial Development in Africa... Financial Indicators have generally Improved Country Stock Market Capitalisation (% of GDP) Private Sector Credit (% of GDP) 2010 2012 Tanzania 5.5 6.4 21.1 24.8 Uganda 10.4 36.7 17.1 16.4 Kenya 44.9 39.7 51.0 52.5 South Africa 174.9 159.3 191.7 80.4 Malaysia 166.3 156.9 127.4 133.8 Germany 43.5 43.7 130.9 123.6 Botswana 29.3 31.8 10.0 14.9 Source: World Bank website The size of the stock market and level of financial intermediation have generally improved in Kenya but there is scope for further improvement as depicted by levels in South Africa and Malaysia The general decline in the indicators of financial development in 2012 reflects the impact of the financial crisis in the Eurozone

3. Kenya’s Experience: … The Financial Sector has driven Growth Overall and Financial Intermediation Quarterly Real GDP Growth Rates (%) Source: Kenya National Bureau of Statistics Financial intermediation growth has generally outpaced overall real GDP growth since 2010 The slowdown in the first quarter of 2013 was mainly associated with the slowdown in economic activity around the elections in March 2013

3. Kenya’s Experience: … Kenyan Banks Expanding into the Region No. of Branches as at December 2012 Institution/ Country Burundi Rwanda Uganda Tanzania South Sudan Total Branches 1 KCB 13 14 11 21 60 2 Cooperative Bank - 3 Diamond Trust 4 27 16 47 CBA 8 9 5 Bank of Africa 32 18 50 6 Fina Bank 15 7 22 Equity Bank 38 61 I & M Bank Imperial Bank 10 ABC Bank NIC Bank    Total 51 125 70 31 282 Improved performance of Kenyan Banks - They are now expanding into the region to maintain their growth momentum 11 banks had established subsidiaries with 282 bank branches outside Kenya in December 2012 In as far as they are investing equity in other regional banks or in green fields - We need strong banks to drive financial sector growth Source: Central Bank of Kenya

3. Kenya’s Experience: … Kenyan Banks Expanding into the Region... Supporting legislation and measures adopted for Kenyan banks to expand in the region: CBK Entered into a Multilateral MOU with the EAC central banks to enhance information sharing and supervisory coordination (signed in 2008) CBK has Signed Bilateral MOUs (Reserve Bank of South Africa, Central Bank of Nigeria, Bank of Mauritius, Bank of Zambia, Reserve Bank of Malawi, Reserve Bank of Zimbabwe and Bank of South Sudan) and a number are at various stages of negotiations and finalization Undertaking periodic joint inspections/examinations of institutions with cross-border operations Hosting of supervisory college for institutions with group regional operations – to better understand their complex structures and risk profiles – as part of consolidated supervisory initiatives (commenced 2012) On-going regional harmonization of laws – covering banking, capital markets, insurance and pension sectors

3. Kenya’s Experience: … Mobile Phone Money Transactions Rising Mobile Phone Network operations commenced in March 2007. In May 2013 the number of mobile phone financial services subscribers reached 23.5 million compared to 10.5 million in May 2010 In 2012, mobile phone money transactions in Kenya were valued at USD18.19 billion, which would represent 43.5 percent of the country’s GDP The average size of transactions per customer has been increasing (from USD45.5 (Ksh.3,067) in March 2007 to USD78.6 (Ksh.6,660.4) in January 2013 since corporates have encouraged the use of the facility in new and diverse ways of making payments. Currently, total mobile phone transactions per day average USD54.4 million

3. Kenya’s Experience: … African Mobile Phone Financial Services Policy Initiative (AMPI) AMPI founded by 18 African members of the Alliance for Financial Inclusion (AFI) a global network of financial inclusion policymakers Objectives: Determine effective policy solutions to advance Mobile Phone Financial Services (MFS) in Africa Serve as a peer learning platform for AFI members in Africa to coordinate efforts and share knowledge and experiences on MFS issues Facilitate High-Level Discussion amongst Leaders with the view to identify barriers that impede uptake of MFS in Africa Mechanisms to accomplish the objectives: An annual African Leaders Roundtable meeting to bring together African AFI members annually to deliberate on strategic issues towards the development of MFS policy and regulatory frameworks across Africa – Central Bank of Kenya Governor is the current Chairman An AMPI Help Desk to undertake technical coordination towards the implementation of AMPI activities A virtual helpdesk structure has been established with six (6) regional help-desks situated in the key sub-regions of Africa. Kenya is represented in this help desk as chair of the initiative, key activities being undertaken include:- Review of technical assistance requests by Bank of Sierra Leone, Central Bank of West African States (BCEAO), and Central Bank of Republic of Guinea. Facilitation of public-private sector roundtable during the 2nd AMPI Leaders Roundtable to be held in Kenya in February 2014

3. Kenya’s Experience: … The Role of Capital Markets The capital markets in Kenya and the EAC region are still small by international standards But the role of the capital markets has changed with time from just offering a platform for trading to a source of long-term funding required for infrastructure development Under-developed capital markets create mismatch of assets and liabilities within the banking sector – as banks utilize short term deposits to lend for infrastructure development Emphasis is now on up-scaling regional capital markets by putting in place the necessary trading infrastructure and a robust legal and regulatory framework: Seven Kenyan companies listed at the Nairobi Securities Exchange (NSE) have also cross-listed in the region: Kenya Airways; Nation Media Group; Jubilee Insurance; Centum Investment; Diamond Trust Bank; Equity Bank; and, Kenya Commercial Bank Umeme Ltd of Uganda – is currently listed at the NSE Companies positioning themselves as regional players for ease of mobilizing capital and up-scaling market for their products In addition, we need an International Financial Centre for the region

3. Kenya’s Experience: … Lessons Learnt and Opportunities for Growth Increasing access to financial services requires a stable financial sector and creating an enabling environment for different players in the market Regulatory and tax reforms coupled with an open policy to foreign investors fuels capital markets development Microfinance growth with diversified products is key to enhance financial inclusion => Take care of all market segments Use of mobile phone financial services platform to enhance mobilization of short/long-term funds and access to financial services Achieving and maintaining macroeconomic stability key to financial sector stability Benchmarking and peer learning by African countries given their similar circumstances

4. Next Steps... Continued harmonization and review of financial sector laws necessary to enhance the role of the sector in the region Implement policies to enhance financial access by linking financial services to the mobile phone platform – this will reduce transaction costs Continue to implement measures to enhance competition in the banking sector Deepen and broaden capital markets through: Supportive legal and regulatory framework (demutualization of stock exchanges to upscale governance standards and enhance operational efficiency) Increased array of tradable products as part of measures to improve mobilization of long term resources for infrastructure financing – initiatives such as facilitating regional fixed income securities issuance Unit costs must be brought down – the first impact comes from market vibrancy due to participants; deposit side as well as loans and advances side