Conference on Revolutionising Finance for Agri-Value Chains 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 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 2

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 of the market/population 3

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: The payments infrastructure and, more so, for small holder farmers and SMEs 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 4

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? 5

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. 6

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 7

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 8

Role of Central Banks in Inclusive Finance… 6. ICT – Provides us with Two Platforms: 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 9

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

Innovations have come with benefits -Inclusion is Rising -Informality is Declining 11 Source: Central Bank of Kenya, 2013

Progress in access TO formal services by Location FinAccess Survey 2013 12

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 236 % — rural compared to 134% — urban 13

Progress in Bank Use in Rural Areas 14

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) 15

Outcomes of the supportive environment by the Central bank… External Shock 16

Times have changed…. Albert Einstein 17

Types of financial inclusion ICT service Thank You 18