The Structural Transformation Story of Kenya’s Financial System Njuguna Ndung’u, CBS Governor, Central Bank of Kenya 30th November, 2010

The Success of Financial Inclusion: (1a) Branch Network of Banks Exponential growth of bank branches from 534 end of 2005 to 1030 end of September 2010 Number of rural branches has grown by 140% compared to 68% in urban areas Two National Deposit Taking Microfinance Institutions have opened 31 branches since 2009 (16 in rural areas). A further community deposit taking microfinance institution has just been licensed. In total expanding financial services is evident

The Success of Financial Inclusion: (1b) Branch Network by Bank Size The acceleration of medium sized bank branches is noteworthy

The Success of Financial Inclusion: (2) The Deposit Accounts Number of deposit accounts has increased from 2.55m in 2005 to nearly 12 million at end of September 2010. The takeoff seems to start in 2007 Number of micro accounts has increased by 425% from about 2.14 million accounts in 2005 to about 11.25 million accounts at end of September 2010. these are covered by the Deposit Protection Fund. Growth attributable to reduced costs of maintaining micro accounts and introduction of innovative instruments But also increased branch outlets that solve the physical distances Barriers of entry have been significantly reduced

The Success of Financial Inclusion: (3) Loan accounts – But still low for 43 banks Number of loan accounts have increased by 207% from 589,296 in December 2005 to 1,802,798 in October 2010, for 43 banks. Some 13,803 are mortgage loans. This compares poorly with 12m deposit accounts

The Success of Financial Inclusion: (4) Banking Sector Deposits, Loans & Advances (Kshs. Bn) But the loans and advances are only 70% of total deposits (October 2010), room to lend more if the price is right

The Success of Financial Inclusion: (5) Enhanced Financial Access   Dec' 2009 Aug' 2010 Oct' 2010 ATMs 1,717 1,883 1,913 Branches 996 1,020 1,037 Number of Deposit Accounts (000) {Banks & MFIs} 8,657 11,872 12,187 Banks {Deposit Accounts (000)} 8,481 11,010 11,295 MFIs {Deposit Accounts (000)} 176 862 892 M-Kesho 20th September 2010 22nd November 2010 Deposit Accounts (New) 201,838 226,320 Amount Mobilized (Ksh. M) 177.8 277.3 Financial deepening through enhanced financial innovations continue to be embraced in the market. Access to financial services as indicated by branch expansion, Number of ATMs, deposit accounts and amounts mobilized through M-Kesho continues to expand.

Impact of Financial Innovations Velocity of money and proportion of currency outside banks have declined significantly. Indication of financial deepening and increased financial innovation.

Change in Base Rate Oct/ Change in average lending rate Oct/ Analysis of Base and Average Lending Rates Category of Bank (Size) Average Base Rate Change in Base Rate Oct/ May 2010 Average Lending Rate Change in average lending rate Oct/ May July 2010 Sep 2010 Oct 2010 All Banks 14.73 14.30 14.25 -0.34 14.44 14.29 13.98 13.85 -0.59 Small Banks 15.02 15.10 14.90 -0.12 14.85 15.61 14.43 14.46 -0.39 Medium Size Banks 14.75 14.42 -0.33 13.57 13.17 -1.85 Large Banks 14.28 13.79 -0.49 14.77 14.62 14.41 14.06 -0.71 Average lending rates and base rates have continued to respond to MPC signals with declines between May and October 2010 across all categories of banks. However, the average rate of decline in lending rates slowed down slightly between September and October 2010. Medium size banks switched from the most expensive to the cheapest lender by October 2010. This is a positive development for growth of the SMEs sector. 28 banks reduced base lending rates between March and October 2010 out of which 15 were large banks. One bank reduced its base lending rate in October 2010.

Analysis of Interest Rates Spread   Lending rates   Deposit rates   Interest Rate Spreads    All Banks Small Banks Medium Size Banks Large Banks May-10 14.44 14.85 15.02 14.77 4.62 4.10 5.03 4.00 9.82 10.75 9.98 10.77 Jun-10 14.39 15.43 15.09 14.58 4.45 3.65 4.96 3.77 9.94 11.78 10.13 10.80 Jul-10 14.29 15.61 15.10 14.62 3.85 3.82 4.70 3.39 10.44 11.79 10.41 11.23 Aug-10 14.18 15.37 14.78 14.55 3.74 3.98 4.66 3.21 11.38 10.12 11.34 Sep-10 13.98 14.43 13.57 14.41 3.53 4.11 4.42 3.03 10.45 10.32 9.14 Oct-10 13.85 14.46 13.17 14.06 3.58 3.70 4.20 10.27 10.76 8.97 11.03 Generally, the spread has increased by 45 basis points between May and October 2010. This was driven by the spread for large banks that increased by 26 basis points. However, the spread for medium size banks declined by 101 basis points over the period, as small banks increased their spread slightly. But the average spread for all banks declined by 18 basis points between September and October 2010 due to an increase in the average deposit rates.

Credit Growth Per Quarter Private sector credit in quarter 3 of 2010 increased significantly compared with that in in quarter 3 of 2009. Given the strong link between private sector credit growth and economic growth, this indicates increased demand to finance economic activity.

Credit Risk Declining The ratio of net NPLs to Total Loans has been declining since January 2010, indicating a decline in the credit risk.

Improved Liquidity Management The horizontal repos market has grown well overtime relative to interbank market. The month of September 2010 was the most active in the horizontal repos market. HRT usage reached the peak in October 2010 since commencement

Weekly Foreign Exchange Purchases and Exchange Rate Movements In most occasions, CBK purchases about US$ 15 million per week compared to more than US$ 300 million average weekly market transactions. CBK purchases from the market cannot affect the movement of the exchange rate. The CBK kept away from the market from 13th Sept to 8th Nov 2010 but the shilling exchange rate remained relatively unchanged with the normal cycles

Changes in Perceptions on Economic Growth (%) Commercial Banks 2-3 3-4.4 4.5-5 5 Above 5 Sep -2009 68 24 Nov-2009 56 22 Jan- 2010 41 59 Mar-2010 40 60 May-2010 76 July-2010 17 69 14 Sep-2010 9 82 Nov - 2010 3 12 39 46 Non-Bank Private Sector Firms 2-3 3-4.4 4.5-5 5 Above 5 68 24 90 10 73 27 86 14 53 33 9 17 66 16 21 63 19 50 31 Expectations for higher economic growth in 2010 maintained.

Imports of Transport and Machinery Equipment (12-Months Cumulative USD Million) Imports of capital goods increasing to support economic growth