Download presentation at 4th africa governance and leadership convention

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
2. Financial Development in Africa – Some Indicators
3. Kenya’s Experience:
1.
a)
b)
c)
d)
4.
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...
2
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

3
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
4
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
5
2. Financial Development in Africa
Notable Financial Inclusion Initiatives in the
Continent

Regional Comparison of Financial Access
South Africa '11
63
Namibia '07
45
Botswana '08
Uganda '09
21
Nigeria '08
21
Malawi '08
19
7
19
Zambia '09
14
Mozambique
'09
12
Tanzania '09
12
4
8
32
23
24
7
19
8
30
9
28
o
55
14
o
63
77

57
14
73
Formal Other

30
27
Formal
25
53
1 10
4


33
42
2
9
27
51
18
35
Rwanda '12
5
22
41
Kenya '13
Burundi '12
5
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:
Informal
Excluded
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)
6
2. Financial Development in Africa...
Financial Indicators have generally Improved
Country
Stock Market Capitalisation (%
of GDP)
Private Sector Credit
(% of GDP)
2010
2012
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

7
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
8
3. Kenya’s Experience: …
Kenyan Banks Expanding into the Region
Institution/
Country
1
No. of Branches as at December 2012
Burundi Rwanda Uganda Tanzania
South
Sudan
Total
Branches
1
13
14
11
21
60
2
KCB
Cooperative
Bank
-
-
-
-
1
1
3
4
Diamond Trust
CBA
4
-
-
27
1
16
8
-
47
9
5
6
7
8
Bank of Africa
Fina Bank
Equity Bank
I & M Bank
-
15
8
15
32
7
38
-
18
6
6
9
-
50
22
61
21
9 Imperial Bank
10 ABC Bank
11 NIC Bank
Total
5
51
3
2
1
125
5
70
31
3
2
6
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
9
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
10
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
11
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
12
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:
o 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
o Umeme Ltd of Uganda – is currently listed at the NSE
o Companies positioning themselves as regional players for ease of
mobilizing capital and up-scaling market for their products
o In addition, we need an International Financial Centre for the region
13
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
14
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:
o Supportive legal and regulatory framework (demutualization of stock
exchanges to upscale governance standards and enhance
operational efficiency)
o 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
o 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
15