Download africa governance conference 2012

Central Bank of Kenya
Prof. Njuguna Ndung’u
Governor
Central Bank of Kenya
August 5-9, 2012.
Mombasa, Kenya
 Need
to build confidence in the strength of financial
institutions and markets for:
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Effective and efficient financial intermediation
Optimal 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
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
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.
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
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
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 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.
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Three billion people in developing countries lack access to formal financial
services – the bulk of these are in Africa
We need more Financial Inclusion
KEY
Formal –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)
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The role of the stock market in the global and African markets has grown over time
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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:
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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.
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There are Internal and Regional/International Measures
 Internal 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 segments

Mobile 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 developments

Extend credit-based financial identity through Credit Reference
Bureaus (CRBs)
 Enhance Consumer Protection and Financial Education

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 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.

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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
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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
o
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Establishing uniformity in payments platforms for intra-regional
trade and capital account transactions
Implementation of an integrated East African Payments System
(EAPS) was operationalized in 2011
Testing of EAPS
ongoing
Governors have signed the agreement for Establishing,
Implementing and Participating in the East African Payments System
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
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 macroprudential 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
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