FINANCIAL SECTOR: OPPORTUNITIES FOR INVESTMENT KENYANS CONNECT 2012 EVENT BY

1. FINANCIAL SECTOR: OPPORTUNITIES FOR INVESTMENT KENYANS CONNECT 2012 EVENT BY Prof. Njuguna Ndung’u, CBS GOVERNOR CENTRAL BANK OF KENYA 9th & 10th February, 2012 Las Vegas, Nevada USA

2. OUTLINE • Macro – Economic Set-up • Kenya’s Financial Sector Landscape • Financial Inclusion for Development • The Regulators Role • Investment Opportunities: The Infrastructure Bond Program • Challenges • Proposed Solutions • How to Invest in Government Securities

3. MACRO –ECONOMIC SET-UP • Economic recovery from 2003: A new policy paradigm. • Economic recovery in Kenya stronger with capacity for future growth. • Public Investment roll-out has been quite successful. • Agriculture • Tourism • Manufacturing • Construction • Services sectors KEY DRIVERS OF THE ECONOMY • Debt to GDP ratio: 60% of GDP in 2003 to 35% in 2009. Shocks have pushed it to almost 54% today. • Buffetted by supply shocks as well as global economic developments. • Strong policy response to supply shocks being implemented to ring fence development budget: capacity for future growth. • CBK currently on a tight monetary policy stance (CBR 18.00%) to tame inflation, inflation expectations and enhance exchange rate stability. • Economic outlook remains strong. • Ratings: • B+ with a strong outlook. • CPIA - 3.8 – Institutional Qualityon a scale of 1 - 6. Monetary Policy & Outlook Fiscal Space

4. KENYA’S FINANCIAL LANDSCAPE • Sector Comprises: • Banks, • Insurance Companies, • Brokerage Firms, • Pension Funds, • Microfinance Institutions and SACCOs. • Contribution to Economy: • Contributes 5.4% of GDP • Sector has potential to contribute 8% to 15% of GDP. SPECIAL FOCUS: BANKING • Banking sector holds assets worth 63% of GDP. There are 43 banks with varying market niches – segmented market. • Has potential to increase formal sector employment beyond the current share of 1%. • Developing and deepening faster than the overall economy. • Financial Infrastucture has enabled financial inclusion and new financial products like Infrastructure Bonds find a place in the market. • Retail banking services utilizing the mobile phone technological platform with success.

5. FINANCIAL INCLUSION FOR DEVELOPMENT Kenya’s financial sector has undergone significant transformation. In the last 6 or so years ,we have seen:- Significant decline of barriers to entry to the financial sector Significant decline in cost of maintaining micro accounts The introduction of new instruments targeting lower segments of the population Increased network of branches across the country

6. REGULATOR’S ROLE CBK has Provided Space for Innovative Solutions by;

7. Kenyan Banks Expansion to the EAC Region

8. Kenyan Banks Expansion To Other Countries • KCB has another 11 branches in Southern Sudan • Equity Bank has 3 branches in Southern Sudan • I&M Bank has 14 branches in Mauritius through its subsidiary Bank One Limited • This is a prerequisite for financing future development of the country, in line with Vision 2030 KCB EQUITY BANK I&M BANK The Kenyan Financial Sector has developed

9. INVESTMENT OPPORTUNITIES • Products: Variety of products with unlimited-room for more innovative financial products especially leveraging on ICT. • The Un-Banked: There is a potentially huge market of the unbanked waiting to be discovered-32.7% as at 2009. As banks expand, they have a market – Investments will grow. • Credit rating: More rating companies looking at performance of institutions to enhance their positions and unleash their potential. • Credit Information sharing: Room for more players to promote competition and enhance quality of reports: The future of the financial sector is in accumulating information capital to shape the monitoring and screening role of the financial system. • Competition: Need for more stronger players to enhance competition-opportunities for equity or debt financing opportunities and business process.

10. BOND MARKET: TARGETING DIASPORA INVESTORS Investment in the infrastructure bond; To finance Long Term infrastructure Investments in Water, Energy and Road Sectors : These are the areas where binding constraints to economic growth are most prevalent. Infrastructure bond Incentives Relatively high yield with returns in excess of 12% per annum. Tax exemption for infrastructure bonds. Amortization. Tradable at the Nairobi Stock Exchange. Can be used as collateral for commercial credits. Opportunity to contribute towards implementation of the vision 2030 projects.

11. INFRASTRUCTURE BOND MARKET TRADING

12. TREASURY BOND MARKET TRADING • There is a Benchmark Bond Program for all other bonds: only that Infrastructure Bonds are a special case with special focus and incentives. • Since the introduction of Automated trading of Bonds in late 2009, the secondary market has been revitalized. • In 2010 & 2011, the bonds market transacted Ksh 894 billion or US$ 10.38billion. • Settlement of Bonds now takes a maximum of 3 days. • Bonds are transacted in a safe environment with minimal risks of fraud. • Currently Diaspora investors can trade securities if they hold nominee CDS accounts with Commercial banks or Investment Banks.

13. TREASURY BILL MARKET RATES • 91 & 182 day Treasury bills issued weekly. • 364 day Treasury bills issued Monthly. NOTE: Minimum Investment amount is Ksh 100,000 and additional amounts MUST be in multiples of Ksh 50,000

14. RATIONALE FOR TARGETING DIASPORA INVESTOR • Diversifying investor base for bond market development. • Diaspora are disadvantaged from having an array of investment choices that are secure, risk free and lucrative. • Reduction of transaction costs by paying interest to local accounts or beneficiaries. • Safeguarding savings and investments at home, save, risk-free and you are also supporting Public Investments for Vision 2030. • Provides an opportunity to support the country’s development agenda.

15. CHALLENGES • Know Your Customer requirements: In order to guard against anti-money laundering. But we have made progress. • Marketing to Kenyans spread far apart in the Diaspora presents logistical challenges. • Stringent regulatory rules in the target source markets. • Procedures for Opening of Investment Accounts. We have simplified this process for investors. We need feedback. • Payments logistics an issue to deal with.

16. PROPOSED SOLUTIONS • Marketing and advertising financial services through Partnerships with other agencies–e.g. With online Investment platforms and Kenyan Missions abroad. • Participation in Diaspora forums & conferences, like the Kenyan’s Connect 2012 event. • Website online application facilities. • Use of Investors bank for AML-KYC purposes. • But feedback from the target market will always improve on the solutions. We wait for your questions and feedback on-line.

17. F.A.Qs: HOW TO OPEN AN INVESTMENT (CDS) ACCOUNT • Visit the Central Bank of Kenya website http://www.centralbank.go.ke/securities/KenyansAbroad.aspx and download mandate card. • Print the appropriate mandate card and fill out your details. • Attach: • A recent coloured passport size photograph and • A copy of investor’s Kenyan National Identity Card (ID) or Passport. These documents must be certified by your Bankers. • Take the filled CDS mandate card to your Commercial bank for certification. The investors Commercial bank will certify the completed CDS mandate card by way of appending the bank’s stamp and signatures of two of their authorized signatories on the space provided.

18. F.A.Qs: HOW TO OPEN AN INVESTMENT (CDS) ACCOUNT Continued… • Affix a company seal for corporate applicants. • Scan the completed CDS mandate card and email toapplications@centralbank.go.ke • Send the physical mandate and attachments by post to The Director, Financial Markets Department Central Bank of Kenya P.O. Box 60000-00200, Nairobi, Kenya N/B – CDS account will only be opened after receipt of the original documents. • Once the CDS account is open, investor will be notified of the CDS account number via email as provided on the CDS mandate card submitted to CBK. A formal notification letter will also follow.

19. F.A.Qs: HOW TO BID • Download the bond application form at http://www.centralbank.go.ke/securities/KenyansAbroad.aspx. • Fill out the following details:  Issue Number  Duration  Value date  Total Face Value - Amount the investor wishes to invest in Kenya Shillings • Investor’s details • Append a signature on the application form and submit online or scan and email toapplications@centralbank.go.ke or fax to +254202863726/3666

20. F.A.Qs: Successful Bidders • All successful applicants will be notified of the allocation and Amount they are required to pay by email provided as provided on the CDS mandate card. • Alternatively they may contact Central Bank of Kenya either via email comms@centralbank.go.ke or ndo@centralbank.go.ke or Tel No. +254-020-2860000. MODE OF PAYMENT FOR SUCCESSFUL BIDS 1. Deadline for payment for successful bids is the following Monday at 2.p.m Kenyan time. 2. All successful applicants will be required to pay the exact payable amount (no less, no more)

21. Current Infrastructure Bond on Sale: IFB1/2011/12 • Current bond has an average rate of 16.640% with a coupon of 12%, payable half yearly. • Selling on TAP waiting for Diaspora to Invest. • Amortization Incentive – redemption in the 4th Year and 8th Year, with final redemption in the 12th year; • 44% of the Bond will be redeemed (get money back) in the 4th year, • 58% of the remaining outstanding amount will be redeemed in the 8th Year. • Final Redemption in the 12th Year. • But it is tradeable at the NSE and can be a collateral • Targeting to raise Ksh 36bn this financial year. • So far Ksh 18.5bn has been invested in the current infrastructure bond. • The Tap closes on 21st February, 2012. • Deadline for payment of successful bids is on 27th February 2012 at 2.p.m Kenyan time.

22. PICTORIAL: Ongoing Infrastructure Bond funded Projects