Central Bank of Kenya

1. Central Bank of Kenya A presentation by PROF. NJUGUNA NDUNG’U GOVERNOR, CENTRAL BANK OF KENYA at THE LEGATUM CENTER’S 2010 CONVERGENCE Massachusetts Institute of Technology (MIT) THE APPROPRIATE INSTRUMENTS FOR BANKING THE BOTTOM BILLION: THE KENYAN EXAMPLE MIT Media Lab • Boston, Massachusetts 29th October, 2010

2. Coverage • The bottom billion: diagnosis • Kenya’s financial inclusion profile • Instruments for banking the bottom billion: • Current and Working Solutions • Mobile phone financial services • Deposit Taking Microfinance Institutions • Expansion of Branch Network of Commercial Banks • Deposit Protection Fund • Proposed Solutions for the Future • Enhancing and increasing core capital of commercial banks • Agent Banking • Consumer Protection • Macro-level Instruments • Credit Reference Bureaus • Currency Centres • The Uptake and Outcomes • Macroeconomic Outcomes • The Lessons

3. Diagnosis • The bottom billion in Africa are the poor but also mostly unbanked. • Half the population in Sub-Saharan Africa lives below the poverty measure of less than USD1.25 per day. (Ravallion,2010;2008;World Bank, 2008). • Collier corroborates the evidence from previous studies that a large proportion of poor people are in Africa. • Thus Africa is at the core of the ‘’bottom billion’’ poverty problem. • In Kenya, 46% of the population live in absolute poverty on less than 1.25 dollars a day. (2006 Kenya Integrated Household and Budget Survey). • The poor in Kenya are mainly characterized by low levels of education, low levels of capital accumulation and poor access to markets – all mutually reinforcing.

4. Diagnosis… • Increased access to financial services to the poor can:- • Provide a safe haven for their meagre savings - some are target savers. • Widen their economic opportunities. • Increase their asset base through increased savings and affordable credit. • Reduce their vulnerability to external shocks: Savings for consumption smoothing. • Kenya’s National FinAccess Survey, 2009 revealed that 32.7% of Kenya’s bankable population is totally excluded from both formal and informal financial services. • If 46% are poor and 32.7% are unbanked - then most of the unbanked are the poor. • Strategies to enhance financial inclusion therefore are a critical component for reducing poverty and uplifting the bottom billion.

5. Kenya’s Financial Inclusion Profile… • Kenya’s financial sector has undergone significant transformation in the last few years. • But still market segmentation exist; we have 43 banks divided into large, medium and small banks also MFIs • In the last 6 or so years, we have seen:- • Significant decline of barriers to entry to the financial sector via removal of minimum balances. • Significant decline in cost of maintaining micro accounts - via ledger fees. • The introduction of new instruments targeting lower segments of the population. But physical distances remain obstacles - that is where innovation is required.

6. Kenya’s Financial Inclusion Profile… • Comparatively, rural dwellers at 17.8% banked are worse off than urban dwellers at 40.3% banked. • Women at 17.8% banked are worse compared to males at 27.9%. • Exclusion amongst rural women stands at 73% compared to urban women at 43%. • Access to insurance services is the worst at 7% of adult population. • Deployment of mobile money transfer services (M-Pesa) in 2007 led to 27.9 % of bankable population accessing money transfer services by 2009 and perhaps better by 2010. • Has increased deposit accounts from 2.55million in 2005 to 12million in 2010.

7. Instruments for Banking the Bottom Billion • Current Solutions • Mobile Financial Services - Use of mobile phones for person to person, person to business, business to person and ATM payment transfers. • Licensing of Deposit Taking Microfinance(DTM) Institutions - Nationwide and Community MFIs. • 2 nationwide DTMs licensed so far with 31 branches across country. • Closer reach to low income segments. Outreach to be enhanced through use of agents and easing branch requirements/specifications. • Deposit Protection Fund-Covers up to Ksh. 100,000(USD 1,250) covers 92% of total accounts in the financial sector • Expansion of Branch Network of Commercial Banks • Increase from 534 in 2005 to 1030 end of September 2010. Growth driven mainly by competition and declining barriers to entry • 140% growth in rural branches compared to 68% growth in urban areas

8. Instruments for Banking the Bottom Billion…. • Future Solutions • Agent Banking – Turning non-bank outlets into financial services providers-.So far 5,892 agents approved, leveraging on mobile phone agents also. Agents to push forward financial inclusion frontiers. • Enhancement of core capital – for commercial banks; New minimum core capital. • Consumer Protection - The missing link in financial inclusion. • Consumer protection rights entrenched in Kenya’s new constitution. • New Constitution; A legal framework to develop strong institutions to grow the market.

9. Instruments for Banking the Bottom Billion… • Macro-level Support • Credit Reference Bureaus - Extending credit based on financial identity • Rolled out in August 2010 and in two months, banks have accessed over 100,000 credit reports. • Currency Centres - Reducing Cash in Transit Costs for banks and their branch networks across regions:- • First Centre already operational from end 2009/early 2010 in Central Kenya serving 88 bank branches. • The Centre is already processing on average 9 % of the total national currency transactions processed by CBK. • Financial Education through a financial regulators joint effort

10. Outcomes – Mobile Phone Financial Services-M-Pesa Flows, Volumes & Values • As at September 2010 • M-Pesa transferred Ksh 68.02 billion equivalent to US$ 841 million with 28.45 million transactions • Per day transactions-Ksh.2.3 bn or USD 29m • Average value per transaction Ksh 2,391 equivalent to US$ 29.6 per transaction • Transaction Cost at Ksh. 30-35 or USD 0.38-0.44 per transaction. • M-Pesa remains a low value payment system: targets the bottom population • This seems to be corroborated with other two pieces of evidence in the same period:- • Accounts in the banking sector have increased. • Currency outside banks as a ratio of broad money has declined.

11. Transition from Money Transfer to Banking for the Micro Savers • For the last three years, millions of Kenyans have been able to use mobile phone platforms to make payments and send remittances. • In 2009 mobile phone platforms began being integrated with banking platforms. • One of the criticisms then was that mobile phone money transfers did not seem to affect financial intermediation significantly. • In May 2010, Equity Bank partnered with Safaricom to launch M-Kesho account that goes beyond transfers to micro-savings, micro-credit and micro-insurance. • Since the launch, over 700,000 M-Kesho accounts have been opened with over USD5 million mobilised. • Other banking products that leverage on mobile phone technology include KCB Bank Connect and Family Bank’s Pesa Pap. • Other mobile phone operators have also launched their mobile money products – Zain (Zap) and Essar (Yu Cash).

12. Outcomes - Expanding Financial Services: Branch Networks, MFIs • 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. • 2 Deposit Taking Microfinance Institutions have opened 31 branches since 2009(16 in rural areas). • Increased outreach programme by Kenyan banks and DTMs reaching rural unbanked and under banked Kenyans.

13. Outcomes - Growth of Kenyan Banking Sector and Deposit Protection Fund(DPF) - Deposit Accounts • Number of deposit accounts has increased from 2.55m in 2005 to nearly 12 million at end of September 2010. • 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. • Growth attributable to reduced costs of maintaining micro accounts and introduction of innovative instruments. • But also increased branch outlets that solve the physical distance. • Barriers of entry have been significantly reduced.

14. Outcomes - Macro Level

15. Outcomes - Macro Level

16. Outcomes - Macro Level • Declining velocity - an indication of financial depth. • Rising multiplier - an indication of financial innovation. • Currency outside the banking sector as a ratio of Broad money has declined - a signal for less money being held in ‘’unsafe’’ places. • These outcomes then portend a challenge to the current monetary policy framework: • Velocity movements may imply unstable money demand. • The relationship between reserve money and broad money is unstable and unpredictable. • Excess liquidity in the banking sector is a new phenomenon. • Monetary policy framework; Target broad money via reserve money as an intermediate target – Totally inadequate

17. Key Lessons • There is a potentially huge market of the unbanked waiting to be tapped into. • There are 43 banks, some have the technology to manage micro accounts - others should follow. • The Regulator has acted as an agent of change and an agent to develop the market:- • Give confidence to drive credibility. • Provide space for innovators to work • Protect the bottom billion as they enter the market - via the Deposit Insurance Fund and risk - based supervision • Regulation and supervision must keep pace with innovation. • But risk of ‘’too big to fail’’ or ‘’too big to save’’ syndromes when micro accounts are involved. One bank holds 46% of the micro accounts. • The Central Bank is working to increase core capital levels and reduce exposure to the Deposit Protection Fund; Important to create strong banks and reduce “too big to fail” moral hazard problem • Move policy frameworks in line with dynamic developments: e.g. monetary policy framework - if we get it right it will serve EAC.