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The Structural Transformation Story of Kenya’s Financial System

The Structural Transformation Story of Kenya’s Financial System. Njuguna Ndung’u, CBS Governor, Central Bank of Kenya 30 th November, 2010. The Success of Financial Inclusion: (1a) Branch Network of Banks.

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The Structural Transformation Story of Kenya’s Financial System

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

  2. 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

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

  4. 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

  5. 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

  6. 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

  7. The Success of Financial Inclusion: (5) Enhanced Financial Access • 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.

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

  9. Analysis of Base and Average Lending Rates • 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.

  10. Analysis of Interest Rates Spread • 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.

  11. 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.

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

  13. Improved Liquidity Management The horizontal reposmarket 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

  14. 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

  15. Changes in Perceptions on Economic Growth (%) • Expectations for higher economic growth in 2010 maintained.

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

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