Africa Financial Institutions & Capital Markets for Wealth & Job Creation

1. THE 3RD AFRICA GOVERNANCE, LEADERSHIP AND MANAGEMENT CONVENTION, 2012Theme:Towards Sustainable Wealth and Job Creation: Challenges and Opportunities for AfricaTopic:“The Role of Africa Financial Institutions and Capital Markets in Wealth and Job Creation.” Central Bank of Kenya Prof. Njuguna Ndung’u Governor Central Bank of Kenya August 5-9, 2012. Mombasa, Kenya

2. 1.0 ROLE OF SOUND FINANCIAL INSTITUTIONS and markets • Need to build confidence in the strength of financial institutions and markets for: • 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

3. 1.1 Effects of fragile FINANCIAL INSTITUTIONS • 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.

4. 1.1 Effects of fragile FINANCIAL INSTITUTIONS… • 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: • A Regulatory System that can readily identify weaknesses and emerging vulnerabilities • A Regulatory System that is capable of analyzing and adequately pricing risks • A Regulatory System that provides appropriate incentives (and from the regulator – penalties) to induce prudent behaviour in the market place • 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

5. 2.0 THE EVIDENCE FROM FINANCIAL INDICATORS • 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.

6. 2.1 FINANCIAL LANDSCAPE OF SELECTED AFRICAN COUNTRIES 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)

7. 2.2 Evolution of stock market Indicators • The role of the stock market in the global and African markets has grown over time • 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: • 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.

8. 3.0 Building STRONG FINANCIAL INSTITUTIONS 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

9. 3.0 Building STRONG FINANCIAL INSTITUTIONS… • 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.

10. 3.1 EXAMPLES FOR EAC FINANCIAL STRUCTURE • 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 • 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 • 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

11. 4.0 Conclusion and going forward • 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 macro-prudential 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

12. THANK YOU