PRESENTATION TO THE BOARD OF DIRECTORS OF DOMESTIC REGULATORS CENTRAL BANK OF KENYA PRESENTATION TO THE BOARD OF DIRECTORS OF DOMESTIC REGULATORS PROF. NJUGUNA NDUNG’U July 20, 2009

OUTLINE Objectives of CBK Structure of the Banking Sector Key Initiatives and Achievements Challenges Areas of Cooperation Central Bank of Kenya 2

OBJECTIVES OF CBK Formulate and implement monetary policy directed to achieving price stability. Foster stability, solvency and proper functioning of a stable market-based financial system. Provision of efficient Payments System. Support the Economic Policy of the Government. Central Bank of Kenya 3

STRUCTURE OF THE BANKING SECTOR The Structure of the Banking Sector is set out below; Type of Institution Number 1 Commercial Banks 43 2 Mortgage Finance Companies 3 Forex Bureaus 123 4 Microfinance Institutions 5 TOTAL 169 Central Bank of Kenya 4

KEY INITIATIVES AND ACHIEVEMENTS a) CBK National Payment Oversight - Real Time Gross Settlement System (RTGS), Kenya Electronic Payment and Settlement System (KEPSS) launched in July 2005. RTGS Advantages:- Reduction and containment of systemic and other payment related risks. Reduction of length of payment cycles for high and time critical value payments to same day settlement. Provision of tools to commercial banks to enable them manage their liquidity efficiently. Provide CBK with a better tool for monetary policy management. Central Bank of Kenya 5

KEY INITIATIVES AND ACHIEVEMENTS... b) Payment System- Clearing House- Cheque Truncation - imaging of cheques. Intended to reduce/eliminate physical movement of cheques. Endgame - Lower operating costs for banks and reduction in cheque clearing cycle. Central Bank of Kenya 6

KEY INITIATIVES AND ACHIEVEMENTS... c) Comprehensive Review of the Banking Act The main reasons for the review is: To align the Act to International Best Practice. To expand the range of permissible activities. To facilitate adoption of Consolidated Supervision. Prompt Corrective Action. To enhance CBK operational independence. Central Bank of Kenya 7

KEY INITIATIVES AND ACHIEVEMENTS... d) Enhancement of Minimum Capital To support Government policy as envisaged in Vision 2030 - strong, stable and efficiency banks that offer services to a wider public are required. To realise this objective, the Law was amended requiring banks to gradually increase their minimum core capital to Kshs1bn by 2010. Consolidation of banks expected – but more importantly, they should be strong in their market niche. Central Bank of Kenya 8

KEY INITIATIVES AND ACHIEVEMENTS... e) Harmonization of Regional Supervisory Practices The five countries in the EAC have been working on initiatives aimed at harmonizing their supervisory and regulatory regimes. MOUs to facilitate information sharing and Consolidated Supervision Central Bank of Kenya 9

KEY INITIATIVES AND ACHIEVEMENTS... f) Improved Access to the Kenyan Public National Survey on Financial Access conducted. Microfinance Act enacted and Regulations gazetted (One Microfinance Institution licensed). Regulations on Credit Reference Bureaus Gazetted. Expansion of branch network. Proposal to allow banks to use agents incorporated in 2009 Finance Bill – Principal/Agent model of financial service delivery. Central Bank of Kenya 10

KEY INITIATIVES AND ACHIEVEMENTS... g) Automation of Bank Supervision Department Procedures Electronic Submission of Returns. Roll out of Banking Supervision Application (BSA)for data analysis. Acquisition of an Electronic Working Papers Solution for the examiners. Acquisition of Computer Audit Assisted Technique (CAAT) software, ACL. Central Bank of Kenya 11

KEY INITIATIVES AND ACHIEVEMENTS... h) Adoption of Risk Based Supervision Methodology - Focuses on assessing the adequacy of institutions’ frameworks to identify, measure and mitigate the inherent risks they face. - Appropriate risk assessment is important for the totality of the financial system – it has a peculiar contagion process Central Bank of Kenya 12

CHALLENGES a) Legislative Reform -Enactment of various legislations is critical to strengthening the existing legal and regulatory framework. Challenges have been posed in this area by the Parliamentary Calendar and getting buy in on some of the proposed changes from Legislators e.g. Anti-Money Laundering proposed Law still pending in Parliament. Central Bank of Kenya 13

CHALLENGES... b) Innovations/Changes in the Banking Sector Technological developments, customer sophistication and competition are driving change and innovations such as new products, outsourcing and centralization of operations in offshore centres. These changes are “stretching’’ the existing legal and regulatory framework. Central Bank of Kenya 14

CHALLENGES... c) Public Expectations The Kenyan public expects the CBK to ensure that their savings held even in institutions that are not within the purview of CBK are safe. There are also expectations in the public domain that the CBK should intervene and reduce the perceived high level of fees and charges levied by banks.   Central Bank of Kenya 15

CHALLENGES... d) Poor Credit Culture The sector’s level of NPLs is high although it has declined in the last few years. The high level of NPLs is due to Weak institutions and poor risk assessment. Information asymmetry problems. Quality of such information - to allow appropriate processing. Central Bank of Kenya 16

POSSIBLE AREAS OF COOPERATION Information Sharing – Building a common information capital Consolidated Supervision – Regulators can talk to each Research and Publication Consumer Protection Anti-Money Laundering Investigations and Compensation Financial Stability Reporting Central Bank of Kenya 17

CENTRAL BANK OF KENYA THANK YOU Central Bank of Kenya