KENYA AS A SERVICES HUB The role of services in economic transformation #SupportingEconTransform

Judith E. Tyson, Research Fellow, Overseas Development Institute April 2015 FINANCIAL SERVICES IN KENYA: ITS POTENTIAL ROLE IN ECONOMIC TRANSFORMATION

INTRODUCTION Overview of Kenya’s financial deepening Types of hubs and their pros and cons –Regional financial hubs –Financial processing hubs Kenya’s competitive position Key questions for our discussion 4

KENYA HAS EXPERIENCED STRONG SUCCESS IN ITS FINANCIAL SECTOR 7.4% of 2013 GDP Financial deepening has accelerated Growth in regional banks and cross- border banking Innovation in mobile banking 5 Source: World Bank’s Global Financial Development database

AND ITS REGULATION IS KEEPING PACE WITH NEW DEMANDS 2014 removal from the Financial Action Task Force following improvements in anti-money laundering and terrorist financing 2015 enhanced capital buffers implemented IMF see a “Strong commitment to strengthening prudential and regulatory oversight” (IMF, 2014) EAC Treaty – liberalization and harmonization of financial services 6

GLOBAL FINANCIAL HUBS 7 Hong Kong Singapore Tokyo New York London Globally represent $3.2 trillion or 5% of GDP and 10% of services exports

DEVELOPING COUNTRY SUCCESSES ARE OF MOST RELEVANCE TO KENYA 8 Hong Kong 1. Regional financial hub 3. Specialist financial hub 2. Processing financial hub Mauritius & Seychelles (Offshore banking) Dubai (Islamic banking) Bermuda (Offshore banking) Singapore Johannesburg Sao Paolo India Philippines There are 3 broad types of hubs… some examples in developing countries today Lagos

1. REGIONAL FINANCIAL HUB High potential contribution to GDP High potential to create high-skill, high-wage employment Accelerates economic development through financial sector growth and strong linkages to other sectors But… “Winner takes all” - although not yet in Sub-Saharan Africa Potential negative impacts on macroeconomic management and financial stability Longer term timeframe 9

2. FINANCIAL PROCESSING CENTERS Serve as “outsourced” processing centre to major financial centres Examples include call centres, data processing, accounts and invoice processing High-volume, low-skill employment creation Little potential for negative impacts on macroeconomic or financial stability Relatively rapid timeframe But … Little impact on financial sector deepening More limited linkages to other sectors 10

WHAT IS KENYA’S CURRENT COMPETITIVE POSITION? 1.Proven success in domestic financial services and its rapidly regionalizing banks are creating critical mass in Nairobi 2.Further synergy because of growing strength in complimentary business services and IT 3.Large talent pool of English-speaking graduates (2) 4.Compatible time zone for global financial centers (2) 5.Participant in EAC treaty (1) 11 1.Need for “best practice” legal and regulatory framework (1) 2.Need for greater number of experienced financial service professionals (1) 3.Need for further financial deepening including in capital and interbank markets (1) 4.Need to ensure confidence in long-term political and economic stability 5.Weaknesses in urban infrastructure that attract business Competitive advantages Competitive disadvantages (1) Most relevant to regional financial hubs (2) Most relevant to financial processing centers

SOURCE: Key questions for the panel discussion; 1. Do participants believe that being a financial hub is a realistic prospect? 2. If so, which type of hub is best for Kenya’s structural transformation - a regional financial center or a processing hub? 3. What is needed from private institutions, regulators and government to make it a reality? Thank you!

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KENYA AS A SERVICES HUB The role of services in economic transformation #SupportingEconTransform