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 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 million accounts at end of September 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
Dec' 2009
Aug' 2010
Oct' 2010
ATMs
1,717
1,883
1,913
Branches
996
1,020
1,037
Number of Deposit Accounts (000) {Banks & MFIs}
8,657
11,872
12,187
Banks {Deposit Accounts (000)}
8,481
11,010
11,295
MFIs {Deposit Accounts (000)}
176
862
892
M-Kesho
20th September 2010
22nd November 2010
Deposit Accounts (New)
201,838
226,320
Amount Mobilized (Ksh. M)
177.8
277.3
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. Change in Base Rate Oct/ Change in average lending rate Oct/
Analysis of Base and Average Lending Rates
Category of Bank
(Size)
Average Base Rate
Change in Base Rate Oct/
May 2010
Average Lending Rate
Change in average lending rate Oct/
May
July 2010
Sep 2010
Oct 2010
All Banks
14.73
14.30
14.25
-0.34
14.44
14.29
13.98
13.85
-0.59
Small Banks
15.02
15.10
14.90
-0.12
14.85
15.61
14.43
14.46
-0.39
Medium Size Banks
14.75
14.42
-0.33
13.57
13.17
-1.85
Large Banks
14.28
13.79
-0.49
14.77
14.62
14.41
14.06
-0.71
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 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
Lending rates  
Deposit rates  
Interest Rate Spreads   
All Banks
Small Banks
Medium Size Banks
Large Banks
May-10
14.44
14.85
15.02
14.77
4.62
4.10
5.03
4.00
9.82
10.75
9.98
10.77
Jun-10
14.39
15.43
15.09
14.58
4.45
3.65
4.96
3.77
9.94
11.78
10.13
10.80
Jul-10
14.29
15.61
15.10
14.62
3.85
3.82
4.70
3.39
10.44
11.79
10.41
11.23
Aug-10
14.18
15.37
14.78
14.55
3.74
3.98
4.66
3.21
11.38
10.12
11.34
Sep-10
13.98
14.43
13.57
14.41
3.53
4.11
4.42
3.03
10.45
10.32
9.14
Oct-10
13.85
14.46
13.17
14.06
3.58
3.70
4.20
10.27
10.76
8.97
11.03
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 repos market has grown well overtime relative to interbank market. The month of September was the most active in the horizontal repos market. HRT usage reached the peak in October 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 (%)
Commercial Banks
2-3
3-4.4
4.5-5 5
Above 5
Sep -2009 68 24
Nov-2009 56 22
Jan-
2010 41 59
Mar-2010 40 60
May-2010 76
July-2010 17 69 14
Sep-2010 9 82
Nov 3 12 39 46
Non-Bank Private Sector Firms
2-3
3-4.4
4.5-5 5
Above 5 68 24 90 10 73 27 86 14 53 33 9 17 66 16 21 63 19 50 31
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