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Thursday 24 May 2012

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Governor CBK Prof. Njuguna Ndung’u

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Central Bank of Kenya

Central Bank Upbeat As Fiscal Reforms Bear Fruit

Best of Kenya interviewed Prof Njuguna Ndung’u, the Governor of the Central Bank of Kenya (CBK) on the health of the banking system. Excerpts:

 

Q: Kenya’s banking system, under the guidance of CBK, appears to have put the upheavals of yesteryears behind it and is stable. Is this a fair assessment of the situation?

A: The sector has grown in leaps and bounds over the past few years with adequate capital and liquidity buffers. For instance as at the end of September 2010, the core capital to total risk weighted assets ratio stood at 18.6 per cent above the statutory minimum of 8 per cent. The liquidity ratio at the same date stood at 46.7 per cent above the statutory minimum of 20 per cent.

 

Q: What specific policy measures would you attribute this to?

A: I would categorise the policy measures in institutional reforms and strengthening of the legal and regulatory framework. With regard to institutional reforms, the Government has strengthened the operational independence of the Central Bank by ceding operational supervisory powers from the Ministry of Finance to the CBK.

 

On the regulatory front, the Central Bank embraced Risk Based Supervision (RBS) in 2004 to proactively identify high risk banks and deploy appropriate supervisory resources. Central Bank has taken a four pronged approach of advising, partnership, regulating and developing the market.

Fiscal Reforms Bear Fruit

Q: After 12 years shareholders of the National Bank of Kenya will be getting a dividend. NBK has come a long way and for some this shows clearly that the Central Bank as supervisor of the system has been strict and particular especially with regard to bad debt portfolios. Would you agree with this observation?

 

A: The banking sector was saddled with non performing loans in the 1990’s and early 2000s. However, the Central Bank strengthened the guidelines and requirements for banks with regard to credit risk management. In 2005, Credit Risk Management Guidelines were issued and revised guidelines on Risk Classification of Assets and Provisioning were issued in 2006. These guidelines have facilitated the strengthening of credit risk standards by banks. This is evident in the ratio of gross non performing loans to gross loans which stood at 7.0 percent at the end of September 2010.

 

 

Q: The International Monetary Fund projects that Kenya’s economy will grow by 5 percent this year which is a percentage point higher than the Government had projected, but certainly the kind of information the CBK was happy to hear. Shall Kenya sustain the growth?


A: It is incorrect to state that the revised growth rate of 5 per cent is one percentage point higher than what Government had projected. In fact the Budget Strategy Paper of June 2010 indicated the economy was forecast to grow by between 4.5 per cent and 5.0 per cent in 2010. The economy is still recovering, retracing its previous growth trajectory when it peaked 7.1 per cent in 2007. Indeed, this is in line with the projected growth rate of 10 per cent and above for the realisation of Vision 2030.

 

The target growth of 4.5 per cent to 5 per cent is achievable:
• A revised GDP growth rate for Q1, 2010 of 4.8 per cent up from the previous estimate of 4.4 per cent and a Q2 growth rate of

  5.4 per cent (figures released by the KNBS)
• The economy’s resurgence in Q2 was driven by a strong recovery in the following sectors:
• Agriculture (5.8%),
• Building and Construction (18%),
• Manufacturing (6.8%)
• Financial intermediation (16%).

 

These four sectors approximately accounted for 60% of the GDP growth for the Q2. Available high frequency sector data underscore the increased optimism on economic performance for the year 2010:Increased cumulative tourist arrivals (from 599,718 in July 2010 to 701,182 in August 2010).

 

• Increased Government spending on Infrastructure
• Increased tea earnings (from Ksh 5 Billion in August 2009 to Ksh 6.58 Billion in August 2010.
• Increased electricity generation (by 0.5% from 568.54 KWh in August to 571.30 KWh in September 2010).
• Increased total consumption of petroleum products (by 2.6% from 257.7 thousand MT in August 2010 to 264.3MT in

  September 2010).
• Increased Coffee auctioned at the Nairobi Coffee Exchange (from 1,699 MT in June 2010 to 5,140 MT in August 2010).

 

Finally there has been increased optimism in the economy (on account of the promulgation of the new constitution and its on-going implementation as well as the expanded EAC market that took effect from July 2010).

 

Kenya’s banking system

Q: Kindly explain the role of the Central Bank and Kenya’s banking system to the success of Vision 2030?


A: The financial sector is one of the six sectors in the economic pillar of vision 2030. Vision 2030 envisages an average annual growth rate of 10% over the next two decades, requiring increased levels of savings and investment from the current 15- 20 percent of GDP to over 30 percent as a share of GDP.

 

The financial sector is expected to mobilise and channel substantial resources required for investment. The role of CBK in facilitating realisation of some of the goals of vision 2030 is centred on the following:

 • Maintaining macroeconomic stability whose elements include price stability, low interest rates and stable market

   determined exchange rates.

• Enhancing financial inclusion. The CBK plays a facilitative role of enhancing the capacity of financial institutions to mobilize

  resources. It has undertaken the   following initiatives;
• Introduction of Agent banking and use of Point of Service devices
• Facilitated the introduction of new products based on ICT, e.g. mobile phone money transfers, etc.
• Introduction of Credit Reference Bureaus
• Other financial sector reforms, e.g., regulating Deposit Taking Micro Finance Institutions (DTMFIs) and SACCOs. What

  would pose a threat to the vision and how would CBK respond?

 

External shocks to the financial sector stability: The CBK conducts macroprudential and micro-prudential regulation and supervision to ensure conformity with best practices. This enables early identification of risks. Response to other shocks requires concerted efforts from other stakeholders in government. These shocks include: External shocks such as volatility of oil prices Unfavourable climatic conditions that could create supply constraints leading to high food and energy prices.

 

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