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Banking and Finance Overview

"Kenya’s financial services sector is the most sophisticated in the region. It is preparing to build on its strengths and grow in line with an expanding economy"

Kenya's financial system is among the largest and more developed in Sub-Saharan Africa, with a large banking sector.

The banks, Non Banking Finance Institutions, microfinance institutions and building societies are supervised by the Central Bank of Kenya while Savings and Credit Cooperatives are regulated by the Commissioner for Cooperatives. No one person can own more than 25% of a commercial bank and the government does not fully own any commercial banks however it does maintain ownership shares in four major commercial banks. Recent developments include the creation of a formal deposit insurance scheme, the Deposit Protection Fund. Also, in June 2005, the CBK finalized plans for electronic money transfers between banks—Real Time Gross Settlement—allowing for the instantaneous movement of funds.

Financial services growth, which was muted in 2003 and 2004, is clearly poised for a take-off in Kenya, on the back of a strengthening economy and systematic reforms of the sector.

Growth in the sector was only 1.5 percent and 1.4 percent in real terms in 2003 and 2004, respectively. But since then, growth in the industry has surged to 8.1 percent in 2005, with the stock of private credit rising further at a rate of 13.5 percent for the year ending September 2006.

To prepare for sweeping upgrades of both banking and insurance, the government has introduced some changes in oversight structure and their top managements. The insurance industry will soon have an independent regulator, following the signing into law of the Insurance Amendment Act of 2006. The new regulatory authority will replace the Office of the commissioner of Insurance.

Banking and insurance reforms
Steady modernization of the financial sector has played a key role in promoting its growth. The introduction of Real Time Gross the Settlement (RTGS) has speeded settlement of online and cheque based payments.
Tighter supervision of banks, including the introduction of more stringent governance guidelines, has also played a part. So, too, have investment by banks in electronic payment technology and in wider networks of cash-point machines throughout the country

The new Banking Act that took effect in January 2007 is expected to have a strong impact on growth, by improving the lending environment. Under the new law, banks will have access to better credit information from loan applicants, and borrowers will benefit from a legal cap on interest charges. In particular, the law will restrict interest charged on loans to no more than double the principal amount.

Even before this law was enacted, the ratio of non-performing loans (NPLs) was falling steadily. The main holders of NPLs have been the large state-owned banks, and the government has spurred these banks to write-off bad loans and improves their balance sheets, in preparation for privatization. Eventually the government plans to withdraw completely from commercial banking. It has already made strides in that direction, restoring Kenya Commercial Bank (KCB) to profitability and proceeding with a restructuring and privatization of the National Bank of Kenya (NBK).

While banking dominates the financial service sector, representing between 70 and 80 percent of financial assets, the insurance industry is also preparing for a major expansion.

Introduction of new mandatory, nationwide health and pension insurance plans will boost demand for these types of insurance, including for supplementary health and pension products provided by the private sector. The health and pension reforms are also expected to increase awareness of and demand for other types of insurance, such as property and life coverage.

Meanwhile, the government has tightened regulation of the industry, promulgating new rules for minimum capital guarantees by brokers and agents. As confidence in agents and underwriters grows, penetration of potential insurance markets in Kenya is expected to rise well beyond its current level of 3.09 percent.

Booming capital markets
Along with banking and insurance, capital markets are poised for a growth spurt. One big driver of that growth will be the introduction of mandatory pension coverage, which will create demand for investment instruments to ensure that funds are available to pay future retirees.

The stock market has already experience one such expansion phase related to the pension market. Following the introduction of regulations in 2000 requiring pension funds to be professionally managed, several insurers – including Old Mutual, British American and African Alliance – launched unit trusts for retail and institutional clients. The new institutional investors have boosted demand for financial instruments of all types.

Beyond growth spurred by the new pension programme, the stock market is expecting to receive a boost from a growing economy generally. Currently, there are 54 listed companies on the Nairobi Stock Exchange (NSE), and cooperate bonds have been issued by two of Kenya’s mobile telecommunications companies (Safaricom and Zain) , as well as by several regional multilateral development banks.

The NSE, which began trading in the 1950s, is being modernized. In recent years it acquired a central depository and settlement system, which has reduced settlement periods. In September 2006, an electronic trading system replaced the “open outcry” method. This is boosting trading volumes and speeding transaction times. As a result of all this changes, the NSE has risen strongly in recent quarters, as both listings and share-trading volumes have increased. The NSE-20 index rose from 4’880 to 5’646 from the 3rd to the 4th quarter of 2006. The percentage stage year-on-year was 42.1 percent in the 4th quarter and 27.3 percent in the 3rd quarter of that same year.

The stock exchange still slightly suffers from concerns about liquidity, which cause investors to concentrate their funds on only about half of the listed stocks. Exchange officials expect, however, that an improved economic environment will boost the prospects of listed companies, making them more attractive targets for investors.


Mobile Banking Innovation
Mobile phone growth in Kenya, as in most of Africa, has been remarkable, even among the rural poor. In June 1999, Kenya had 15,000 mobile subscribers. It now has over 16 million out of a population of 35 million
With this growth and a large portion of the population remaining unbanked. The biggest mobile phone company Safaricom, introduced M-PESA a service allowing you to transfer money using a mobile phone.
Kenya is the first country in the world to use this service and its runaway success has seen the system being replicated by local competitors, and internationally
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