This year marks the 50th anniversary of the Republic of Kenya. As Ms. Lagarde of Managing Director of the IMF noted on her recent trip, “Kenya’s economic gains over the past few years have been nothing short of remarkable.” How has Kenya been able to achieve so much in such a short period of time?
In the whole mix, we have to acknowledge the role played by the financial system specifically the banking sector because the financial system in Kenya is heavily dominated by the banks. The banks play a key role in terms of facilitating the economic growth of the country. The way you look at it is that the banking system provides the oil which lubricates the moving parts of the economic engine that drives the growth. So, the banks have to position themselves to play this role effectively and indeed the banks have been able to demonstrate that they are positioning themselves to play this role. For example, Kenyan banks are not only looking at the opportunities of ensuring that banking services are accessible to members of Kenyan community but also extending this to the region to take advantage of the opportunities that are arising from the EAC (East Africa Community) integration frame work. A survey released recently by FinAccess showed was that over the years 2006 – 2009 – 2013 there has been remarkable improvement of Kenyans who were able to access financial services of which banking dominates as indicated earlier. Currently, we only have about 25% of the total bankable population unbanked. We have made significant improvements.
A number of Kenyan banks are taking advantage of EAC market availability and have gone out in to EAC countries like Uganda, Rwanda, Tanzania, Burundi and even South Sudan. In a way we are exploiting the market as a country.
The East African Community (EAC) has a population of about 140 million and a combined GDP of more than $100 billion, considering Kenya is already the financial leader in the region, how is the Kenyan banking sector working to leverage this potential to become even the financial capital of Africa?
There are a number of factors; first, we have formed East Africa Bankers Association. The whole idea of forming the East Africa Bankers Association was to influence the evolution of policy framework at the regional level, using the same approach that is used by each member at the national level so that our members can then be able to effectively play in a scenario where there is a level playing field at the regional level. The East Africa Bankers Association plays exactly the same role National Bankers Association play in their respective countries but at a regional level.
There is a move by the Kenyan Government to create the Nairobi International Financial Center. Nairobi will be positioning itself to be a financial hub not only for EAC or COMESA region but for Africa. There is already a team that the Government has put in place to ensure that it is well coordinated and driven by the National Treasury.
Arguably the most important element to any successful capital market is trust or confidence in the underlying economy. Considering the recent tragic events that have happened in Kenya, what do you think needs to be done to regain the trust and confidence of the international community in Kenya as a safe destination for investment?
The outcome of the electoral process given the fact that there were complaints that were raised and resolved through the judicial process and the parties were happy with the outcome and they moved on. The fact that we now have a legitimate Government that has got the mandate of the people and the challenge has been resolved by the parties and they have come to accept the outcome, this was critical in sending the right signal to the investors and various stakeholders which lays ground to attract investment in to the economy.
Subsequently, we have consistently demonstrated that we are committed to implementing what we set ourselves up to implement. In addition, we have also discovered some oil resources which in a way, if appropriately harnessed will give considerable boost to the economy.
How is Kenya working to ensure that they don’t fall into the “oil curse” that has plagued other African countries?
MR. HABIL OLAKA: First, the general feeling that the fiscal policy and the monetary policy directions are showing signs of coordination between the two and the net result is stability in the market which then instills confidence in the investors to invest in the economy.
Secondly, the exogenous factors – what is happening in the United States of America (U.S.A) and the Euro zone, made the emerging markets and sub-saharan Africa a plausible destination for these funds and given that Kenya is positioned in the South as the flagship for Africa, there was a tendency to have the outflow coming in to Africa in terms of looking for investment opportunities and given the position of Nairobi Stock Exchange, the stock markets promising some fairly good returns, that in a way made this investment option very attractive to the investors who are looking for alternative investments other than their home investments in the U.S.A or within Europe.
The association must work closely with the government to ensure public policy reflects business friendly guidelines for investment and operations, can you tell us a little bit about how you interact with them?
One of the key mandates of the association is the advocacy role – we proactively engage various stakeholders within the policy environment. So we engage the Government arm – the National Treasury, the regulator – the Central Bank of Kenya –, the parliamentarians because they would come up with a legislation that would affect us in one way or another, we engage consumer groups because whatever is put in place has got to take in to considerations what the consumer says and we have tried to ensure that we are well positioned to play that role. So one of the things we have realized is that advocacy without proper support from research is not as effective. You are more effective when you are advocating for a position that is well researched on and you are relying on concrete evidence to support your advocacy position. If you are well supported by a well-founded research body, then you are in a better position to speak out on the basis of your facts and get your position agreeable and credible to the people. We have a department of research and policy. They do actual research to support the policy initiatives that we advocate for and for this to be done effectively we have got the Center for Research on Financial Markets and Policy©.
What are some of the top priorities or areas of interest the KBA is advocating for based on your research?
MR. JARED OSORO (DIRECTOR OF RESEARCH AND POLICY AND THE DIRECTOR OF THE KBA CENTRE FOR RESEARCH ON FINANCIAL MARKETS and POLICY): As a banking industry we are at the core of the progress of the country. So some of the areas you touched on the real side of the economy i.e. infrastructure, agriculture, industry and other areas related areas that support the core of the economy are where we are trying to see how the banks can play a leading role.
Previously we have been looking how the banking industry has been positioning itself as a leader through innovative crossing of boundaries in three respects; one in the relationship in banks and mobile networks operators in operating mobile money, which has contributed significantly towards financial inclusion; two the geographical expansion of banks to other jurisdictions in East Africa; and three the relationship between the banks and capital markets.
The Kenyans banks’ expansion across the East African region is not only boosting financial returns to the concerned banks but also support the financial integration of the region. This could be viewed as an integral building block for the East Africa union as it moves towards the penultimate integration agenda of a monetary union.
Our research theme for this year is put the Banking industry at the core in supporting the key sectors like agriculture, infrastructure, and resource based investment like oil and gas, which are forthcoming. We will seek to see how Kenya can take advantage the likelihood of fundamental changes in the structure of the economy given the recent discovery of oil and gas resources with the view to ensuring that the growth drivers are merely not resource-based, but rather we have an economy that benefits from resources while at the same time remaining focused on services as a key growth driver.
With the recent discovery of oil and gas in Kenya, we are likely to see the type of FDI flows evolve depending on emerging opportunities. This is the potential that Americans investors may wish to take advantage of. Those that want to position themselves to target the regional market make a strategic entry into Kenya as the springboard either to launch in to other markets or to seek to investigate the markets. This has been evident in the financial sector, some of the regional international banks who seek to invest in the region come to Nairobi first and then from there they see how they can approach the East Africa region. That places Kenya as a continental hub.
We do our research in partnership with a number of other entities including the Central Bank of Kenya and the academia and trying to make it as dynamic as possible so that it remains at the frontier in respect to rigour and policy relevance.
What mobile banking has done in Kenya over the last five years is nothing short of remarkable. Estimates put the usage at more than two-thirds of the adult population and accounting for around 25% of the country’s GDP or $2.6 million an hour, why did this banking revolution happen in Kenya and what effect did it have on the overall banking sector?
MR. HABIL OLAKA: Initially, when the mobile money transfer services came up especially with the launch of Mpesa, banks looked at it as competition. With time and with the success that Mpesa achieved, coupled with further understanding of the separate role that money transfer services played in the payment chain, the banking industry realised the need for collaboration. The mobile money transfer service was more or less achieving transfer of money from point A to point B without the physical cash movement. An individual would withdraw the money from bank account and transfer the money from point A to point B. Initially, the mechanism of transferring money say upcountry was very crude, you had to go to a bus station and get someone to give your money that was travelling upcountry, and sometimes only 50% of the money would reach. That has been transformed from manual process with all the risks attendant to it to an automated process that you can do instantaneously with all the security features in place hence banks realized that they could leverage on that, the mobile network operator will be relying on the fact that it can play in the financial services space while the bank is able to leverage on the subscribers of the mobile network to be able to get the services across to the subscribers of the mobile network operator.
When banks realized this, there was a massive move and a number of them are now collaborating with the mobile network operators and coming up with an array of products where they are leveraging on each other’s strengths. The FinAccess survey shows that there is a remarkable improvement in Kenya in terms of access to financial services by the consumers moving the excluded now to only 25%. We attribute this to the convergence between the banking services and the mobile telephony (i.e. mobile banking).
To an extent, we can attribute this remarkable progress to the supporting role played by the regulators, because for any innovation to work, you can easily stifle innovation through the regulation by putting in boundaries and you let innovation only occur within the erected boundaries and of course, the innovation may never occur. But in Kenya the approach was a bit different, you let innovation thrive but keep an eye on it, look at the risks that are emanating from the innovation then put in the regulations to address the risks. This has enabled mobile banking to thrive. The regulations like the NPS Act was enacted later as a way of ensuring that what is evolving is kept under watch by the regulator. This in a way has enabled Kenya to outpace most of the other jurisdictions by virtue of the kind of approach that the regulator took.
What initiatives do you have to expand banking services into the rural areas of Kenya?
MR. HABIL OLAKA: There are a number of initiatives that KBA as the umbrella body for the commercial banks in Kenya is trying to address i.e. addressing the convergence between the infrastructure suppliers and the banking services through agency banking. Effectively banks are able to use existing infrastructure to be able to deploy their services to the consumers. For example; instead of putting up brick and mortar through branch network, the specification for a branch does not make economic sense to put them in some of the areas, as per the regulator’s specification. Yet these remote areas are the areas that most need the services of the banks. So with the development of agency banking you can use the existing infrastructure like the petrol station, pharmacy, supermarket, existing agency of mobile network operator to deploy your services as a bank. This convergence has enabled banks to get out and reach areas that were initially inaccessible by the banking services, no wonder we’ve got such a progression that now only 25% are not accessed, which though still a large number, has dramatically come down. The challenge is now to move it to the next level. If we can move it to a lower level from 25% to less than 10% excluded, it would be great progress.
What are you expectations for Islamic banking in Kenya?
MR. HABIL OLAKA: There are a number of people who are excluded from financial services because of economic reasons or because they don’t have a branch available within their reach, or they don’t have access to the services. But there is another proportion that is excluded from financial services because of their faith. Their faith limits them from accessing the conventional banking services, and therefore we need to have services that can also resonate with their faith, hence if you introduce products that are specifically addressing the limitations arising as a result of peoples’ faith then you would be able to access those who currently are not able to access the services because of conflict with their faith..
The other thing about the Sharia Compliant financial services (banking, insurance capital markets) is that they may be attractive to consumers who are not necessarily muslims as the preferences may be inclined towards that the same way a Muslim would be inclined to the same product offering but for reasons of faith. The promotion of the Sharia compliant financial products will go along way in terms of moving our financial inclusion agenda forward.
Within the Kenya Bankers Association, we have already realized this and we have set up a committee – Islamic Banking Advisory Committee that will be advising the Governing Council of the Kenya Bankers Association in terms what steps to put in place to promote the Sharia Compliant banking products within the banking industry. There are already two banks that are licensed as Islamic banks to provide Sharia Compliant banking services (a license that is purely for that) so they do not provide anything else apart from Sharia compliant banking products.
There is also another licensing regime where banks are allowed to have a window that provides Sharia compliant products. So there are the normal conventional banking products but then they have a window that specifically addresses the Sharia compliant banking products. Banks are positioning themselves to attack this specific market.
MR. JARED OSORO: The whole issue of Islamic financial services ties in very well with Vision 2030. This is because a key characteristic of the economies where Islamic financial services are already entrenched is that of being resource rich. Typically, such economies have a positive current accounts positions and are willing to invest the surpluses outside of their economies. Our ability to receive such resources and therefore bridge our savings gap may be constrained by not being compliant to shariah law. As you may know, in vision 2030 the level of investment requirement is well beyond 30 % of GDP and the level of savings is well below 20% of GDP. So we have this huge gap. Consequently, being Sharia compliant will enable us to take advantage of this external resource pool.
Where do you see opportunities for investment from US investors and companies?
MR. HABIL OLAKA: Given the strategic positioning where the government is trying to promote an economy-driven state, I see opportunities becoming apparent in key sectors like agriculture, which is one of the main contributors of Kenya’s GDP.
Another growth area is in tourism. Though it relies on a number of exogenous factors which must be positive for the sector to thrive, my outlook is that the sector’s performance will remain positive on account of a number of government initiatives. Hence it’s an area that would be attractive for investment.
Infrastructure is also another major investment area. Kenya is currently positioning itself as a corridor i.e. the neighboring countries like Uganda, Rwanda, Burundi are relying on Kenya for moving their goods from the port of Mombasa. So Kenya will need to develop its infrastructure system quite rapidly to be able to play that role and effectively support neighboring countries in their pursuit for economic growth. The opportunities are quite a number; almost every sector has got opportunities for investment and growth.
If you look at energy for instance, the potential of geothermal energy is substantial. This is one area where private sector investors from the U.S should come and quickly take advantage of existing opportunity.
The other area is the financial sector. We have seen a number of American investors and investment banks come to the market whenever we have an IPO. These big investments banks usually partner with the local ones for particular transactions. There are opportunities for them to venture into the market even in a small way and build their network.
As CEO of the KBA, if we were to come back here in 5 years and interview you again, optimally, what achievements or accomplishments would you like to have completed?
MR. HABIL OLAKA: My dream is to position KBA in such a way that we are a true voice of the industry and create partnership with other stakeholders. That will be manifested by the KBA being consulted by the various stakeholders on virtually anything that affects the industry in particular and the economy in general rather than being approached as a by the way after the fact. We want to position ourselves to be the ones driving the agenda.
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