Kenya is undoubtedly the financial center of the East African Community (EAC), however as Cabinet Secretary at the National Treasury Henry Rotich explains, it aims to extend beyond the EAC’s borders to become a financial focal point for Africa as a whole and also introduce new legislation to expand the sector at home.
What role does the development of finance sector play in facilitating growth in the East African Community (EAC)?
EAC member states attach great importance to financial sector development and deepening in the pursuit of their poverty reduction goals. By mobilizing savings, and facilitating payment and trade of goods and services, as well as promoting the efficient allocation of resources, the financial sector plays a critical role in facilitating economic growth. A dynamic and efficient financial industry provides key pillars to assist the latter by mobilizing and pooling saving; monitoring investments and exerting corporate governance; easing trading, diversification, and management of risks; and making possible the exchange of goods and services.
Within the EAC, the finance sector has been growing at a rapid rate. Kenya plays a leading role and is an important financial hub for our neighbors. You will find most of the Kenyan banks are present in the neighboring countries, and some even have extended their wings beyond the EAC region.
This sector supports economic growth not only by promoting private sector development, but also enabling the public sector to invest in infrastructure. It also enables households to invest in human capital and thus benefitting from consumption smoothing.
In Kenya the financial services sector is critical to achieving the Vision 2030 target of 10% annual average economic growth. The sector is expected to stimulate a significant increase in investments and savings through mobilizing both domestic and international resources. The aspiration articulated for the sector in the Vision is: “to create a vibrant and globally competitive financial sector that will promote a high level of savings to finance Kenya’s overall investment needs.” The critical area of investment envisaged in the Vision is infrastructure development.
Many African countries have continued to lag behind in infrastructural development due to competition for funds from other social economic demands such as health, security, education, justice and others, which leave governments with limited resources to spend on infrastructure.
How will new regulatory reforms, such as the Finance Act 2015, establish Kenya as the financial heart of Africa?
There is no doubt that Kenya is already the center of the EAC’s financial sector, but we want to extend beyond the EAC’s borders and we believe the country is strategically placed to be a hub for Africa as a whole. A Medium-Term Plan (MTP)II, which we are currently implementing, identifies two key flagship projects for the financial services sector, namely: the establishment of the Nairobi International Financial Center (NIFC) to position Kenya as a regional financial hub and an international financial center; and the development and implementation of a Capital Market Master Plan. These are vital projects whose implementation is critical to the achievement of the broader Vision 2030 objectives and increasing Kenya’s significant role within the financial sector of Africa as a whole.
The legislation is intended to improve the institutional and regulatory environment immensely over the next years. We want to model along the lines of what London has done, and have already discussed key initiatives and signed an MoU when the Lord Mayor of London visited Nairobi. We are also working with Qatar International Financial Center, which actually benefited from capacities and support from London in order to achieve its objectives.
Is the National Treasury creating a more conducive environment to improve ease of doing business in Kenya and attract the necessary foreign direct investment (FDI)?
The trends in FDI have increased significantly over the last years, namely in oil exploration, geothermal energy, and infrastructure, etc. We have seen a growing interest in investing in Kenya, however the challenge has been to materialize those enquiries into actual and real investments. We are working closely with the national government to follow on the recent momentum, where Kenya was the third most improved country in terms of ease of doing business. We are currently working on private-public partnership (PPP) legislation which should have a huge implication on the country’s ranking in terms of an FDI destination and also ease of doing business.
How is Kenya’s success in mobile banking being used as a benchmark in Africa to encourage others to digitize their payments to increase financial inclusion and enhance uptake of banking services?
The evolution of information and communication technologies (ICT) has already shown its potential to widen access to financial services, and Kenya’s success in this area is the story to tell and replicate. The rapid diffusion of mobile phone technology has produced “real-time” connectivity between cities and opened up access in remote rural areas, providing the infrastructure for new payment systems and basic banking services. Kenya’s rapid expansion of its mobile phone-based payments system, M-PESA, is always cited as an illustration of how new ICT can produce striking financial innovation.
More than 80% of adult Kenyans have made use of mobile money services, which is phenomenal, and mobile money is gaining popularity in neighboring countries such as Uganda and Tanzania, albeit at a slower pace. The growth of mobile phone-based banking provides opportunities for banks to expand their operational reach, while also introducing new institutions in the form of the telecommunications companies. A key example is Equity Bank when it recently introduced a new initiative called Equitel, through which they plan to increase banking penetration in the region through its subsidiaries.
How is the National Treasury working with the private sector to develop an inclusive insurance market in order to increase penetration?
It’s true that the insurance sector penetration is very low by all standards, which makes it an attractive investment destination. We have already seen several international firms investing or reinvesting in the sector, which on its own is a strong indication of the potential. The bigger challenge however, for the sector has been the legal framework; we have a very old, archaic, insurance act. The National Treasury has been working very closely with both private and public sectors on a new bill that is awaiting to go to parliament, which will create more opportunities for the sector to thrive and flourish.
Secondly, the sector has had a very negative image among the general population. In this regard, we are working very closely with the Insurance Regulatory Board and the private sector to change perceptions and mindsets. Some of the key insurance companies are on the ground talking to farmers, villagers and teachers, etc., in order to showcase the real impact insurance can have on their livelihoods.