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Opening remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the 2024 BOJ-IMES Conference "Price Dynamics and Monetary Policy Challenges: Lessons Learned and Going Forward", hosted by the Institute for Monetary and Economic Studies, Tokyo, 27 May 2024.
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May 27, 2024 Bank of Japan Opening Remarks at the 2024 BOJ-IMES Conference Hosted by the Institute for Monetary and Economic Studies, Bank of Japan UEDA Kazuo Governor of the Bank of Japan I. Introduction It is our great pleasure to welcome distinguished speakers and guests to our 29th BOJ-IMES Conference. We would like to thank you all for your participation. I would also like to thank my old friend, John Taylor, who was the very first Mayekawa Lecturer in 2008, for coming back to our conference to deliver his second Mayekawa Lecture later. While we hold our research conference almost every year, this year's conference is unique in that it is held as part of our "Broad Perspective Review" of monetary policy. The review aims to further deepen our understanding of various unconventional monetary policy measures over the past 25 years and to gain insights that will be useful for future policy conduct. This conference will cover two main themes: "Price dynamics" and "Effects of conventional and unconventional monetary policy instruments." We very much look forward to lively discussions with you today and tomorrow to gain further insight into these themes. To set the stage, let me start my remarks with the recent changes in our monetary policy framework, followed by my reflection on the past 25 years condensed into 20 minutes. II. Japan’s Zero-Inflation Trap and the BOJ’s Large-Scale Monetary Easing Changes in the Monetary Policy Framework The Bank of Japan (BOJ) decided on the termination of most of its non-traditional monetary easing measures at its March 19 meeting, in response to the improving inflation outlook. Discontinued measures included: the yield curve control (YCC) involving a negative shortterm policy rate and control of the 10-year JGB yield, and purchases of risky assets such as equity-linked ETFs and J-REITs. Additionally, two types of forward guidance were ended: one stating that the BOJ would continue with Quantitative and Qualitative Monetary Easing (QQE) with YCC as long as it was necessary for maintaining the price stability target in a stable manner, and the other indicating that the BOJ would continue expanding the monetary base until inflation exceeded 2% and stayed above the target in a stable manner. For further insights into this decision, please refer to my speech at the PIIE (Ueda, 2024). The Zero-Inflation Trap and the Zero Lower Bound on the Nominal Interest Rate Reflecting on the past, the BOJ initiated non-traditional easing measures in the late 1990s, with brief interruptions during 2000-2001 and 2006-2007 when the short-term policy rates were positive. Having been a BOJ board member during the inception and termination of these measures, I would like to discuss their efficacy and limitations. While extensive literature exists on this topic, the BOJ is currently conducting a "Broad Perspective Review" of its experience, as I mentioned earlier, with results forthcoming. Today, I confine myself to informally addressing the perennial question of Japan's struggle to escape a long period of zero-to-low inflation, also known as the zero-inflation trap, despite extensive non-traditional monetary policy interventions. This discussion also serves as an introduction to this conference. Chart1 shows a simple 3-year moving average of the rate of change in headline CPI, and vividly illustrates the zero-inflation trap. Inflation, by this measure, remained between -1.0% to 0.7% from 1996 to 2022, a span of 27 years.1 I think that the primary explanation for this phenomenon lies in the effective zero lower bound on nominal interest rates (ZLB), shown in Chart 2, where the overnight rate fell below 0.5% by late 1995. By the onset of the zeroinflation trap, the BOJ had exhausted its leverage over short-term interest rates as a means of stimulating the economy. The BOJ’s Large-Scale Monetary Easing I acknowledge potential objections to this assertion. Many central banks, including the BOJ, introduced various non-traditional measures to stimulate the economy, some of which remained in use in Japan until recently, as outlined earlier. I anticipate presentations during the conference will suggest that some of these measures can effectively overcome the difficulties created by the ZLB. Nonetheless, the BOJ's prolonged struggle to escape the zeroinflation trap serves as evidence of the challenges posed by the ZLB. Some may argue that the evolving policy framework adopted by the BOJ was at certain points not optimal. For instance, during the initial years of the zero-inflation trap, there was no explicit inflation target. In 2000, the BOJ deliberated whether it should define the price stability as some specific inflation rate, such as zero or a small positive number, but did not reach a consensus at that time. Eventually, in March 2006, the BOJ stated that a range of 0 to The CPI figures are staff estimates and exclude the effects of the consumption tax rate hikes, and others. 2% with a median of 1% was consistent with its understanding of price stability before clarifying further by confirming in December 2009 that the range did not include negative values, and the BOJ finally introduced the price stability target of 2% in January 2013. With hindsight, the introduction of a clear inflation target could have influenced the discussion before the BOJ's decision to terminate the zero-interest policy in August 2000. At that time, core inflation was still -0.5 percent, while forward guidance on the short rate introduced in April 1999 stated that the Bank would continue the zero rate until deflationary concerns were dispelled. Although it is difficult to attribute the subsequent deflation solely to the minor rate increase, the termination may have weakened the efficacy of the forward guidance. Another aspect worth considering is the timing of asset purchases. The BOJ's active acquisition of long-term JGBs happened relatively late compared with the observed inflation dynamics (Chart 1). While the BOJ began buying more long-term JGBs with the onset of quantitative easing in March 2001, there was no significant increase in its holdings of JGBs until 2013, as shown in Chart 3. By contrast, the Fed's holdings of US Treasury securities began to rise sharply in early 2009, in response to the global financial crisis. Having said that, it should be noted that, as shown in Chart 4, the 10-year JGB yield was already below 2% in the late 1990s, while the 10-year Treasury yield was close to 4% when the Fed initiated its large asset purchases. This prompts the question of how much impact larger-scale JGB purchases would have had in the early 2000s. The Zero-Inflation Trap and the Entrenched Nature of Low Inflation Expectations Let me now turn to a second possible explanation for the BOJ’s difficulties. I think the entrenched nature of low inflation expectations played a key role; it led to changes in economic agents' behavior, especially the strategic pricing behavior of firms, and, in turn, prolonged the period of the zero-inflation trap. As my colleagues will elaborate later, when firms do not think their peers will raise prices, they think it is best to keep their prices (and wages) unchanged, even in the face of small changes in costs or demand, making overall inflation or inflation expectations more entrenched at around zero. An economy in this situation may need a large shock to move from one equilibrium to another. The BOJ conducted extensive surveys among firms regarding their price-wage-setting behavior. Chart 5 shows some notable findings. Many firms answered that, during the period of the zero-inflation trap, they were not able to raise prices because their competitors were not doing so, while over the past couple of years, the opposite trend has emerged. While there is an element of circular reasoning in this observation, the important point is that such strategic interactions can give rise to multiple equilibria, or, at least diminish the response of prices and wages to positive shocks.2 Chart 6 shows the rate of change in wages set in the annual spring wage negotiations, which astonishingly remained at virtually zero during 19992013, reflecting the entrenched nature of the zero-inflation trap. However, there is evidence of changes after 2013: first, wages started to rise modestly in response to the new easing policy framework introduced in 2013 and the emerging labor shortage; then they rose sharply in 2023-2024, probably in response to the recent global inflation and the continuation of the easing framework.3 III. Challenges Ahead Let me briefly outline the challenges that lie ahead. Our primary objective is to achieve 2% inflation in a sustainable and stable manner. Thus far, we have made progress in moving away from zero and lifting inflation expectations, but we must now re-anchor them, this time at the 2% target. We will proceed cautiously, as do other central banks with inflation-targeting frameworks. While many of the challenges we face are similar to those encountered by our counterparts, some are uniquely difficult for us. One prime example of such challenges is determining the neutral interest rate (r*). Estimating it accurately is challenging for any central bank, but it is particularly so in Japan, given the prolonged period of near-zero short-term interest rates over the past three decades. Although real interest rates have exhibited some fluctuations, the absence of significant interest rate movements poses a considerable obstacle in assessing the economy's response to changes in interest rates. Taylor (2000) makes a similar point with regard to US inflation dynamics. Lagarde (2023) argues that the global inflation of 2021-23 acted as a coordination mechanism in changing expectations and pricing behavior. See, Ueda (2024) and Uchida (2024). Last, but certainly not least, I hope the discussions at the conference today and tomorrow will offer some valuable takeaways for the central bank community and be of some help going forward. Thank you for your kind attention. References: Lagarde, Christine (2023) “Policy Making in an Age of Shifts and Breaks,” Speech at the Annual Economic Symposium “Structural Shifts in the Global Economy” Organized by the Federal Reserve Bank of Kansas City in Jackson Hole, 25 August. Taylor, John B. (2000) “Low Inflation, Pass-Through, and the Pricing Power of Firms,” European Economic Review 44, 1389-1408. Uchida, Shinichi (2024) “Japan's Economy and Monetary Policy,” Speech at a Meeting with Local Leaders in Nara, https://www.boj.or.jp/en/about/press/koen_2024/ko240208a.htm Ueda, Kazuo (2024) “On the Recent Changes in the Bank of Japan's Policy Framework,” Remarks at the Peterson Institute for International Economics, https://www.boj.or.jp/en/about/press/koen_2024/ko240502a.htm Opening Remarks at the 2024 BOJ-IMES Conference Hosted by the Institute for Monetary and Economic Studies, Bank of Japan UEDA Kazuo Governor of the Bank of Japan Chart 1 Inflation Rate (Consumer Price Index <All Items>) 2.5 3-year backward moving avg., y/y % chg. 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 CY 94 Note: Figures are staff estimates and exclude the effects of the consumption tax hikes, policies concerning the provision of free education, and travel subsidy programs. Source: Ministry of Internal Affairs and Communications. Chart 2 Short-Term Interest Rate and Inflation Rate 3-year backward moving avg., y/y % chg. 5 % Uncollateralized overnight call rate (LHS) CPI (all items, RHS) -1 -1 -2 -2 CY 94 Note: The CPI figures are staff estimates and exclude the effects of the consumption tax hikes, policies concerning the provision of free education, and travel subsidy programs. Sources: Ministry of Internal Affairs and Communications; Bank of Japan. Chart 3 Central Bank’s Government Bond Holdings 700 tril. yen tril. U.S. dollars Japan: JGBs (LHS) United States: Treasury notes and bonds (RHS) Dec-02 Dec-05 Dec-08 Dec-11 Dec-14 Dec-17 Dec-20 Dec-23 Note: Figures are monthly data for Japan and data on last Wednesday of each month for the United States. Sources: Board of Governors of the Federal Reserve System; Bank of Japan. Chart 4 Long-Term Interest Rates % United States Japan -2 CY 87 Note: The long-term interest rates are market yield on U.S. Treasury Securities and JGBs at 10-year constant maturity. Sources: Board of Governors of the Federal Reserve System; Ministry of Finance. Chart 5 Large-Scale Survey on the Corporate Sector Reasons why raising prices was difficult Price competition Reasons why the difficulties in raising prices have eased % Wider recognition that price rises are inevitable % Significant rise in inflation Consumers' high thriftiness Increased cases of price hikes at competitors Sluggish inflation Solid demand despite price rises Potential damage to corporate image Product shortages due to supply constraints Costs associated with arrangements within the firm and with business partners Industry regulations and systems governing price setting Other Expectations for higher inflation First phase Second phase Current phase Other No easing in difficulties Note: In the left-hand chart, firms were asked to respond to the question by dividing the past 25 years since the mid-1990s into three phases, which comprise (1) the "first" phase, defined as the period from the mid-1990s to the 2000s, (2) the "second" phase, defined as the 2010s, and (3) the "current" phase, defined as the period over the past one year. Source: Bank of Japan. Chart 6 Base Pay Increase (Spring Wage Negotiation) y/y % chg. Base pay increase CY 2023 CY 2024 +2.1% +3.6% -1 CY 80 Note: Figures from 1980 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2024 are figures released by Rengo. The figure for 2024 is from Rengo's fifth aggregation. Sources: Japanese Trade Union Confederation (Rengo); Central Labour Relations Commission.
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Speech by Mr Seiji Adachi, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Kumamoto, 29 May 2024.
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May 29, 2024 Bank of Japan Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Kumamoto ADACHI Seiji Member of the Policy Board (English translation based on the Japanese original) I. Recent Depreciation of the Yen and Monetary Policy I usually start my speech at the meetings with local leaders by talking about developments in economic activity and prices. However, this time I would first like to talk about the Bank of Japan's possible responses to foreign exchange rate developments, while sharing my own views. This is because the Bank has been receiving an increasing number of opinions regarding its stance toward the weaker yen, which temporarily approached 160 yen against the U.S. dollar recently. First of all, the basic principle is that the sole objective of monetary policy is to achieve price stability. The concept of the trilemma of international finance shows that no economy can simultaneously achieve the three goals of autonomous monetary policy, free capital mobility, and a stable foreign exchange rate. Based on this, if a central bank tries to fix the exchange rate, which fluctuates in the short term, at a certain level by means of monetary policy, this induces a trade-off for a large constraint on its future conduct of monetary policy. Let me apply this idea to the current situation. If a central bank frequently changes its monetary policy to stabilize a foreign exchange rate that is as highly volatile as recently observed, swings in interest rates are expected to become larger. Should fluctuations in interest rates become too large, it will be difficult to project future interest rates, thereby hindering fund raising for households' housing investment and firms' fixed investment. If fund raising by firms and households becomes difficult, this inevitably has a negative impact on economic activity. I therefore believe that, if responses to short-term fluctuations in the foreign exchange rate are made by means of monetary policy, price stability will be adversely affected. Then, in what case should a central bank respond to foreign exchange rate developments through monetary policy? Currently, the Bank of Japan aims to achieve the price stability target of 2 percent in a sustainable and stable manner. If a prolonged excessive depreciation of the yen affects price developments and this is projected to have a negative effect on achieving the price stability target, it will be an option for the Bank to respond by means of monetary policy. To give a clear image, I would like to talk about how foreign exchange rate developments affect prices. Fluctuations in the foreign exchange rate are one factor that directly affects yen-denominated import prices, which tend to correlate with goods prices with a time lag. Changes in import prices will spread from upstream to downstream demand stages in producer prices, and presumably this will eventually spill over into consumer prices (Chart 1). That said, it warrants attention that the extent of the spillover and time lag is not fixed, because this depends on how firms at each demand stage pass on cost increases. Meanwhile, if the rate of increase in this fiscal year's consumer price index (CPI) is pushed upward through the channel I have mentioned, this could affect the results of the 2025 annual spring labor-management wage negotiations. The impact of foreign exchange rate developments on firms' inflation expectations is also an important factor. Firms' price-setting stance is significantly affected by their medium- to longterm outlook for inflation for three to five years ahead. In terms of firms' inflation outlook, the Bank's March 2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) shows that firms' medium- to long-term inflation expectations have been stable at about 2 percent since around 2022 (Chart 2). This is evidence that it has become more likely that sustainable and stable inflation will be achieved. Should there be large swings in these inflation expectations due to foreign exchange rate developments, the Bank may need to consider making monetary policy responses. II. Economic Activity and Prices A. Economic Activity 1. Current situation I would now like to talk about economic activity, which can be considered as a "fundamentals" factor when looking at future developments in foreign exchange rates. Japan's economy has recovered moderately, although some weakness has been seen in part (Chart 3). The effects of a suspension of production and shipment at some automakers have recently been exerting downward pressure on the economy, but I believe this is only temporary. In my view, if this temporary factor is excluded, the economy is recovering moderately at the moment. In what follows, I would like to take a look at economic activity in detail, disregarding this temporary factor that has been pushing down the economy. Let us first look at private consumption. Faced with the recent high inflation, households are becoming thriftier. For example, they have been shifting toward lower-priced goods -- such as private label products -- especially when purchasing nondurable goods, which mainly include food and daily necessities. However, various statistics and high-frequency indicators indicate that private consumption has been solid as a whole, led mainly by services consumption (Charts 4 and 5). Anecdotal information also suggests that appetite for spending on high-end goods has been strong among high-income individuals and foreign visitors to Japan. Next, I will turn to exports. Exports to China and Europe have been lacking momentum due to stagnation in those economies. Those to the NIEs and the ASEAN economies have bottomed out, but they have been somewhat weak due to a sluggish rebound in IT-related demand. However, exports overall have been more or less flat, with those to the United States having been firm, particularly in automobiles (Chart 6). Let us now look at business fixed investment. In addition to increasing demand for fixed investment associated with digital transformation (DX) and green transformation (GX), demand for construction investment in, for example, urban redevelopment and development of logistics centers has also been increasing over the past few years. Accordingly, the Bank's March 2024 Tankan shows that business fixed investment plans maintain high growth. However, actual data continues to fall behind the solid plans presented in the Tankan (Charts 7 and 8). This may be because it has been difficult for firms to project future external demand due to uncertainties regarding developments in overseas economies, and also because business fixed investment has been delayed due to a shortage of the human resources needed to actually construct and set up new buildings and facilities. However, despite such delays, investment plans continue to show firmness, suggesting that firms' appetite for investment remains strong. Let me also note that I consider developments in business fixed investment an extremely important factor since it holds the key to achieving the price stability target. Hence, Japan's economy is certainly not stagnant, but, as a number of uncertainties remain, it cannot be said to be buoyant. 2. Outlook Next, regarding the outlook for economic activity, I believe that Japan's economy has started to show many encouraging signs of an upturn. Let me start with private consumption. Disposable income is expected to increase on the whole as the provisional results of the 2024 annual spring labor-management wage negotiations have significantly exceeded the 2023 level, despite some differences observed in the level of wage increases among individual firms. The amount outstanding of households' financial assets, which are savings, or "stocks" when thinking in terms of flow and stock, has increased substantially, mainly due to a rise in stock prices at home and abroad (left panel of Chart 9). Furthermore, with significant wage increases expected for a second consecutive year, households' expectations for an increase in their permanent income may be heightening, reflecting their anticipation that wages will continue to rise (right panel of Chart 9). Given that these factors are already pushing up consumer sentiment at present, private consumption is expected to remain firm. Exports and business fixed investment are projected to rise from the current levels. One reason for this is that there have been signs that overseas economies will recover after bottoming out. By region, the U.S. economy has remained firm, mainly led by private consumption. The Chinese economy is likely to gradually move out of its slowing phase owing to the government's economic measures, although it will still take time for adjustments in the real estate market to be completed and for structural issues such as those pertaining to regional economies to be resolved. European economies have shown signs of bottoming out. Returning to Japan's economy, if a virtuous cycle between wages and prices starts to operate smoothly, reflecting wage increases in fiscal 2024, growth expectations for Japan's economy will be revised upward accordingly. Consequently, this could bring about an expansion in business fixed investment because the necessary capital stock will have increased. B. Price Developments in Japan 1. Current situation I will now talk about price developments in Japan. The year-on-year rate of increase in the CPI has been declining, and it can be said that the rate is now in a deceleration phase (Chart 10). To examine this movement in detail, I would like to focus on the frequency of price changes by separating the category of "sticky" consumer prices, made up of items for which the price changes relatively infrequently, and "flexible" consumer prices, made up of items for which the price changes relatively frequently. 1 Sticky consumer prices are likely affected by medium- to long-term inflation expectations and wage developments, whereas flexible consumer prices tend to be affected by raw material prices that mainly reflect developments in commodity markets. Sticky consumer prices have continued to rise moderately due to the upward pressure exerted mainly by wage increases. On the other hand, the rate of increase in flexible consumer prices seems to be decelerating, as the impact of the pass-through of cost increases stemming from the rise in import prices has waned. I have therefore judged the rate of increase in the CPI to be in a deceleration phase because flexible consumer prices currently have a larger impact on overall consumer prices than sticky consumer prices. 2. Outlook I will also separate the categories of sticky and flexible consumer prices in talking about the outlook for the CPI. First, let me look at flexible consumer prices. On a yen basis, import prices rose sharply, mainly due to a surge in international commodity prices and to the impact of disruptions in global supply chains, both of which were observed during the COVID-19 pandemic. After peaking in September 2022, however, import prices were on a declining trend. They then bottomed out in July 2023 and turned positive in February 2024 on a year-on-year basis (Chart 11). Because flexible consumer prices move with a time lag of about six to nine months from changes in import prices, flexible consumer prices may hit the bottom from around summer to autumn 2024 and start rising thereafter. Sticky consumer prices are mainly composed of services prices, as they refer to items for which the price changes relatively infrequently. Flexible consumer prices are mainly composed of goods prices, as they refer to items for which the price changes relatively frequently. Next, I would like to look at sticky consumer prices. The rate of increase in sticky consumer prices is more likely to rise, reflecting the results of the 2024 annual spring labor-management wage negotiations. Let me elaborate on this. It is expected to take about a few months for the results of the 2024 wage negotiations to be reflected in wages. As wage increases are expected to be reflected in inflation only thereafter, I presume that the momentum for a rise in sticky consumer prices will increase from around summer to autumn 2024, as will be the case with flexible consumer prices. Regarding future wage developments, I am concerned that there is a risk of labor shortages becoming more acute. This is for the following reasons: (1) even if high wage increases are realized in fiscal 2024, it is unlikely that structural labor shortages due to the declining and aging population will be resolved, and (2) the number of those who are not in the labor force is at a historically low level for seniors and women, whose labor participation has underpinned labor supply to date. Therefore, the current main scenario is that firms will inevitably continue to need to raise wages to some extent to secure their workforce. Based on this scenario, sticky consumer prices are likely to rise steadily. As I have explained, the rate of increase in the CPI is currently in a deceleration phase. That said, my view is that it could start rising again from around summer to autumn 2024, as far as can be determined from developments in import prices, producer prices, and wages. C. Upside and Downside Risks to Economic Activity and Prices The outlook for economic activity and prices I have presented so far may seem somewhat optimistic. I should note that it is important to pay due attention to the fact that the outlook is uncertain as it entails both upside and downside risks. These risks also range from the short term to the medium to long term. I will first talk about the short-term risks. As I mentioned earlier, if the yen depreciates further or remains weak for a prolonged period, this could cause an earlier-than-expected reversal in the year-on-year rate of increase in the CPI. Moreover, if the reversal occurs and the prospect of sustainable and stable inflation exceeding 2 percent increases, the Bank may face the need to adjust the level of monetary accommodation more rapidly than expected by raising its policy interest rate. On the other hand, if the Bank raises its policy interest rate at an excessively rapid pace, this will run the risk of economic downturn in Japan. Furthermore, although it is very unlikely, should an unexpected shock in global financial markets occur, the preconditions for achieving sustainable and stable inflation could break down. When considering short-term upside and downside risks, due attention is required to developments in inflation in the United States. If it takes longer than expected for inflation in the United States to stabilize, this will make it harder to bring the policy interest rate down and consequently leave U.S. interest rates at high levels. If the United States continues to see firm economic conditions even under such circumstances, this could cause the yen to remain weak for a longer period. Meanwhile, if prolonged high U.S. interest rates cause, for example, adjustments in the U.S. real estate market to intensify, and this then sparks concern over financial system stability or induces adjustments in stock prices, market participants may shift to a "risk-off" mode. In any case, developments in the U.S. economy warrant attention and I will continue to monitor the situation closely. Let us now look at the medium- to long-term risks. These include disruptions in international commodity markets and international distribution systems stemming from geopolitical issues such as the situation in Ukraine and the Middle East. There is also a risk that the global economy will become fragmented, reflecting strengthened efforts to address economic security, and risks pertaining to U.S. fiscal conditions. As I will discuss later, while I foresee that it will take some more time to achieve the Bank's monetary policy goal of sustainable and stable inflation, if, in the meantime, medium- to long-term risks materialize, the Bank may need to change its projected timing for achieving that goal. It is extremely difficult to precisely predict the upside and downside risks to economic activity and prices that I have discussed. For this reason, I believe it important to carefully monitor changes in the environment, including developments in economic activity at home and abroad and in financial markets. III. Conduct of Monetary Policy Changes in the Monetary Policy Framework Taking account of the economic and price developments I have explained so far, I would like to talk about the Bank's conduct of monetary policy, while sharing my own views. First, I will summarize the Bank's current conduct of monetary policy. At the Monetary Policy Meeting (MPM) held in March 2024, the Bank judged that it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner. It revised the policy framework in this light (Chart 12). Specifically, the Bank terminated largescale monetary easing measures, including yield curve control and the negative interest rate policy, as it considered that these measures had fulfilled their roles. The Bank decided that it would guide the short-term interest rate as a primary policy tool and that, with the price stability target of 2 percent, it would conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions, aiming at sustainable and stable achievement of the target. In addition, the Bank judged that the inflation-overshooting commitment regarding the monetary base had fulfilled the conditions for its achievement. It should be noted that these policy changes do not signify a shift to monetary tightening. In other words, given the current outlook for economic activity and prices, the Bank anticipates that accommodative financial conditions will be maintained for the time being. In hindsight, I believe that these policy changes were implemented smoothly for the most part, given the absence of any major market disruptions in their wake. At the outset, however, some voiced the opinion that it would have been better to first confirm incoming data, such as the results of various economic indicators due to be released in April. I voted for the policy changes at the March MPM, and I would like to explain my rationale for doing so. The first reason was that the conditions for changing policy had already been met. Various conditions were in play. For example, looking at the distribution of the year-on-year rate of change in the price of individual items constituting the CPI, the shape of the distribution clearly differs from that at the time of policy changes in 2000 and 2006 (Chart 13). When the Bank made policy changes in 2000 and 2006, the distribution was weighted to the left, indicating that a high proportion of items had a negative year-on-year rate of change. This shape suggests the possibility that the policy changes were taken in a situation where considerable deflationary pressure remained. By contrast, the price change distribution by item in the CPI at the time of the March 2024 policy changes was weighted to the right, indicating that an overwhelmingly high proportion of items had a positive year-on-year rate of change. This means that the current increase in CPI inflation is not driven by a limited increase in the price of specific items, but rather, the prices of many items together are increasing. The second reason for my vote pertains to the market's understanding of the policy decision. My concern about making policy changes at the March 2024 MPM was the possibility that the changes would lead market participants to form a dominant view that monetary policy had taken an abrupt shift toward tightening. If this happened, it would initially spark a negative reaction in financial markets. This would then spread to the real economy, causing the economy to deteriorate, and raising the likelihood that deflationary pressure would increase again. To avoid this situation, it was important for the Bank to provide appropriate communication so that market participants would understand that, even if the Bank made policy changes, it was only part of its efforts to achieve the price stability target, and that accommodative financial conditions would be maintained for the time being. Fortunately, the short-term interest rate -- the main policy interest rate target following the March policy changes -- has remained at a very low level. Given various sources such as anecdotal information, I feel that market participants have an adequate understanding of the Bank's intention behind the changes. The third reason for my vote relates to the 2024 annual spring labor-management wage negotiations. The first provisional aggregate results compiled by the Japanese Trade Union Confederation (Rengo) showed that the year-on-year rate of increase in wages (including seniority- and performance-related wages) agreed in the negotiations was significant at 5.28 percent, which was even higher than the previous year's wage hikes. My thinking was that, if the first provisional aggregate results indicated a year-on-year increase of at least 5 percent, that would be a good benchmark for going ahead with policy changes. This was because past results suggested that, if the annual spring labor-management wage negotiations achieved a 5 percent wage hike, the rate of increase in "sticky" consumer prices, especially services prices, would likely return to a level in which the achievement of the Bank's price stability target comes into sight. My view back in January was that the results would not exceed this benchmark. The reason for my belief was that, although Rengo had set a target for wage hikes of 5 percent or more at this year's negotiations, experience suggested that the numbers usually turn out to be lower than the level demanded by labor unions. Thus, I assumed we would have to make a comprehensive judgment on the timing of policy changes after examining other data, including economic indicators to be released in April and onward. However, the yearon-year increase turned out to be 5.28 percent, which took me by surprise. There may be some issues with the aggregate results of the annual spring labor-management wage negotiations, such as the range of firms included in the calculations. Judging by the past, however, these results allow an estimation of wage developments at firms overall. Moreover, the high figures in the first provisional aggregate results suggest that many firms have enough encouraging prospects for business performance and plans for improving productivity to cover wage costs. This gave me reason to expect that the results of economic indicators and other data to be released in April and onward would be relatively positive; thus, I did not see the need to wait for those results to come out before making policy changes. Future Conduct of Monetary Policy Next, I will talk about the future conduct of monetary policy. The goal of the Bank's monetary policy will continue to be the achievement of sustainable and stable inflation, and until this goal is reached, it is important to maintain the current accommodative financial conditions. The background for this is that, although the achievement of sustainable and stable inflation has become increasingly more likely, it is still difficult to affirm that such inflation will be achieved. It is important for the Bank to maintain accommodative financial conditions until it can be confident of achieving its goal. The Bank must at all costs avoid hastily raising the policy interest rate, since making monetary policy changes prematurely would hinder the momentum toward the long-awaited recovery in Japan's economy. This is why I believe it is vital to keep the real interest rate negative, in principle. However, at the same time, it is important to be aware of the possibility that too much focus on downside risks could accelerate inflation and result in the Bank having to conduct rapid monetary tightening, which could adversely affect the economy. Let me be a little more specific. If the Bank fixes the policy interest rate at its current level of around 0 percent until sustainable and stable inflation is achieved and begins to raise the policy interest rate only after this has been achieved, it will, to curb rapid inflation, inevitably raise the policy interest rate at a much faster pace than the inflation rate. This could in turn have a negative impact on the economy. I believe the implication of monetary policy conduct since the outbreak of the COVID-19 pandemic is that it is necessary to be mindful of the risk of projections skewing too much in one direction; for example, during the pandemic, although risks for prices were expected to be skewed to the downside, prices actually rose higher than expected. It has therefore become increasingly important for the Bank, in terms of risk management in its monetary policy conduct, to take account not only of downside risks but also of upside risks. As long as the underlying inflation rate continues to rise toward 2 percent, I believe it is vital to adjust the degree of monetary accommodation gradually in response to developments in economic activity and prices as well as financial conditions. Since the framework for yield curve control has fulfilled its long-standing purpose, it is conceivable that the Bank will reduce the amount of its Japanese government bond (JGB) purchases at some point in the future. The Bank is currently examining the situation in financial markets under the framework of JGB purchases revised in March; under the revised framework, it has continued its purchases at broadly the same amount as before. If the Bank reduces the amount at a rapid pace in the future, this could cause discontinuous fluctuations in long-term yields, and such a move might be misinterpreted as an abrupt shift in the Bank's monetary policy toward tightening, in which case there is a risk of a negative impact being exerted on the economy, as I said earlier. This is why I believe that, when it comes to reducing its JGB purchases, it is desirable for the Bank to do so gradually, while taking comprehensive account of the situation in the bond market in terms of supply and demand conditions, the degree of functioning, and liquidity conditions. Thank you. Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Kumamoto May 29, 2024 ADACHI Seiji Member of the Policy Board Bank of Japan Chart 1 Spillover Effects of Import Prices on the CPI for Goods y/y % chg. y/y % chg. y/y % chg. -10 -5 -10 -20 -30 CY 16 Import price index ID index (stage 1) ID index (stage 2) -20 CY 16 ID index (stage 2) ID index (stage 3) ID index (stage 4) -10 24 CY 16 ID index (stage 4) FD index (excluding exports) CPI for goods (less fresh food and energy) Note: The import price index is on a yen basis. The FD-ID price indexes divide demand into the final demand (FD) stage and four stages of intermediate demand (ID) based on the Input-Output Tables for Japan. Goods and services prices are then aggregated according to the stage to which they belong to compile the FD index and the ID indexes for stages 1 to 4, ranging from the upstream to downstream stages of the production process. Sources: Ministry of Internal Affairs and Communications; Bank of Japan. Firms' Inflation Outlook for General Prices 2.5 Chart 2 y/y % chg. 3 years ahead 5 years ahead 2.0 1.5 1.0 0.5 0.0 CY 14 Note: Figures show the inflation outlook of enterprises for general prices (all industries and enterprises, average) in the Tankan. Source: Bank of Japan. Chart 3 Real GDP s.a., ann., tril. yen CY 09 Source: Cabinet Office. Chart 4 Consumption Activity Index (CAI, Real) CAI (Travel Balance Adjusted) CAI by Type s.a., CY 2015=100 s.a., 2019/Q1=100 s.a., 2019/Q1=100 Nondurable goods <40.5> Services <50.7> CY 14 CY Durable goods <8.9> 23 24 19 23 24 Notes: 1. In the left panel, figures exclude inbound tourism consumption and include outbound tourism consumption, and are based on Bank staff calculations. 2. In the right panel, figures in angle brackets show the weights in the CAI. Figures are based on Bank staff calculations. 3. In the right panel, "nondurable goods" includes goods classified as semi-durable goods in the SNA. Sources: Bank of Japan; etc. Chart 5 Consumption Developments Based on Credit Card Spending chg. from baseline, % -10 -20 -30 Total Retail (excluding energy) Services (excluding energy) Energy -40 -50 -60 CY 20 Notes: 1. Figures are from the reference series in JCB Consumption NOW, which take into account changes in the number of consumers. The baseline is the average for the corresponding half of the month for fiscal 2016 through fiscal 2018. 2. Figures for the total and for services exclude telecommunications, and figures for energy consist of those for fuel, electricity, gas, heat supply, and water. Figures are based on Bank staff calculations. Source: Nowcast Inc./ JCB, Co., Ltd., "JCB Consumption NOW." Chart 6 Exports Total Real Exports Real Exports by Region s.a., CY 2020=100 United States <20.1> EU <10.3> CY 23 24 19 China <17.6> NIEs, ASEAN, etc. <34.4> Other economies <17.6> 23 24 Notes: 1. Figures are based on Bank staff calculations. 2. Figures for 2024/Q2 are those for April. 3. In the right panel, figures in angle brackets show the share of each country or region in Japan's total exports in 2023. Figures for the EU exclude those for the United Kingdom for the entire period. Sources: Ministry of Finance; Bank of Japan. Chart 7 Developments in Business Fixed Investment Plans y/y % chg. FY 2024 Average (FY 2004-2022) -3 -6 -9 Mar. FY 2020 FY 2021 FY 2022 FY 2023 June Sept. CY 09 s.a., 2019/Q1=100 s.a., 2019/Q1=100 Dec. Forecast Actual Notes: 1. Figures are based on the Tankan and are for all industries including financial institutions. 2. Figures include software and R&D investments but exclude land purchasing expenses. R&D investment is not covered as a survey item before the March 2017 survey. 3. There are discontinuities in the data for December 2021 and December 2023 due to changes in the survey sample. Source: Bank of Japan. Chart 8 Business Fixed Investment Coincident Indicators of Business Fixed Investment s.a., ann., tril. yen Leading Indicators of Business Fixed Investment s.a., CY 2020=100 s.a., ann., tril. yen Machinery orders (private sector, excluding volatile orders) Construction starts (private, nonresidential, estimated construction costs) Private nonresidential investment (SNA, real, left scale) Domestic shipments and imports of capital goods (right scale) CY 09 Private construction completed (nonresidential, real, right scale) CY 09 Note: Figures for real private construction completed are based on Bank staff calculations using the construction cost deflators. Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism. Note: Volatile orders are orders for ships and those from electric power companies. Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism. Chart 9 Factors Affecting Future Private Consumption Wage Increases and Households' Income Outlook Households' Financial Assets 2,200 tril. yen 2,100 2,000 1,900 share of respondents expecting their income to rise in the next five years, % 1,800 1,700 1,600 Decreased or unchanged 1,500 CY 15 Source: Bank of Japan. Increased Income over the past year Note: The vertical axis shows the share of respondents who answered that they expected their wages in five years to be considerably or somewhat higher than the current wages of those five years their senior in the same company. The bar labeled "increased" shows this share for respondents who replied that their income had increased over the past year, while the bar labeled "decreased or unchanged" shows the share for respondents who replied that their income had decreased or remained unchanged over the past year. Figures are based on the April 2023 survey. Source: JTUC Research Institute for Advancement of Living Standards. Chart 10 CPI for All Items Less Fresh Food y/y % chg. 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 CY 19 Mobile phone charges Effects of travel subsidy programs Effects of the consumption tax hike and free education policies Energy Excluding the above factors CPI (less fresh food) Notes: 1. Figures for "energy" consist of those for petroleum products, electricity, as well as manufactured and piped gas charges. 2. Figures for the "effects of the consumption tax hike and free education policies" from April 2020 onward are Bank staff estimates and include the effects of measures such as free higher education introduced in April 2020. Source: Ministry of Internal Affairs and Communications. Chart 11 Import Price Index (Yen Basis) y/y % chg. -10 -20 CY 19 Source: Bank of Japan. Chart 12 Changes in the Monetary Policy Framework (March 2024) As recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged that it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner. It considers that its large-scale monetary easing measures have fulfilled their roles, including the negative interest rate policy and the yield curve control. With the price stability target, the Bank will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool, in response to developments in economic activity and prices as well as financial conditions from the perspective of sustainable and stable achievement of the target. Given the current outlook for economic activity and prices, it anticipates that accommodative financial conditions will be maintained for the time being. Short-term interest rate (uncollateralized overnight call rate) % <After> <Before> 0.1 -0.1 <After> In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses, such as increasing the amount of JGB purchases (Guideline for market operations) The Bank will encourage the rate to remain at around 0 to 0.1% The Bank will continue its JGB purchases at broadly the same amount as before 0.0 March MPM March MPM (The rate had been in the range of -0.1 to 0%) ETFs and J-REITs The Bank will discontinue purchases Chart 13 CPI Price Change Distributions share of the number of items, % CY 1991 CY 2000 CY 2006 CY 2024 8 to 10 6 to 8 4 to 6 more than 10 y/y % chg. 2 to 4 0 to 2 -2 to 0 -4 to -2 -8 to -6 -10 to -8 -10 or less -0.3 Rate on the Policy-Rate Balances (-0.1%) <Before> Upper bound for 10-year JGB yields as a reference 1.0 Around 0.1% increase 0.0 -0.2 % Rate on the current account balances (+0.1%) 0.2 -6 to -4 0.3 Long-term interest rates Notes: 1. Figures are calculated using long-term time series data for each item in Japan's CPI (2020-base). 2. Figures for CY 1991 are for January 1991. Figures for CY 2000, CY 2006, and CY 2024 are for July 2000, February 2006, and February 2024, respectively; these are the months preceding the months in which a change in monetary policy was introduced. Source: Ministry of Internal Affairs and Communications.
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bank of japan
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Speech by Mr Toyoaki Nakamura, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Sapporo, 6 June 2024.
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June 6, 2024 Bank of Japan Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Sapporo NAKAMURA Toyoaki Member of the Policy Board (English translation based on the Japanese original) I. Economic Developments at Home and Abroad I will begin my speech by talking about recent developments in and the outlook for overseas economies. The pace of recovery in overseas economies has slowed. Uncertainties surrounding these economies have continued to be high (Chart 1). For example, one concern is that, with inflationary pressure still looming on a global basis, there may be a resurgence in inflation triggered by wage increases. In addition, the European and Chinese economies have been slow to recover and tensions in the Middle East have increased. The U.S. economy, despite the impact of policy interest rate hikes, has been firm, mainly due to resilient private consumption, and according to projections by the International Monetary Fund (IMF) is expected to grow by 2.7 percent in 2024. However, there is a risk that, if inflation resurges, tight monetary policy will become prolonged. European economies have kept slowing moderately due to the continued impact of factors such as policy interest rate hikes. There is concern over economic recovery being delayed in Europe due to factors such as the risk of a resurgence in inflation and economic stagnation in Germany. The Chinese economy has remained on a moderate slowing trend, reflecting structural changes in the economy leading to insufficient domestic demand and excess supply capacity. These changes are mainly due to adjustments in the real estate market, an aging population, and a rise in households' thriftiness. Looking ahead, uncertainty continues to be high, as adjustment pressure in the labor and real estate markets remains, and there is concern over heightening deflationary pressure and growing trade friction, mainly reflecting excessive supply in some goods. Let me move on to recent developments in Japan's economic activity and prices. The economy has recovered moderately, despite weaknesses in some parts. In the corporate sector, goods exports have been more or less flat despite the slowdown in the pace of recovery in overseas economies. Meanwhile, inbound tourism demand, which falls under services exports, has continued to increase, pushed up partly by the effects of the yen's depreciation. Turning to industrial production, although the underlying trend has been more or less flat, production has declined recently, due in part to the effects of a suspension of production and shipments at some automakers. Corporate profits have been on an improving trend, and business sentiment has been favorable. Likewise, business fixed investment has been on an increasing trend. As for the household sector, private consumption, although showing some signs of resilience, has been weak recently, mainly due to the impact of price rises, given that disposable income has been growing slower than wages, and to the decline in automobile sales caused by the suspension of shipments at some automakers (Chart 2). Turning to prices, although the effects of the pass-through to consumer prices of cost increases triggered by past rises in import prices are waning, lingering indirect effects remain; in addition, the effects of government support measures against price increases have run their course and services prices have continued to rise moderately, so that the year-on-year rate of increase in the consumer price index (CPI) for all items less fresh food has been in the range of 2.0-2.5 percent recently. As for the outlook, the April 2024 Outlook for Economic Activity and Prices (Outlook Report) forecasts that Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies growing moderately and the virtuous cycle from income to spending gradually intensifying against the background of factors such as accommodative financial conditions (Chart 3). However, households' disposable income may not rise as much as wages due to, for example, the heavier social burden and the increase in the number of pensioners, both of which are the result of structural issues such as the aging and declining population, and also due to the so-called annual income barrier -- that is, the fact that households' secondary earners or seniors try to adjust their working hours so that their income stays under the ceiling for tax exemption. This may lead households to reverse the reduction in their saving rate and become thriftier, while small and medium-sized firms may delay reforms aimed at boosting their earning power. My concern is that, under these circumstances, Japan's growth rate may fall below its potential and remain so. I will return to this point in more detail later. Meanwhile, the median of the Bank of Japan Policy Board members' forecasts for the year-on-year rate of increase in the CPI for all items less fresh food is above 2.5 percent for fiscal 2024 and at around 2 percent for fiscal 2025 and 2026. However, I fear that the rate in fiscal 2025 and thereafter may not reach 2 percent if private consumption becomes sluggish due to households reversing the reduction in their saving rate and becoming thriftier, and the rate of price increases slows down. II. Conduct of Monetary Policy and Structural Changes in the Economy At the March 2024 Monetary Policy Meeting, the Bank decided to change its monetary policy framework. With regard to this decision, I was in favor of discontinuing purchases of exchange-traded funds (ETFs) and other assets, which were mainly related to large firms proceeding with reforms, but I was opposed to terminating the negative interest rate policy and revising the policy framework of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control. My thinking was that, to ensure that the price stability target of 2 percent is achieved, the policy framework should be changed only after improvement in the earning power and capacity for raising wages of small and medium-sized firms, driven by spillovers from the benefits of reforms at large firms, which are driving economic growth, was confirmed. To this end, I consider it necessary to make sure that firms conduct active corporate reforms by avoiding any adverse impact, such as from financial market turmoil, on corporate managers' willingness to undertake reforms. Since the March 2024 Tankan (ShortTerm Economic Survey of Enterprises in Japan) subsequently showed that the earnings of small firms are expected to improve, and based on data available at present, I believe it is appropriate to maintain the current policy for the time being. I would now like to talk about my thoughts on the future conduct of monetary policy, taking into account recent developments in economic activity and prices. A. The Importance of Stronger Household Purchasing Power Looking at recent developments in prices and wages, the year-on-year rate of increase in the CPI for all items less fresh food was 2.2 percent for April 2024, marking a growth rate of 2 percent or more for 25 months in a row. Against this background, firms' and households' inflation expectations are rising, and there is a sense that large firms in particular are increasingly willing to raise wages in a sustained manner due to favorable business performance and labor shortages (Charts 4 and 5). However, I think that the recent figures for the year-on-year rate of increase in the CPI for all items less fresh food are mainly the result of a slowdown in the year-on-year rate of decline in electricity and gas charges due to the dissipation of effects of government subsidies. Meanwhile, the rate of increase in the CPI for all items less fresh food and energy, which is not directly affected by energy price fluctuations, has fallen for eight consecutive months. These developments indicate that inflation so far has been largely driven, with a lag, by the surge in import prices, and that the pass-through of higher wages to prices is still less than robust. That said, given that unit labor costs in the first quarter of 2024 rose by 2 percent on a year-on-year basis, I am paying close attention to developments going forward (Chart 6). The aggregate results for the wage growth rate agreed in the 2024 annual spring labormanagement wage negotiations compiled by the Japanese Trade Union Confederation (Rengo) show a 5.2 percent wage hike for fiscal 2024, the highest level in 33 years. 1 However, since these aggregate results are mainly for large firms, how much of this wage hike spills over to small and medium-sized firms, where about 80 percent of employees in Japan work and which account for about 70 percent of labor costs, remains to be seen. Moreover, while employee compensation in 2023 rose by 1.7 percent year on year, household disposable income, which represents households' purchasing power, increased by only 0.2 percent, due in part to the heavier social burden and the expiration of government benefits provided during the previous year to households that were exempt from the resident tax. While household final consumption expenditure rose by 3.7 percent despite the lingering sluggishness in the income situation, this was largely due to households drawing down the ample savings accumulated during the pandemic, and the saving rate decreased from 3.4 percent in 2022 to 0.1 percent in 2023 (Chart 2). 2 Households' purchasing power remains weak, with real consumption of households in fiscal 2023 decreasing by 0.6 percent from the previous fiscal year (Chart 7). While the fixed-amount income and resident tax reduction in fiscal 2024 is expected to have positive effects, given that households may reverse the reduction in their saving rate and become thriftier, not only do real wages need to turn upward, but disposable income also needs to rise firmly for the virtuous cycle from income to spending to strengthen. As I mentioned, the 2024 annual labor-management wage negotiations yielded the highest wage growth in 33 years. Meanwhile, from 1990 to 2023, the working age population in Japan decreased by about 10 percent, and the number of pensioners increased 2.4-fold. Furthermore, additional increases in the labor participation rate are very unlikely, given issues such as the The figure of 5.2 percent is based on the aggregate results for the fifth round of submitted responses. See "Quarterly Estimates of Household Disposable Income and Household Saving Ratio (Reference series)," Estimates for Oct.-Dec. 2023 (2015 base year; based on 2008SNA) released by the Cabinet Office. annual income barrier for homemakers and seniors as well as the gradual shift to a super-aged society in which seniors aged 75 and older -- i.e., the advanced elderly -- account for more than half of the population aged 65 and older (Chart 8). As shown in the Family Income and Expenditure Survey, consumption expenditure declines significantly in households where the head of the household is aged 65 and older (Chart 9); therefore, as the population continues to age, there will likely be downward pressure on the overall consumption expenditure of households. To strengthen the purchasing power of households and stimulate private consumption, sustained high wage hikes for the working age population are essential. Moreover, I think that bringing about changes in the financial asset composition of Japanese households so that they, like households in the United States and Europe, derive more income from the growth of listed firms, would be an effective way of firmly increasing disposable income (Chart 10). I will elaborate on this point later. As I have explained thus far, to achieve sustainable economic growth, it is necessary to ensure that high wage hikes lead to a solid increase in disposable income and that the virtuous cycle from income to spending becomes stronger. Therefore, in considering the future conduct of monetary policy, I would like to carefully monitor whether real private consumption makes a positive turnaround, which forms the basis of the virtuous cycle from income to spending. B. The Importance of Improving Small and Medium-Sized Firms' Earning Power and Capacity for Higher Wages While small and medium-sized firms employ about 80 percent of the total workforce and account for about 70 percent of labor costs in Japan, labor costs per employee at small firms are only half of those at large firms, and those at medium-sized firms only three-quarters (Chart 11). To achieve, at the national level, sustainable wage growth that can keep up with rising prices, it is essential for small and medium-sized firms to improve their earning power and capacity for raising wages. Ever since Japan fell into deflation, the prolonged stagnation of the economy, long-standing business practices making it difficult for firms to pass on higher costs to prices, and continued fierce competition have led to "risk-off management" taking hold. As a result, firms held off from expanding and fell into a cost-cutting mindset, leading to a decline in their earning power and capacity for higher wages. Meanwhile, many large firms have restructured their business portfolios and have been increasing their earning power and capacity for raising wages. According to the Financial Statements Statistics of Corporations by Industry, Annually, while large firms' operating profits per employee grew 1.6-fold from fiscal 1990 to fiscal 2022, those of small firms roughly halved and those of medium-sized firms remained flat. Moreover, while the break-even ratio, which is available from fiscal 2007 to fiscal 2022 only due to data constraints, for large firms improved to about 60 percent, it remained at around 90 percent for small firms and improved only moderately to around 80 percent for medium-sized firms. These developments show that the gap between large firms and small and medium-sized firms in terms of their capacity for increasing earning power and for higher wages have been widening (Chart 12). Against this background, I am still not sure that the recent wage hikes will be sustained, given some anecdotal information indicating that they are defensive in nature to retain human capital. 3 I believe that restructuring efforts at large firms, which are driving economic growth, have not yet sufficiently spilled over to small and medium-sized firms. That said, there appears to be a growing sense of urgency among corporate managers at small and medium-sized firms. Since the start of 2024, there have been numerous reports about the growing impact of the initiatives taken by the Japan Fair Trade Commission to more actively encourage small and medium-sized firms to pass on cost increases to prices. My hope is that, in the lead-up to the price negotiation campaign in September 2024 promoted by the Small and Medium Enterprise Agency, small and medium-sized firms will make headway in their efforts to pass on higher costs to prices and secure funds for raising wages. With regard to small firms, the March Tankan showed a significant improvement in the diffusion index (DI) for output prices (calculated by deducting the percentage of enterprises answering that they expected output prices to "rise" from the percentage expecting them to "fall") and higher profits in the forecasts for fiscal 2024 (Chart 13). These developments suggest that it is more likely for the fruits of reforms at large firms to spill over to small and medium-sized firms because of the improved price pass-through environment. However, while the improved price pass-through environment helps firms to boost their business performance in the short term, achieving sustained wage increases requires more than simply passing on higher wages to prices. Specifically, having improved their profitability, small and medium-sized firms need "Human capital" is a concept coined to express that human resources are valuable for corporate management. to strengthen their competitiveness by leveraging their improved profit base to make investments and strengthen their business structures with the aim of increasing their productivity and value added. Meanwhile, large firms have been enhancing their growth potential by shifting from closed innovation, which relies on in-house expertise, to open innovation, which takes advantage of outside expertise, and by reinforcing their core businesses. While research by the Ministry of Economy, Trade and Industry showed that the share of listed medium-sized firms -- firms with 2,000 employees or less -- that grew into large firms in the past 10 years is much lower than in the United States and Europe, I think that by pushing ahead with the reforms I mentioned, more small and medium-sized firms will be able to enhance their growth potential of their own accord. 4 In the March Tankan, firms overall expected their business fixed investment in fiscal 2023 to have grown by 10.2 percent from the previous fiscal year, while the figure for small firms was higher at 13.7 percent. 5 However, whether business fixed investment will expand remains to be seen, since some firms, particularly small ones, have currently put fixed investment on hold due to supply-side constraints and a lack of capacity to invest. Moreover, there are also concerns that firms may not have the required capacity in place when needed to achieve their business plans, so that they may miss out on business opportunities and hence fail to secure the funds needed for raising wages. Taking a look at growth in wages of regular employees at the time of recruitment by prefecture shows that, while the growth rate has been rising across regions since 2023, for wages to increase nationwide in a sustained manner, small and medium-sized firms need to grow (Chart 14). It is therefore critical that regional financial institutions familiar with the situation of According to research by the Ministry of Economy, Trade and Industry, the share of listed mediumsized firms (i.e., firms with 301 to 2,000 employees) in fiscal 2011 that had grown into large firms (i.e., firms with more than 2,000 employees) by fiscal 2021 was 11 percent in Japan. This is significantly lower than the 30 percent in the United States and the 22 percent in Europe (the figure is for the United Kingdom, France, and Germany). For details, see the material regarding the policies to promote the growth of medium-sized firms with high growth potential that lead regional economies, released by the Ministry of Economy, Trade and Industry on March 13, 2024 (available only in Japanese). The figures for business fixed investment plans include software and research and development (R&D) investment but exclude land purchasing expenses. They are based on all industries and enterprises, excluding the finance and insurance industries. such firms and their regions play their part by strengthening their cooperation with support organizations such as the Organization for Small & Medium Enterprises and Regional Innovation, the National Center for Industrial Property Information and Training (INPIT), the National Institute of Advanced Industrial Science and Technology (AIST), and university research centers in the respective regions. Regional financial institutions also should provide value-added services, such as in-depth business matching for mergers and acquisitions (M&As) and third-party business succession. These services will help small and mediumsized firms to strengthen their core businesses, expand their scale of operations, and improve job satisfaction among their employees, which in turn will help to boost the attractiveness and revitalization of regions struggling with population outflows. C. Sustainable and Stable Achievement of the 2 Percent Price Stability Target With prices and wages finally starting to move, Japan's economy is approaching a critical turning point (Chart 15). The economy has almost reached the golden opportunity to break out of its long-standing stagnation, achieve the 2 percent price stability target, and realize sustainable economic growth. Large firms have begun to take the lead in raising wages at a higher rate to address labor shortages and achieve further growth, which has pushed up overall wage levels. Meanwhile, small and medium-sized firms are beginning to find it easier to pass on higher wages to prices. As a result, small and medium-sized firms are also making various efforts to enhance customer satisfaction, which is necessary to allow them to raise selling prices, and I see positive changes taking place in the economic structure. As the market and the corporate sector come to appreciate these efforts, firms can increase their selling prices in line with enhanced customer satisfaction and raise wages of employees contributing to creating added value, which in turn will boost employee engagement and growth expectations. These developments, together with productivity improvements and more innovation, will lead to a virtuous cycle from prices to wages and from wages to prices. Moreover, it is expected that, along with the sustainable and stable achievement of the price stability target, firms will become more forward-looking in their business activities and households will become more optimistic about the future. I look forward to your efforts as growth-oriented business leaders to continue to pursue reforms (Chart 16). Nonetheless, it is hard to imagine that the cost-cutting orientation of firms, which lasted for 30 years, will suddenly change in two short years. My view is that to achieve the 2 percent price stability target in a sustainable and stable manner, changes in the economic structure are needed to turn hope for a strong economic recovery into certainty. From this perspective, I consider it critical to carefully monitor progress in the strengthening of firms' business structures and measures to achieve further growth, including how widespread small and medium-sized firms' efforts to pass on higher costs to prices are and how much their capacity for raising wages improves, along with developments in business fixed investment, investment in human capital, R&D investment, M&A activity, and third-party business succession. III. Pursuing Sustainable Economic Growth to Overcome Structural Issues I would now like to share my personal views from a medium- to long-term perspective on the "dynamism" of firms, employment, and households that is needed to achieve sustainable growth in Japan's economy, which is highly affected by structural issues. A. Aspiring for Growth and Fostering the Dynamism of Firms and Employment In societies that face structural issues such as an aging and declining population, the purchasing power of households tends to weaken and private consumption is prone to stagnating, pushing the economy into a downward spiral of contraction, leading to growing concerns about the social security system, and triggering a vicious cycle in which people are pessimistic about the future. To counter this, it is necessary to create a growth spiral on the back of the steady growth of existing firms, the increased movement of labor to growing firms, and the rapid growth of startups into so-called unicorns. In addition, wage hikes need to spread and business practices with regard to passing on cost increases need to improve, while corporate managers need to take steps to ensure that their labor force generates greater added value and to expand the scale of their business. Efforts to further step up exports to growing overseas economies are also essential. Such efforts help to strengthen the earning power of firms and to achieve "structural wage hikes" -- that is, a situation in which wages rise sustainably due to productivity improvements above and beyond any increase in the social burden imposed by structural issues -- helping to realize sustainable economic growth in which people feel better off. Large firms in Japan have begun to channel management resources into core businesses, introduce job-based employment, and more aggressively raise scheduled wages for younger workers, which until now were kept low relative to their productivity. They are also stepping up investment in human capital, such as in reskilling and the hiring of mid-career specialists, and seeking to create a work environment that motivates employees and allows them to realize their full potential. Through these efforts, firms are increasing the capacity of individuals to generate innovations and boosting customer satisfaction with their products and services. Thus, it seems to me that these firms are making active management efforts to focus on human capital as a way of strengthening their earning power. Moreover, more than half of large firms are undertaking mid-career hiring or considering doing so. 6 This suggests mounting competition to attract human resources, and it seems that labor is moving to large firms that continue to grow and offer high wages. Thus, forces in Japan's labor market pushing up wage levels, which are the lowest among the Group of Seven (G7) countries, are growing (Chart 17). However, the slope of wage profiles by job grade in Japan is still less steep than in other major Asian economies (Chart 18). Therefore, individuals' efforts to promote growth need to be better recognized, higher wage increases need to be achieved going forward, and wage profiles need to continue to be reformed. My hope is that growth-oriented small and medium-sized firms, thanks to their improved profitability as a result of actively passing on higher costs to prices, boost their investment and strengthen their business structures, so that more firms, supported by government policies, have the dynamism to expand their business -- that is, for small firms to grow into mediumsized firms and medium-sized firms to grow into large firms. On the other hand, given that funding for startups that try to use new technologies to carve out new markets has been sluggish and the number of unicorns is much smaller than in other countries, Japan's economy lacks the momentum to generate a growth spiral (Chart 19). Going forward, however, I hope to see many startups grow rapidly into unicorns in line with the government's Startup Development Five-Year Plan and that this, together with the growth of small and mediumsized firms, will inspire admiration for firms and individuals pursuing growth, drawing both In a recruitment plan survey of major firms published in April 2024 by Nikkei Inc., 54.2 percent of firms -- including those that had not yet finalized their recruitment plans as of March 12, 2024 -- gave specific numerical targets in their response with regard to their plans for mid-career hiring. funds and talent to growth-oriented firms, and thus creating a growth spiral that reinforces the dynamism of firms and employment characterized by continuing rises in wage levels (Chart 20). Meanwhile, the number of M&As and cases of third-party business succession have steadily increased, and the growth rate of firms that have gone through a business succession is higher than the industry average, indicating that budding developments toward a greater dynamism of firms and employment are steadily gaining traction (Chart 21). Nurturing these budding developments is vital in overcoming structural issues such as an aging and declining population, so that Japan will turn into a growth-oriented society in which young people -the future of the country -- have hope for a better tomorrow. B. Expectations for Improved Household Dynamism The new Nippon Individual Savings Account (NISA) program was launched this year and has started to lead to a shift from saving to investing. Unlike in the United States, household disposable income in Japan has greatly relied on labor income from the firm where a person works for many years (Chart 2). However, this is beginning to change. To raise household disposable income, people are more actively trying to earn higher wages not only by making efforts to contribute to the growth of the firm where they work, but also by changing jobs to growing firms and/or improving their skills such as through reskilling. Furthermore, there has been an expansion in investment to increase dividend income from listed firms that drive economic growth. These developments suggest that a household dynamism is emerging (Chart 22). While it is important for households to understand the risks associated with such investment, I think that, if they have the financial capacity, efforts to shift from saving to investing -- provided it focuses on the long term, regular contributions, and risk diversification -- as well as continued efforts by households to expand their sources of income through increased dividend income are a key element of economic growth. I believe that these efforts can help to increase household wealth, including that of seniors, through economic growth (Charts 8 and 10). I will pay close attention to changes in the composition of household financial assets and disposable income amid rising inflation expectations. However, if households increasingly accumulate financial assets because they are worried about the future and want to save for retirement, this may lead to a shift from consumption to investment, which may make households thriftier. Therefore, it is essential that asset formation by households strike the right balance between managing assets for retirement and generating income for the present. For this reason, I have high hopes for the educational outreach of the Japan Financial Literacy and Education Corporation (J-FLEC), established in April 2024, to promote a better understanding regarding the balance between consumption, savings, and investment. Thank you. Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Sapporo June 6, 2024 NAKAMURA Toyoaki Member of the Policy Board Bank of Japan Chart 1 IMF Projections in the World Economic Outlook (April 2024) y/y % chg. IMF projections -2 -4 Japan United States Euro area -6 China India World output -8 CY 80 Source: IMF. Chart 2 Household Disposable Income Breakdown and Saving Rates Japan United States tril. yen % Other (left scale) Social insurance premiums (left scale) Income tax (left scale) Operating surplus and mixed income (left scale) Social security benefits (left scale) Property income (left scale) Compensation of employees (left scale) Saving rate (right scale) tril. USD % Other (left scale) Personal current transfer receipts (left scale) Contributions for government social insurance (left scale) Personal current taxes (left scale) Personal income receipts on assets (left scale) Compensation of employees (left scale) Saving rate (right scale) -4 -8 CY 94 -200 CY 94 -4 Sources: Cabinet Office; U.S. Bureau of Economic Analysis (BEA). Chart 3 Forecasts of the Majority of the Policy Board Members y/y % chg. Real GDP CPI (all items less fresh food) (Reference) CPI (all items less fresh food and energy) Fiscal 2023 +1.3 to +1.4 [+1.3] +2.8 +3.9 Forecasts made in January +1.6 to +1.9 [+1.8] +2.8 to +2.9 [+2.8] +3.7 to +3.9 [+3.8] Fiscal 2024 +0.7 to +1.0 [+0.8] +2.6 to +3.0 [+2.8] +1.7 to +2.1 [+1.9] Forecasts made in January +1.0 to +1.2 [+1.2] +2.2 to +2.5 [+2.4] +1.6 to +2.1 [+1.9] Fiscal 2025 +0.8 to +1.1 [+1.0] +1.7 to +2.1 [+1.9] +1.8 to +2.0 [+1.9] Forecasts made in January +1.0 to +1.2 [+1.0] +1.6 to +1.9 [+1.8] +1.8 to +2.0 [+1.9] Fiscal 2026 +0.8 to +1.0 [+1.0] +1.6 to +2.0 [+1.9] +1.9 to +2.1 [+2.1] Notes: 1. Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates). 2. The forecasts of the majority of the Policy Board members are constructed as follows: each Policy Board member's forecast takes the form of a point estimate -- namely, the figure to which they attach the highest probability of realization. These forecasts are then shown as a range, with the highest figure and the lowest figure excluded. The range does not indicate the forecast errors. 3. Each Policy Board member makes their forecasts taking into account the effects of past policy decisions and with reference to views incorporated in financial markets regarding the future conduct of policy. Source: Bank of Japan. Chart 4 Composite Index of 10-Year-Ahead Inflation Expectations, by Type of Economic Agents 2.5 % Composite index of inflation expectations (10-year ahead) Sub-index for households 2.0 Sub-index for firms Sub-index for economists and market participants 1.5 1.0 0.5 0.0 CY 07 Note: The composite index is calculated by extracting the common components, based on the first principal component, of the inflation expectations of firms, households, and economists and market participants. For details on the calculation method, see Box 4 in the April 2024 Outlook Report. Sources: Bloomberg; Consensus Economics Inc., Consensus Forecasts; QUICK, QUICK Monthly Market Survey <Bonds>; Bank of Japan. Chart 5 Firms' Willingness to Raise Wages Results of the Annual Spring Labor-Management Wage Negotiations Employment Conditions DI 50 DI ("excessive" - "insufficient"), % points -10 -20 Actual regular wage increase Actual base pay increase CPI inflation Rengo's fifth aggregation results Insufficient -30 -40 y/y % chg. Forecast -1 -50 -2 CY 91 CY 91 Notes: 1. In the left panel, figures are for all industries and enterprises, excluding financial institutions. 2. In the right panel, figures for CPI inflation are for all items less fresh food, excluding the effects of the consumption tax hikes. Figures for the actual base pay increase and the actual regular wage increase from 1991 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 onward are figures released by Rengo. Figures are based on the wage negotiation results submitted by labor unions for which the base pay increase is clear. The figures for 2024 are from Rengo's fifth aggregation. Sources: Central Labour Relations Commission; Ministry of Internal Affairs and Communications; Rengo; Bank of Japan. Chart 6 Consumer Prices and Unit Labor Costs Unit Labor Costs Japan's Consumer Prices y/y % chg. CPI (less fresh food) y/y % chg. Japan United States Euro area CPI (less fresh food and energy) -4 -1 -2 CY 18 -8 CY18 Sources: Cabinet Office; Haver; Ministry of Internal Affairs and Communications; U.S. Bureau of Labor Statistics (BLS). Chart 7 Consumption of Households and GDP Fiscal 2023 Long-Term Time Series y/y % chg. Real consumption of households Real GDP Nominal GDP ann., q/q % chg. -2 -2 -4 -4 -6 FY 95 Source: Cabinet Office. -6 23/Q2 Q3 Q4 24/Q1 Chart 8 Japan's Demographic Composition and Rate of Wage Increases mil. persons % Seniors aged 75 and older (left scale) Seniors aged 65 to 74 (left scale) Working age population aged 15 to 64 (left scale) Children aged 14 and under (left scale) Percentage of the population aged 65 and older (right scale) Rate of wage increases (right scale) CY 90 Note: Figures for the rate of wage increases until 2010 are those released by the Central Labour Relations Commission, while those from 2015 onward are figures released by Rengo. Figures for the demographic composition through 2020 are based on the Population Census and those for 2023 are based on the final estimates of Population Estimates (as of December 1, 2023), both of which are released by the Ministry of Internal Affairs and Communications. Sources: Central Labour Relations Commission; Ministry of Internal Affairs and Communications; Rengo. Chart 9 Average Consumption Expenditure by Age Group of Household Head (as of 2023) thous. yen 34 years old and under 35-39 years old 40-44 years old 45-49 years old 50-54 years old Note: Average monthly amount for two-or-more-person households. Source: Ministry of Internal Affairs and Communications. 55-59 years old 60-64 years old 65 years old and over Chart 10 Household Financial Assets Japan 2,200 International Comparisons tril. yen Financial assets (total) Cash and deposits Equity Investment trusts 2,000 1,800 % 2.1 Other 2.7 3.1 25.1 1,600 Insurance, pension, and standardized guarantees 29.1 28.6 12.9 1,400 1,000 39.4 10.1 52.6 11.9 35.5 4.9 FY 90 Investment trusts 2.2 Debt securities Equity 21.0 5.0 1.3 1,200 Cash and deposits 12.6 Japan United States Euro area Notes: 1. In the left panel, figures for fiscal 2023 are as of end-December 2023. 2. In the right panel, figures for Japan are as of end-December 2023. Figures for the United States and the Euro area are as of end-March 2023, based on "Flow of Funds: Overview of Japan, the United States, and the Euro area," released by the Bank's Research and Statistics Department on August 25, 2023. Source: Bank of Japan. Chart 11 Importance of Small and Medium-Sized Firms Average Number of Employees mil. persons Small firms Medium-sized firms Large firms Labor Costs per Employee Labor Costs tril. yen mil. yen FY 07 FY 07 FY 07 Notes: 1. Figures are based on the Financial Statements Statistics of Corporations by Industry, Annually, and exclude the finance and insurance industries. Large firms are commercial corporations with capital of 1 billion yen or more. Medium-sized firms are commercial corporations with capital of 100 million yen or more but less than 1 billion yen. Small firms are commercial corporations with capital of less than 100 million yen. 2. Labor costs include salaries and wages, bonuses, and welfare expenses. Source: Ministry of Finance. Chart 12 Earning Power and Capacity for Raising Wages by Firm Size Operating Profits per Employee Break-Even Ratio mil. yen % Small firms Medium-sized firms Large firms FY 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 FY 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Notes: 1. Figures are based on the Financial Statements Statistics of Corporations by Industry, Annually, and exclude the finance and insurance industries. Large firms are commercial corporations with capital of 1 billion yen or more. Medium-sized firms are commercial corporations with capital of 100 million yen or more but less than 1 billion yen. Small firms are commercial corporations with capital of less than 100 million yen. 2. Break-even ratio = break-even sales / sales. Break-even sales = fixed costs / marginal profit ratio. Fixed costs = labor costs + interest expenses, etc. + depreciation and amortization expenses + rent on movable property and real estate. Marginal profit ratio = (sales - variable costs) / sales. Variable costs = sales - fixed costs - current profits. Source: Ministry of Finance. Chart 13 Improvement in Price Pass-Through Environment (DI for Output Prices) Long-Term Time Series 2023 Onward DI ("rise" - "fall"), % points Large firms Medium-sized firms DI ("rise" - "fall"), % points Small firms Forecast Rise -10 -20 -30 -40 -50 CY 90 Note: Figures are for all industries and enterprises, excluding financial institutions. Source: Bank of Japan. CY 23 Chart 14 Growth in Wages of Regular Employees at Time of Recruitment by Prefecture Hokkaido Aomori Iwate Miyagi Akita Yamagata Fukushima Ibaraki Tochigi Gunma Saitama Chiba Tokyo Kanagawa Niigata Toyama Ishikawa Fukui Yamanashi Nagano Gifu Shizuoka Aichi Mie Shiga Kyoto Osaka Hyogo Nara Wakayama Tottori Shimane Okayama Hiroshima Yamaguchi Tokushima Kagawa Ehime Kochi Fukuoka Saga Nagasaki Kumamoto Oita Miyazaki Kagoshima Okinawa Between 2 to 3% inclusive Over 3% Between 1 to 2% inclusive Between 0 to 1% inclusive 0% or less monthly y/y % chg. Note: This heatmap is based on analysis by Dai-ichi Life Research Institute Inc., using HRog Wage Now released by Nowcast Inc. Source: Dai-ichi Life Research Institute Inc. Chart 15 Prices and Wages CPI (Less Fresh Food) Nominal Wages y/y % chg. Before the deflationary period During the deflationary period Period under QQE (pre-pandemic) Since the outbreak of the pandemic -2 -2 -4 FY 90 y/y % chg. -4 FY 90 Before the deflationary period During the deflationary period Period under QQE (pre-pandemic) Since the outbreak of the pandemic Notes: 1. Figures for the CPI (less fresh food) are Bank staff estimates and exclude the effects of consumption tax hikes, policies concerning the provision of free education, travel subsidy programs, and the reduction in mobile phone charges. 2. Figures for nominal wages are for establishments with 30 or more employees for fiscal 1990, and with 5 or more employees from fiscal 1991 onward. Figures from fiscal 2016 onward are based on continuing observations following the sample revisions. Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications. Chart 16 Promoting a Virtuous Cycle by Strengthening the Earning Power of Firms Virtuous Cycle: Vicious Cycle Continuous Growth Efforts Unable to pass on cost increases to prices Pass-through of cost increases to prices Efforts to absorb cost increases through cost reductions and new product development, etc. Increase in value added through cost reductions and new product development, etc. Decline in capacity for investment Sluggish wages Equipment, human capital, R&D, marketing, etc. Improvement in capacity for raising wages Improvement in capacity for investment Structural wage hikes Equipment, human capital, R&D, marketing, etc. Expansion of investment Investment restraint Decline in employee engagement Boosting of employee engagement Lack of management resources Sluggish consumer appetite for spending Increase in consumers' appetite for spending Decline in growth expectations Strengthening of management resources Enhancement of customer satisfaction Decline in capacity for raising wages Rise in growth expectations Increase in productivity and innovation capacity Decline in productivity and innovation capacity Price competition and sluggish sales Increase in the value of employees and products, etc. and expansion of sales Decline in earning power and sluggish business performance Strengthening of earning power and sustainable growth Sluggish tax revenue and concern about sustainability of the social security system Increase in tax revenue and improvement in sustainability of the social security system Chart 17 Comparison of Average Annual Wages in G7 Countries 10 thous. USD, constant prices, 2022 PPPs Japan United States Canada United Kingdom Germany France Italy CY 91 Note: Average annual wages in full-time equivalent. Source: OECD. Chart 18 Annual Pay Comparison with Asian Economies (as of 2023) thous. USD Japan (Japanese firms) China (Beijing) South Korea Thailand Vietnam Singapore Senior manager in a large firm Manager in a large firm position class Notes: 1. The horizontal axis shows the level of the position class as defined by Mercer. Position classes below the executive level at large firms are shown in this chart. The further to the right, the higher the position class. 2. Figures include incentives paid for 100 percent achievement of performance targets and are the medians for each position class. Source: Mercer, 2023 Total Remuneration Survey. Chart 19 Startups Startup Funding in Japan: Total Value and Number of Firms Funded 1.2 tril. yen thous. firms GDP Size and Number of Unicorns 5 30 tril. USD number 1,000 10 tril. USD Total value of deals (left scale) Nominal GDP in 2023 (left scale) Number of firms funded (right scale) 1.0 number Number of unicorns (right scale) 0.8 0.6 0.4 Government target： 10 trillion yen in FY 2027 0.2 0.0 CY 14 United States China Japan Germany India United Kingdom France Notes: 1. In the left panel, the total value of deals is defined as follows: for unlisted startups, the amount of funds raised since their establishment to the time of the survey, in terms of equity or other financial instruments that may be converted into equity; for startups that launched initial public offerings (IPOs), the amount of funds raised immediately before the IPO. 2. In the right panel, the number of unicorns is calculated based on CB Insights, "Global Unicorn Club: Private Companies Valued at $1B+ (as of March 20th, 2024)," https://www.cbinsights.com/research-unicorn-companies. Sources: CB Insights; IMF; INITIAL, Japan Startup Ecosystem Report 2023. Chart 20 Dynamism of Firms and Employment Further growth Growth Aspiring for growth Growth spiral Small firms Startups Growth 【Organic growth】 Investment in equipment, human capital, R&D, marketing, etc. 【Inorganic growth】 M&A, third-party business succession Large firms Rise in wage levels Growth Growth Financial capital Investment funds, financial institutions, firms, R&D institutions Mediumsized firms Human capital Large firms Growth Unicorns Growth Chart 21 Progress in Structural Reforms by Small and Medium-Sized Firms Growth above the Industry Average after Business Successions Number of Business Successions thous. consultees thous. cases 2.5 % Number of consultees (left scale) Number of contracts (right scale) 2.0 1.5 1.0 0.5 0.0 FY 11 12 13 14 15 16 17 18 19 20 21 22 23 1 year later 2 years later 3 years later 4 years later 5 years later Notes: 1. The left panel shows the number of consultees and the number of contracts concluded at the Business Successions Support Center. 2. The right panel shows the difference of the net income growth rate between the industry average and the average of firms that underwent a change in management between 2010 and 2015, in the first five years after the business succession. Sources: Organization for Small & Medium Enterprises and Regional Innovation, JAPAN; Small and Medium Enterprise Agency, 2021 White Paper on Small and Medium Enterprises in Japan. Chart 22 Dynamism of Households Growth of the firms where people work Improving skills through reskilling, etc. Changing jobs to growing firms Higher wages Household expenditure Labor income Expansion in sources of income Pensions, etc. Social burden Increase in dividends Financial income Dividends Savings; hoarding of cash and deposits Partial shift Investments Listed firms Investing through the new NISA Sustainable expansion in investment focusing on the long term, regular contributions, and risk diversification
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Statement by Mr Kazuo Ueda, Governor of the Bank of Japan, before the Committee on Financial Affairs, House of Councillors, Tokyo, 18 June 2024.
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Kazuo Ueda: The Bank's Semiannual Report on Currency and Monetary Control Statement by Mr Kazuo Ueda, Governor of the Bank of Japan, before the Committee on Financial Affairs, House of Councillors, Tokyo, 18 June 2024. *** Introduction The Bank of Japan submits to the Diet its Semiannual Report on Currency and Monetary Control every June and December. I am pleased to have this opportunity today to talk about recent economic and financial developments and about the Bank's conduct of monetary policy. I. Economic and Financial Developments I will first explain recent economic and financial developments. Japan's economy has recovered moderately, although some weakness has been seen in part. Exports have been more or less flat. With corporate profits improving, business fixed investment has been on a moderate increasing trend. The employment and income situation has improved moderately. Private consumption has been resilient, although the impact of price rises has remained and automobile sales have continued to be pushed down by a suspension of shipment at some automakers. With regard to the outlook, Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions. The year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been in the range of 2.0-2.5 percent recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned. Regarding the outlook, while the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices are expected to wane, the rate of increase is projected to be pushed up through fiscal 2025 by factors such as a waning of the effects of the government's economic measures pushing down CPI inflation. Meanwhile, underlying CPI inflation is expected to increase gradually and, in the second half of the projection period of the April 2024 Outlook for Economic Activity and Prices, it is likely to be at a level that is generally consistent with the price stability target of 2 percent. Concerning risks to the outlook, there remain high uncertainties surrounding Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior. Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices. Meanwhile, Japan's financial system has maintained 1/2 BIS - Central bankers' speeches stability on the whole. Even in the case of an adjustment in the real economy at home and abroad and in global financial markets, the financial system is likely to remain highly robust on the whole, mainly because Japanese financial institutions have sufficient capital bases. Regarding financial risks from a longer-term perspective, while there is a possibility that prolonged downward pressure on financial institutions' profits may lead to a gradual pullback in financial intermediation, the vulnerability of the financial system could increase, mainly due to the search for yield behavior. Although these risks are judged as not significant at this point, it is necessary to pay close attention to future developments. II. Conduct of Monetary Policy Next, I will explain the Bank's conduct of monetary policy. At the Monetary Policy Meeting (MPM) held last week, the Bank decided to maintain the current guideline for money market operations during the intermeeting period, in which it would encourage the uncollateralized overnight call rate to remain at around 0 to 0.1 percent. Regarding purchases of Japanese government bonds (JGBs), CP, and corporate bonds for the intermeeting period, it will conduct the purchases in accordance with the decisions made at the March 2024 MPM. The Bank also decided that it would reduce its purchase amount of JGBs thereafter to ensure that long-term interest rates would be formed more freely in financial markets. It will collect views from market participants and, at the next MPM, will decide on a detailed plan for the reduction of its purchase amount during the next one to two years or so. With the price stability target of 2 percent, the Bank will conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions, from the perspective of sustainable and stable achievement of the target. Thank you. 2/2 BIS - Central bankers' speeches
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Remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the introduction of a new series of Bank of Japan notes, Tokyo, 3 July 2024.
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Kazuo Ueda: Introduction of a new series of Bank of Japan notes Remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the introduction of a new series of Bank of Japan notes, Tokyo, 3 July 2024. *** The Bank of Japan will start issuing a new series of Bank of Japan notes from 8:00 a.m. today, July 3, 2024. The three denominations (10,000 yen, 5,000 yen, and 1,000 yen notes) carry portraits of SHIBUSAWA Eiichi, TSUDA Umeko, and KITASATO Shibasaburo, respectively. On the back of the notes, the 10,000 yen note features the Tokyo Station Marunouchi Building; the 5,000 yen note features Japanese wisteria flowers, or fuji in Japanese; and the 1,000 yen note features "Kanagawa-oki nami ura" (Under the Great Wave off Kanagawa) from the series Fugaku sanjurokkei (Thirty-six Views of Mount Fuji), a Japanese ukiyo-e woodblock print by KATSUSHIKA Hokusai. These notes come with the latest security features, including 3-D holograms. Efforts have also been made to enhance the universal design of the notes, a design that caters for all kinds of people and groups. For example, the Arabic numerals indicating face value on the front and back of the notes have been enlarged. Let me express my deepest gratitude to the many people who have worked to prepare for this day since the announcement to introduce a new series of Bank of Japan notes was made in April 2019. Today, the Bank is planning to send off the new series of Bank of Japan notes with a total value of 1.6 trillion yen to the public. Despite the trend toward cashless payment, cash is a secure means of payment that can be used by anyone, anywhere, and at any time, and it will continue to play a significant role. It is my hope that the new series of Bank of Japan notes will be widely distributed to the people to support the economic infrastructure of Japan. Thank you for your kind attention. 1/1 BIS - Central bankers' speeches
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Speech by Mr Shinichi Uchida, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Hakodate, 7 August 2024.
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August 7, 2024 Bank of Japan Japan's Economy and Monetary Policy Speech at a Meeting with Local Leaders in Hakodate UCHIDA Shinichi Deputy Governor of the Bank of Japan (English translation based on the Japanese original) Introduction It is my pleasure to have the opportunity today to exchange views with leaders in administrative, economic, and financial areas in southern Hokkaido. I would like to take this chance to express my sincere gratitude for your cooperation with the activities of the Bank of Japan's Hakodate Branch. Before hearing from you, I will explain Japan's economic activity and prices, as well as the Bank's conduct of monetary policy. I. Economic Developments Please take a look at Chart 1. I will start by talking about Japan's economic developments. Japan's economy has recovered moderately, although some weakness has been seen in part. Looking back, the economy continued to grow at a relatively high rate through the first half of 2023, reflecting the normalization of economic activity following the COVID-19 pandemic. Subsequently, the growth rate temporarily turned negative, partly due to a suspension of production at some automakers, but the economy has remained on an improving trend. It is expected to keep growing at a pace above its potential growth rate. Let me move on to Chart 2. In the corporate sector, business sentiment has stayed at a favorable level and corporate profits have been at record-high levels. In this situation, business fixed investment plans in the June 2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) indicate that the year-on-year rate of increase in investment for fiscal 2023 was 9.9 percent and that the rate of increase in planned investment for fiscal 2024 is over 10 percent. Software investment has increased, mainly reflecting a rise in investment to address labor shortages, while moves to further increase research and development (R&D) investment have been noticeable. Business fixed investment is likely to remain at a high level, since projects for future growth, such as the ones I just mentioned, will continue to push up investment, and there has been an accumulation of projects that had to be postponed due to factors such as labor shortages in construction. Turning to Chart 3, private consumption has been resilient. As the red line in the left-hand graph shows, consumption of "services" such as travel and dining-out has increased moderately, approaching the pre-pandemic level. On the other hand, the impact of price rises has been particularly notable for goods such as food products and daily necessities, which have seen large price increases, and consumption of "nondurable goods," including food products and daily necessities, has declined, as shown by the green line. Households' defensive attitudes toward spending have been observed, such as a shift toward inexpensive products. Consumer sentiment has also become cautious, as seen in the right-hand graph. Regarding the outlook for private consumption, it is necessary to continue to pay close attention to the impact of price rises. Meanwhile, in this year's annual spring labor-management wage negotiations, the highest level of wage growth in around three decades was achieved across a wide range of firms, and the effects of this have gradually been reflected in actual wages. Various survey results indicate that this year's summer bonus payments are likely to exceed those of last year. The baseline scenario is that private consumption will remain resilient. Please take a look at Chart 4. Risks to the outlook for Japan's economy include developments in overseas economic activity and prices and in global financial and capital markets. Overseas economies have grown moderately on the whole, and the baseline scenario is that they will keep growing moderately. As the left-hand graph shows, the International Monetary Fund (IMF) projects that the global economy will grow at 3.2 percent for 2024 and 3.3 percent for 2025, which is broadly in line with past average growth rates. That said, adjustment pressure has remained in the labor and real estate markets in China, and there are also geopolitical risks such as the situation surrounding Ukraine and the Middle East. Inflation rates in Europe and the United States have followed a declining trend, albeit with fluctuations, and some central banks have started to lower their policy interest rates. It should be noted, however, that inflationary pressure has remained in these economies, and there are uncertainties over how past policy interest rate hikes by overseas central banks will affect their real economies and financial systems given the significant degree of these hikes. As shown in the upper right-hand graph, the U.S. economy has continued to grow at a relatively high rate despite the high policy interest rate of over 5 percent. As the lower right-hand graph indicates, the U.S. labor market has also remained tight, but the tightness has waned recently, broadly returning to the pre-pandemic level. Meanwhile, employment-related statistics released last week indicate, for example, a rise in the unemployment rate, raising some concerns of an economic slowdown. I believe that the U.S. economy will most likely have a soft landing, for the following reasons. First, it seems that productivity in the United States has increased due to such factors as the movement of labor resulting from the pandemic. Second, since change in the real economy, including labor market conditions, occurs in moderation, it is possible to address developments through policy interest rate cuts or other policy actions. If the U.S. real economy heads toward a soft landing, this will likely be reflected in financial and capital markets, including stock prices. However, since market developments are naturally more rapid than real economic developments, attention is warranted on the risk of current developments in financial and capital markets feeding into the real economy. I will refer to developments in financial and capital markets later, in relation to the conduct of monetary policy. II. Price Developments and Structural Changes in the Labor Market Current Situation of and Outlook for Prices Next, I will move on to price developments. Please take a look at Chart 5. As shown by the red line, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has decelerated moderately, albeit with fluctuations. The latest figure, which is for June, stands at 2.6 percent. Looking at the breakdown, the contribution of food products, shown by light blue bars, and that of other goods, shown by dark blue bars, have continued to be affected by a pass-through to consumer prices of cost increases led by the past rise in import prices. With these pass-through effects waning, however, the positive contributions of food products and other goods have decreased moderately. The pink bars show that the positive contribution of services has also decreased to some extent. Taking a closer look at developments in services prices, however, a mechanism whereby wage increases moderately push up services prices is gradually becoming evident. Chart 6 shows the distribution of the year-on-year rates of change in prices of individual items that make up the CPI for services. Please take a look at the left-hand graph. For April 2023, the distribution had a large peak at around 0 percent. While there was another peak at around 10 percent, this peak comprised dining-out and other items for which prices were affected by the rise in raw material costs, meaning that their high rates of increase were due to cost-push factors. Services items with a high ratio of labor costs, shown by dark blue bars, were concentrated at around 0 percent. On the other hand, as the right-hand graph shows, the peak of the price change distribution for April 2024 is centered on 2 percent, including items with a high ratio of labor costs. In sum, while price increases led by the rise in import prices have waned, wage increases have been increasingly reflected in prices. Please take a look at Chart 7. As for the outlook, the year-on-year rate of increase in the CPI for all items excluding fresh food is likely to be 2.5 percent for fiscal 2024 and thereafter is projected to remain at around 2 percent for fiscal 2025 and 2026. Now, please turn to Chart 8. As seen in the left-hand graph, when households were asked a question focusing solely on inflation, the majority of respondents answered that it is unfavorable. However, as the right-hand graphs show, when firms and households were asked a question that compares a situation in which neither prices nor wages (or household income) rise -- the economy in a deflationary period -- with a situation in which both rise moderately -- similar to the case in economies such as Japan up until the 1980s and Europe and the United States before they experienced high inflation -- about 70 percent of firms responded that a moderate rise is preferable, and the proportion of households preferring a moderate rise was higher than that of households preferring no rise. While the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of increase in the CPI, what it aims at is achieving an economy in which both wages and prices rise moderately. Firms have also taken into consideration a situation in which both wages and prices rise moderately when deciding their pricing strategies. Please take a look at Chart 9. While firms' outlook for output prices for one year ahead, shown by the blue line, has settled down somewhat, the outlook for five years ahead, shown by the red line, has continued to rise moderately. Since it is hard to imagine that firms foresee the sizable increase in raw material costs continuing for five years, it is likely that they are considering setting prices on the assumption that wages will continue to increase. Structural Changes in the Labor Market Now, please take a look at Chart 10. Given factors such as demographic changes in Japan, it is likely that labor shortages will persist, leading to a rise in wages. As shown by the blue line, the working-age population started declining 30 years ago, in the mid-1990s. However, during the period of deflation, indicated by the shaded areas in the chart, the number of employed persons remained flat or decreased slightly, as the green line indicates. Consequently, the difference between this and the working-age population, shown by the light blue bar graph, remained broadly unchanged at about 20 million. During this period, demand was sluggish. Although firms actually had a perception of excess employment, they managed to sustain existing employment amid expectations from society to do so, supported by various government subsidies. This was a very tough situation for people trying to newly enter the labor market, giving rise to the phrase "employment ice age generation." Under the large-scale monetary easing that began in 2013, coupled with various government measures and other factors, the economy subsequently improved, resulting in an increase in employment of over 5 million people. With the working-age population remaining on a downtrend, the gap between the working-age population and the number of employed persons, shown by the light blue bar graph, has since narrowed rapidly and now stands at around 6.5 million. From this point on, the room for additional labor supply will be further limited. This change in the labor market is structural and irreversible. For the past 10 years or so, I have been arguing that the only plausible driving force for change in Japan's economy is labor shortages. Friction is inevitable during a period of change, but as long as Japanese society shows strong resistance to an increase in unemployment, it is unrealistic for Japan to adopt a process of change such as that seen in the United States, which involves going through a temporary increase in bankruptcies and a rise in unemployment while hoping for the next stage of recovery. I fully agree that strengthening growth potential should be the main focus for Japan's economic growth, but the question is how. It is true that more than a decade of large-scale monetary easing gave rise to various side effects, and I take them seriously. However, I do believe that monetary easing has created the current labor market situation. As the graphs in Chart 10 also make clear, it is impossible to explain the situation solely in terms of demographic changes. Moreover, after experiencing labor shortages, firms and society had to change. Economic metabolism will accelerate in a way that is acceptable to Japanese society, in other words, in a way that does not result in a large increase in unemployment. I expect Japan's growth potential to strengthen through firms' concrete actions. The only way to become a firm that working people choose is to boost profits, and individual firms' actions will bring about growth in the overall economy. The main player in a capitalist economy is certainly the private sector, and the direction of growth is determined by the market mechanism. The significance of growth strategies lies in their role in creating a favorable environment for the private sector and supporting their activities. Of course, even if triggering a rise in unemployment is less likely, change is accompanied by friction. Moreover, the benefits and impacts differ depending on the firm, the individual, and the region. Services that have been available due to a surplus of labor will not be provided within the market mechanism. It is sometimes said that, as in the case of urban areas, taxis used to be waiting when you came out of a station in nonurban areas, but it is now hard to get a taxi in these areas even if you call for one. However, this is a natural development if supply and demand conditions in urban areas have changed, making it easier for taxi drivers to find customers in these areas. I think that the following issues need to be considered under the assumption that labor shortages will persist: how to maintain the functions of the regions; how to build relationships between urban areas and surrounding areas; and how to make up for needs that cannot be met within the market mechanism. The various changes going on around you may be the outcome of what is shown by the light blue bars. At the very least, things will not change for the better if nothing is done. III. The Bank's Conduct of Monetary Policy Next, I will explain the Bank's conduct of monetary policy. At the Monetary Policy Meeting (MPM) held last week, the Bank decided to raise its short-term policy interest rate by 0.15 percentage points. It will encourage the uncollateralized overnight call rate to remain at around 0.25 percent. The Bank also decided on the plan for the reduction of its purchase amount of Japanese government bonds (JGBs) until the end of fiscal 2025. Reduction of the Purchase Amount of JGBs First, I will outline the Bank's decision to reduce its purchase amount of JGBs. Please take a look at Chart 11. The Bank's JGB holdings account for roughly half of the total outstanding JGBs, and until July, the Bank purchased JGBs at about 6 trillion yen per month, which is broadly equivalent to the monthly redemption amount of JGBs it holds. At the July MPM, the Bank decided on a plan to gradually reduce the amount of its monthly purchases of JGBs so that it would be halved to about 3 trillion yen per month at the end of fiscal 2025. Please turn to Chart 12. Under the large scale monetary easing that began in 2013, the role of the Bank's JGB purchases was to stimulate the economy by pushing down medium- to long-term interest rates. As the left-hand graph shows, the effects of these purchases derived mainly from the stock effect -- that is, the impact that corresponds to the amount outstanding of JGBs held by the Bank. It is estimated that this stock effect pushed down 10-year JGB yields by about 1 percentage point, and that it also lowered other yields to a degree corresponding to the length of their maturities. The stock effect will decrease as the Bank reduces its purchase amount of JGBs. However, at the pace decided at the July MPM, I believe that the reduction of the amount of JGBs purchases will not change significantly the effects of monetary easing, as the reduction in the Bank's JGB holdings will be limited to roughly 7-8 percent over 18 months. Meanwhile, it should be noted that the impact of reducing JGB holdings is not necessarily proportionate to the impact of increasing JGB holdings, as their effects can be asymmetric. Please take a look at the right-hand graph. The stimulus effects of a decline in interest rates on the economy are larger for shorter maturities than for longer maturities. Given these factors, although the reduction of the purchase amount of JGBs will have some impact on overall monetary easing effects, the impact is likely to be smaller than that of the short-term interest rate. The Bank therefore decided to reduce its purchase amount of JGBs at the planned pace, thereby letting long-term interest rates be formed more freely in the market. On this basis, the Bank will adjust its policy stance in response to developments in economic activity and prices, using the short-term interest rate as a primary policy tool, while taking into account the effects of long-term interest rates formed in the market. The Bank's Decision to Raise the Short-Term Policy Interest Rate Next, I will outline the Bank's decision to raise the short-term policy interest rate. Please take a look at Chart 13. Japan's economy has recovered moderately, and is likely to keep growing at a pace above its potential growth rate. Meanwhile, some weak developments have been observed: for example, private consumption has been affected by higher prices, and the real GDP growth rate for the January-March quarter of 2024 was negative, partly due to the effects of the suspension of production at some automakers. These developments are one of the main reasons that the Bank maintained the short-term policy interest rate, shown by the red line, at a low level of around 0 to 0.1 percent, even after terminating the negative interest rate policy in March. Given that actual inflation and inflation expectations have risen, this rate is very low in real terms, as shown by the blue line, and implies highly accommodative financial conditions. If economic activity and prices develop in line with the Bank's outlook, it would be appropriate for the Bank to accordingly adjust the degree of monetary accommodation. At the MPM held last week, the Bank judged that developments in economic activity and prices, which I explained in the first half of this speech, were in line with its outlook, as seen in the results of this year's annual spring labor-management wage negotiations being reflected in wages. Please turn to Chart 14. As shown by the left-hand graph, actual inflation has been above 2 percent for more than two years and is projected to continue doing so for fiscal 2024. The rise in actual inflation has had a direct impact on Japan's economy and the daily lives of all of you gathered here, and this is a key factor when making policy decisions. In this situation, as the right-hand graph shows, the year-on-year rate of change in import prices, which had once settled down, has turned positive again, due to the effects of the yen's depreciation. It is necessary to examine the impact of the rise in import prices on consumer prices, while taking account of the fact that Japanese firms' behavior is diverging from what it was during the period of deflation. During that period, firms tended to avoid passing on cost increases to prices as much as possible. As a result, the degree to which rises in import costs were passed on to consumer prices was moderate. Over the past few years, the pass-through of higher import costs to consumer prices has been evident, partly since the degree of the rise in import costs was significant. In addition, amid labor shortages, this pass-through has led to wage increases, thereby pushing up underlying inflation. Given that firms' behavior has shifted more toward raising wages and prices, it is likely that movements in foreign exchange rates are affecting prices to a larger degree and at a more rapid pace. Although the rate of increase in import prices is not as large as 50 percent -- as was the case two years ago -- the yen's depreciation and the consequent rise in import prices are upside risks to consumer prices. As mentioned above, the Bank confirmed that developments in economic activity and prices were in line with its outlook. Concerning risks, with CPI inflation having been above 2 percent for more than two years, the year-on-year rate of change in import prices has turned positive again, reflecting the yen's depreciation. Given these factors, the Bank assessed that a policy interest rate of around 0.25 percent would be more appropriate than one of around 0 to 0.1 percent in terms of balancing upside and downside risks. Needless to say, a policy interest rate of around 0.25 percent is significantly low, not only in nominal terms but especially in real terms. The Bank will therefore continue to support the economy by maintaining highly accommodative financial conditions. As for the future conduct of monetary policy, in a nutshell, I believe that the Bank needs to maintain monetary easing with the current policy interest rate for the time being, with developments in financial and capital markets at home and abroad being extremely volatile. In this regard, the Bank explained its thinking in the July 2024 Outlook for Economic Activity and Prices (Outlook Report) that "as for the conduct of monetary policy, while it will depend on developments in economic activity and prices as well as financial conditions going forward, . . . if the aforementioned outlook for economic activity and prices will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation." It should be noted that this approach is conditioned by the phrase "if the outlook for economic activity and prices will be realized." On this point, the significant movements in stock prices and foreign exchange rates since last week would be relevant. Financial and capital markets have seen a rapid weakening of the U.S. dollar and a decline in stock prices worldwide, triggered by the growing concern over a slowdown in the U.S. economy that I referred to earlier. In particular, the yen has appreciated significantly against the U.S. dollar, since large positions that had been built up on a weaker yen are being unwound. Moreover, partly due to the correction of the yen's depreciation, stock prices in Japan have declined to a greater extent than other economies. Basically, stock prices reflect corporate profits and the economic outlook. On this point, corporate profits in Japan have been at historically high levels. This is not simply the result of a weak yen, but of a fundamental improvement in profitability. Of course, movements in stock prices affect corporate investment and private consumption, through factors such the wealth effect, and ultimately the outlook for economic activity and prices, and they are therefore a key factor in determining the conduct of monetary policy. Furthermore, regarding foreign exchange rates, as a result of the correction of the yen's depreciation, the upside risk to prices arising from higher import prices has decreased accordingly. As indicated by the green line in Chart 14, since the year-on-year rate of increase in import prices has been at around 0 percent on a contract currency basis, the rise in import prices on a yen basis is mostly due to the yen's depreciation to date. In this context, the correction of the yen's depreciation affects the conduct of monetary policy. If the outlook, the upside and downside risks to the outlook, or the likelihood of realizing the outlook change as a result of these market developments, the path of the policy interest rate will certainly change. In fact, in contrast to the process of policy interest rate hikes in Europe and the United States, Japan's economy is not in a situation where the Bank may fall behind the curve if it does not raise the policy interest rate at a certain pace. Therefore, the Bank will not raise its policy interest rate when financial and capital markets are unstable. As I mentioned, I believe that the U.S. economy will most likely have a soft landing, and that the rise in Japanese stock prices is attributable to the improvement in corporate profitability. Since it is unlikely that there have been significant changes in economic fundamentals in both countries, the reaction to the U.S. economic indicators for a particular month seems too large. However, since recent developments in financial and capital markets at home and abroad have been extremely volatile, the Bank is monitoring developments in these markets and their impact on economic activity and prices with utmost vigilance, and it will conduct monetary policy as appropriate. Let me reiterate my view that the Bank needs to maintain monetary easing with the current policy interest rate for the time being. IV. Recent and Future Economic Activity in Southern Hokkaido Lastly, I would like to talk about the economy of southern Hokkaido, centered around Hakodate. Established in 1893, the Hakodate Branch is the Bank's third oldest existing site in Japan. We have been operating at this historic location for over 130 years. We intend to continue contributing to the region through our operations, including the provision of central banking services and information that will benefit the regional economy. In doing so, we would like to ask for your continued support and cooperation. The Bank assesses that the economy of southern Hokkaido has picked up. Tourism, which is a major industry in the region, has been partly constrained by labor shortages. However, the regional economy has been boosted by significant numbers of tourists brought in by events such as the premiere of a popular animated movie that is set in the region, the arrival of cruise ships, the Hakodate Marathon, and large-scale conventions. On the other hand, the economy faces serious structural issues. The fishing-related industry, which along with tourism has been a driver of the regional economy, has remained in an extremely severe situation, due to a prolonged downturn in catches, especially of Japanese flying squid. Moreover, the region's workforce, which is essential to revitalizing industries and fostering a new economy, has continued to decline at a faster pace than in other regions across Japan. In particular, the outflow of young people is an issue weighing heavily on the economy of southern Hokkaido. Even amid such adversities, being blessed with a wealth of tourism resources, southern Hokkaido has seen the steady emergence of new and promising developments that take advantage of its natural features. In the agricultural sector, while the region already boasts local specialties such as potatoes, leeks, and pumpkins, it has seen an expansion in the production of wine and sake (rice wine). In the fishing sector, where scallops, sea cucumbers, sea urchins, and kelp are well-known, operators of salmon farms have been trying to promote their salmon through the building of brand recognition. In the energy sector, plans are moving ahead for large-scale offshore wind power generation plants on the Sea of Japan. I hope that the region will develop its local industries into even larger ones using the resources its natural features have blessed it with. As shown by Chart 15, Hakodate ranks consistently high among "places to visit." While regions across Japan face structural issues, including those relating to demographic developments, I believe that solutions to these issues differ by region. If regional economies compete with economies in major urban areas by the same standards, this will inevitably put them at a disadvantage in terms of economies of scale and profits due to agglomeration. Just as what individuals value is diverse, so is what they find attractive about a particular region. With this in mind, if a region can find ways to compensate for its weaker points, it will be able to persuade more people to live in the region. From now on, the most effective prescription for issues facing regions across Japan is to attract residents. Let me conclude by offering my hope that Hakodate will make great strides as a "place to live in." Thank you very much for your attention. Japan's Economy and Monetary Policy Speech at a Meeting with Local Leaders in Hakodate August 7, 2024 UCHIDA Shinichi Deputy Governor of the Bank of Japan Introduction I. Economic Developments II. Price Developments and Structural Changes in the Labor Market III. The Bank's Conduct of Monetary Policy IV. Recent and Future Economic Activity in Southern Hokkaido Chart 1 I. Economic Developments The BOJ's Forecasts for Real GDP (July 2024 Outlook Report) s.a., ann., tril. yen FY 2024 +0.6% FY 2025 +1.0% FY 2026 +1.0% FY 13 Note: The forecasts presented are the medians of the Policy Board members' forecasts. The values of real GDP for fiscal 2024 onward are calculated by multiplying the actual figure for fiscal 2023 by all successive projected growth rates for each year. Sources: Cabinet Office; Bank of Japan. Chart 2 I. Economic Developments Corporate Sector Business Conditions DI "favorable" - "unfavorable", % points Corporate Profits s.a., tril. yen Large firms Small and medium-sized firms Business Fixed Investment y/y % chg. Planned investment in the June 2024 survey : +10.8% -10 "Favorable" -20 -30 "Unfavorable" -5 -10 Large firms -40 Medium-sized firms -15 Small firms -50 CY 07 09 11 13 15 17 19 21 23 CY 07 09 11 13 15 17 19 21 23 -20 FY 08 10 12 14 16 18 20 22 24 Notes: 1. In the left-hand chart, figures are based on the Tankan. 2. In the middle chart, figures are current profits based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude "finance and insurance." Figures from 2009/Q2 onward exclude pure holding companies. 3. In the right-hand chart, figures are based on the Tankan, including software and R&D investments and excluding land purchasing expenses. R&D investment is not included before the March 2017 survey. Figures are for all industries including financial institutions. Sources: Bank of Japan; Ministry of Finance. Chart 3 I. Economic Developments Household Sector Confidence Indicators Private Consumption s.a., CY 2019 = 100 s.a. Total real private consumption Of which, services (travel, dining-out, etc.) Of which, nondurable goods (food products, clothes, daily necessities, etc.) CY 19 Improved Consumer Confidence Index Economy Watchers Survey (household activity) Worsened CY 19 Notes: 1. In the left-hand chart, figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption. 2. In the right-hand chart, figures for the Economy Watchers Survey are those for the current economic conditions DI. Sources: Bank of Japan; Cabinet Office. Chart 4 I. Economic Developments Overseas Economies IMF Projections in the World Economic Outlook Update y/y % chg. IMF projections Real GDP Growth in the United States ann., q/q % chg. -2 -4 CY 21 CY 1990-2019 average: +3.6% -1 -2 -3 CY 00 02 04 06 08 10 12 14 16 18 20 22 24 Labor Market in the United States 16 % CY 19 Unemployment rate (left scale) ratio Average hourly earnings (y/y chg., left scale) Ratio of job openings to unemployment (right scale) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Note: In the left-hand chart, IMF projections are those as of July 2024. Sources: IMF; Haver. Chart 5 Ⅱ. Price Developments and Structural Changes in the Labor Market Consumer Prices y/y % chg. Energy Food products Goods (less food products) Services June 2024 CPI (less fresh food) +2.6% +2.2% CPI (less fresh food and energy) -1 -2 CY 19 Source: Ministry of Internal Affairs and Communications. Chart 6 Ⅱ. Price Developments and Structural Changes in the Labor Market Services Prices by Item 1. April 2023 2. April 2024 share of the number of items, % share of the number of items, % Low labor cost ratio Low labor cost ratio High labor cost ratio High labor cost ratio -2 or less or more y/y % chg. -2 or less or more y/y % chg. Notes: 1. Figures show the CPI for general services (less housing rent). Figures are staff estimates and exclude the effects of policies concerning the provision of free education and the effects of travel subsidy programs. 2. CPI items are matched to the items in the 2015 Input-Output Tables for Japan and grouped in terms of the share of "wages and salaries" and other labor costs in the domestic output of those items. Figures for items with a high (low) labor cost ratio are for items that fall into the top (bottom) 50 percent in general services (less housing rent). Source: Ministry of Internal Affairs and Communications. Chart 7 Ⅱ. Price Developments and Structural Changes in the Labor Market Forecasts for the CPI y/y chg. FY 2024 FY 2025 FY 2026 All items less fresh food ＋2.5％ ＋2.1％ ＋1.9％ (Reference) All items less fresh food and energy ＋1.9％ ＋1.9％ ＋2.1％ Note: Figures are the medians of the Policy Board members' forecasts in the July 2024 Outlook Report. Source: Bank of Japan. Chart 8 Ⅱ. Price Developments and Structural Changes in the Labor Market Perception of Wages and Prices Opinions of the Current Price Rise (Households) Preferred State for Prices and Wages (Firms) Prices and wages rising moderately % Prices and wages hardly changing Neither affects business activities Not sure Share of households which responded "rather unfavorable" concerning the price rise Prices and income both rising moderately Prices and income both remaining almost the same Neither would affect my livelihood % Preferred State for Prices and Income (Households) CY 07 Manufacturing (large and medium-sized firms) Manufacturing (small and micro firms) Nonmanufacturing (large and medium-sized firms) Nonmanufacturing (small and micro firms) Not sure % Note: In the left-hand and lower right-hand charts, figures are from the Opinion Survey on the General Public's Views and Behavior (those in the lower right-hand chart are from the March 2024 survey). In the upper right-hand chart, figures are from the annex paper to the Regional Economic Report, "Results of the Survey regarding Corporate Behavior since the Mid-1990s." Source: Bank of Japan. Chart 9 Ⅱ. Price Developments and Structural Changes in the Labor Market Firms' Outlook for Output Prices 5.5 chg. from the current level, % 5.0 4.5 4.0 1 year ahead 3.5 5 years ahead 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 CY 14 Note: Based on the Tankan. Source: Bank of Japan. Chart 10 Ⅱ. Price Developments and Structural Changes in the Labor Market Labor Market 9,000 ten thous. persons ← Deflation → Projection 8,000 7,000 6,000 (1) Aged 15-64 (working-age population) (2) Employed persons 5,000 3,000 (1) - 2,000 Projection 1,000 -1,000 FY 70 Note: The projection for the working-age population is by the National Institute of Population and Social Security Research. The projection for the number of employed persons is calculated based on projections by the Japan Institute for Labour Policy and Training. Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research; Japan Institute for Labour Policy and Training. Chart 11 Ⅲ. The Bank's Conduct of Monetary Policy Plan for the Reduction of the Purchase Amount of JGBs The concept of the plan for the reduction until March 2026 1. Long-term interest rates: to be formed in financial markets in principle 2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets Reduction in a Predictable Manner Amount of monthly JGB purchases tril. yen (approximate amount) Interim assessment 5.7 5.3 The Bank's JGB holdings In principle, the Bank will reduce the planned amount of its monthly outright purchases of JGBs by about 400 billion yen each calendar quarter. 4.9 4.5 4.1 3.7 3.3 2.9 tril. yen Roughly a 7-8% decrease From April 2026 The Bank will discuss a guideline in the interim assessment and announce the results. Jul-24 Oct Jan-25 Apr Jul CY 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Oct Jan-26 Apr Allowing Enough Flexibility 1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM. 2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases. 3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary. Chart 12 Ⅲ. The Bank's Conduct of Monetary Policy Effects of the BOJ's JGB Purchases Sources of Changes in 10-Year JGB Yields Effects of a Decline in Interest Rates on the Output Gap, by Maturity 2.5 % -0.06 Effects of BOJ's JGB holdings Effects of setting the YCC range U.S. Treasury yields Other 10-year JGB yields 2.0 1.5 -0.05 -0.04 1.0 0.5 Larger impact of a decline in interest rates on the output gap -0.03 0.0 -0.02 -0.86% -0.5 -0.01 -1.0 -1.5 CY 05 elasticity 0.00 years Notes: 1. For details of the methodology, see Box 6 of the April 2024 Outlook Report. 2. For details of the methodology, see Appendix 8 in the Comprehensive Assessment released in September 2016. The chart shows the updated results in the April 2024 Outlook Report. Source: Bank of Japan, "Outlook for Economic Activity and Prices (April 2024)." Chart 13 Ⅲ. The Bank's Conduct of Monetary Policy Real Short-Term Interest Rate (1-Year) 1.5 Introduction of the negative Introduction of QQE interest rate policy % Termination of large-scale monetary easing Introduction of YCC 1.0 Real interest rate Policy interest rate 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 CY 10 Notes: 1. Figures for the policy interest rate are the target level (or the upper bound of the target range) of the uncollateralized overnight call rate, except for the period when this rate was not an operating target. For the period from the introduction of QQE to the introduction of the negative interest rate policy, figures are for the interest rate applied to excess reserves. For the period from the introduction of the negative interest rate policy to the termination of large-scale monetary easing, figures are for the interest rate applied to the Policy-Rate Balances. 2. Figures for the real interest rate are calculated as government bond yields (1-year) minus the composite index of inflation expectations (staff estimates). Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg. Chart 14 Ⅲ. The Bank's Conduct of Monetary Policy Consumer Prices and Import Prices CPI Import Price Index y/y % chg. y/y % chg. Yen basis CPI (less fresh food) Contract currency basis -1 -10 -2 CY 21 Sources: Ministry of Internal Affairs and Communications; Bank of Japan. -20 CY 21 Chart 15 Ⅳ. Recent and Future Economic Activity in Southern Hokkaido Economic Activity in Hakodate City Places to Visit rank Sightseeing Spots in Hakodate Hachiman-Zaka Slope Goryokaku Park Night View from Mt. Hakodate Hakodate City Sapporo City Kyoto City Otaru City CY 12 13 14 15 16 17 18 19 20 21 22 23 Note: In the left-hand chart, figures indicate the tourism attractiveness ranking by municipality in the Chiiki burando chōsa, a survey by the Brand Research Institute, Inc. Sources: Brand Research Institute, Inc.; Travel Hakodate.
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bank of japan
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Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Yamanashi, 28 August 2024.
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bank of japan
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Speech by Ms Junko Nakagawa, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Akita, 11 September 2024.
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Junko Nakagawa: Economic activity, prices, and monetary policy in Japan Speech by Ms Junko Nakagawa, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Akita, 11 September 2024. *** Figures accompanying the speech I. Current Situation of Economic Activity and Prices A. Current Economic Developments Abroad I would like to begin my speech by talking about the current situation of overseas economies (Chart 1). As for global business sentiment, the Purchasing Managers' Index (PMI) for the manufacturing industry, after exceeding 50 -- the break-even point between improvement and deterioration -- recently dropped slightly below 50, and has then been hovering around the 50 level, supported by a pick-up in IT-related demand, particularly in demand related to artificial intelligence. Business sentiment for the services industry has improved. The International Monetary Fund (IMF) projects that the global economy will grow at 3.2 percent for 2024 and 3.3 percent for 2025. Although the growth rate is not as high as pre-pandemic levels, the projection is broadly in line with the average growth rate since 1980. Let me briefly explain developments in major overseas economies. Overseas economies have grown moderately on the whole, while the pace of improvement differs to some extent across countries and regions as well as industries. The U.S. economy has grown moderately, mainly led by private consumption, although it has been affected by past policy interest rate hikes by the Federal Reserve. The Chinese economy has improved moderately, partly due to government support, despite the continued effects of real estate market conditions. Emerging and commodity-exporting economies other than China have improved moderately on the whole, as signs of a pick-up have been seen in exports. B. Current Economic Developments in Japan I will now turn to the current situation of Japan's economy. The Bank of Japan judges that the economy has recovered moderately, although some weakness has been seen in part. Exports and industrial production have been more or less flat, as the effects of the suspension of production and shipment at some automakers have been dissipating. In what follows, I would like to explain developments in Japan's economy from two aspects: the corporate sector and the household sector. 1. Corporate sector Let me start with the corporate sector (Chart 2). Corporate profits have improved. The Financial Statements Statistics of Corporations by Industry, Quarterly showed that current profits for all industries and enterprises for the April-June quarter of 2024 rose, reaching the highest level since the April-June quarter of 1985, from when comparable data are available. This mainly reflects progress in the pass-through of cost increases 1/7 BIS - Central bankers' speeches to prices and the increase in non-operating profits due to the yen's depreciation, as production and shipment at some automakers began to resume after the suspension. Business sentiment has stayed at a favorable level. The Bank's June 2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) showed that the diffusion index (DI) for business conditions has generally been maintained for both manufacturing and nonmanufacturing: firms have been increasingly passing on cost increases to prices and have benefited from an increase in profits brought about by the yen's depreciation, although they have faced not only a rise in raw material and input prices but also labor shortages, a rise in personnel expenses, and consumers' increased thriftiness owing to higher prices. With corporate profits improving, business fixed investment has continued on a moderate increasing trend, mainly led by digital- and labor saving-related investments at home (Chart 3). Construction investment has been flat recently, with some firms postponing their investment plans due to high construction material prices. That said, a leading indicator of such investment has been on an uptrend, partly due to the establishment of new factories and the extension of existing ones. In addition, construction of logistics facilities has been undertaken in response to the so-called 2024 problem, which refers to issues arising from a reduction in the statutory limit on annual overtime, and relatively large-scale urban redevelopment projects have been set in place. Under these circumstances, business fixed investment plans in the June Tankan indicated a year-on-year rate of increase of 10.8 percent for fiscal 2024, suggesting a high increase compared with past June surveys. Exports and industrial production have been more or less flat (Chart 4). Let us take a look at their latest developments. After having declined for the January-March quarter of 2024, affected mainly by the suspension of production and shipment at some automakers, exports and production have been increasing recently, as the effects of these suspensions have been dissipating. I will outline developments in real exports by region and by type of goods (Chart 5). By region, exports to the United States have been at relatively high levels, albeit with fluctuations. Those to Europe, particularly of automobiles and capital goods, decreased until recently, but automobile exports have recently been rebounding. Exports to China seem to have picked up moderately, but exports of semiconductor production equipment and other goods have recently been declining. Those to the NIEs, the ASEAN economies, and some other Asian economies have increased recently, with progress in global inventory adjustments for IT-related goods. By type of goods, exports of automobile-related goods have picked up, as the effects of the suspension of production and shipment at some automakers have been dissipating. Exports of capital goods have been more or less flat, after bottoming out. Exports of IT-related goods have been affected by the progress in inventory adjustments. Meanwhile, exports of intermediate goods, including chemicals, have been at relatively low levels, mainly reflecting firms' perception of excessive supply, primarily among Asian economies. 2. Household sector I now turn to the household sector, focusing on private consumption and the employment and income situation. Let us first look at private consumption (Chart 6). Consumer confidence indicators had continued to improve, reflecting expectations for an increase in income, but they have 2/7 BIS - Central bankers' speeches recently deteriorated somewhat, mainly reflecting an increase in consumers' thriftiness owing to higher prices and concern over future price rises. The Consumption Activity Index, which is calculated by combining various sales and supply-side statistics, has been resilient: although sales of food and clothes have been affected by high prices, automobile sales have picked up, sales of air conditioners have been favorable reflecting the extremely hot weather, and consumption of high-end goods by the wealthy has remained robust. The employment and income situation has improved moderately. After the pandemic, the number of employed persons, both regular and non-regular employees, has been on a moderate uptrend, albeit with fluctuations (Chart 7). The employment growth is led mainly by industries facing a severe labor shortage: the information and communications industry for regular employees, and industries such as wholesale and retail trade as well as face-to-face services for non-regular employees. There has been a clear increase in nominal wages, reflecting the results of this year's annual spring labor-management wage negotiations and an increase in special cash earnings. In particular, the year-on-year rate of change in real wages has turned positive recently, reflecting high growth in special cash earnings. Likewise, the rate of increase in scheduled cash earnings has continued to show high growth, due to a reflection of the results of the annual spring labor-management wage negotiations -- in which the rate of increase in base pay significantly exceeded last year's high rate -- and also due to last year's increase in the minimum wage. Meanwhile, potential additional labor supply -- i.e., the difference between the workingage population and the number of employed persons -- is likely to shrink (Chart 8). This is because of demographic changes and because labor force participation of women and seniors has already advanced to a high degree. Therefore, with labor market conditions becoming increasingly tight, wages will likely become more susceptible to upward pressure. To understand how much capacity firms have for raising wages, I would like to point to labor share, which shows the ratio of labor costs to value-added. Labor share is higher at small and medium-sized firms than at large firms, suggesting that their capacity for raising wages is limited. However, looking at wage growth at firms with a high labor share, even small and medium-sized firms tend to have a positive stance toward raising wages if they expect to raise selling prices. With a view to realizing a virtuous cycle between income and spending, I believe it is important to continue to pay careful attention as to whether improving profits, resulting from the passthrough of cost increases to prices, and sustained increases in wages, will spread to micro, small, and medium-sized firms. C. Current Price Developments in Japan Next, I would like to talk about prices in Japan (Chart 9). The year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food is above 2.5 percent. The year-on-year rate of change in the producer price index (PPI), adjusted for the effects of seasonal changes in electricity rates, has risen. This reflects firms' moves to pass on increases in raw material costs, personnel expenses, and other costs to prices, as well as a scaling back of the government's measures to reduce the household burden of higher electricity and gas charges. The year-on-year rate of increase in the services producer price index (SPPI) has remained relatively high recently at around 2.5-3.0 percent, mainly on the back of the rise in personnel expenses. The rate of increase in the CPI (all items less fresh food and energy, 3/7 BIS - Central bankers' speeches excluding the effects of temporary factors) has been on a decelerating trend on the whole. Specifically, with respect to general services prices, firms' moves to pass on personnel expenses have been widely observed; in contrast, particularly for goods prices, the pressure on firms to pass on raw material cost increases has waned. If we focus on factors affecting future price developments, possible upswings in the CPI, led by higher import prices, require attention (Chart 10). The rise in import prices to date could affect the CPI with a time lag, although commodity prices have declined and the excessive depreciation of the yen has subsided. As upward pressure on wages due to tight labor market conditions remains in overseas economies, inflation abroad could persist, exerting upward pressure on import prices. There are also uncertainties stemming from geopolitical risks. On this basis, as I will mention later, it is necessary to closely monitor how developments in financial and capital markets at home and abroad affect prices. II. Outlook for and Risks to Economic Activity and Prices A. Outlook I would like to turn to the outlook for Japan's economic activity and prices (Chart 11). As presented in the Outlook for Economic Activity and Prices (Outlook Report) decided by the Bank at the July 2024 Monetary Policy Meeting (MPM), the real GDP growth rate is projected to be 0.6 percent for fiscal 2024, and 1.0 percent for both fiscal 2025 and fiscal 2026, in terms of the median of the Policy Board members' forecasts. Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions. In the corporate sector, exports and production are likely to return to an uptrend, as overseas economies continue to grow moderately. In the household sector, employment is likely to continue rising during the course of economic recovery. However, as I mentioned earlier, since it becomes more difficult for labor supply to increase and labor market conditions tighten, wage growth will increase as a trend, which also reflects price rises. In this situation, for the time being, although private consumption is expected to be affected by the price rises, it is projected to increase moderately on the back of higher wage increases. Private consumption is also projected to be underpinned, for the time being, by government support measures, such as the continuation of measures to reduce the household burden of higher gasoline prices, emergency measures against higher electricity and gas charges, and cuts in income tax and inhabitant tax. In terms of the median of the Policy Board members' forecasts in the July 2024 Outlook Report, the year-on-year rate of change in the CPI (all items less fresh food) is projected to be 2.5 percent for fiscal 2024, 2.1 percent for fiscal 2025, and 1.9 percent for fiscal 2026. Likewise, the rate of change in the CPI (all items less fresh food and energy) is projected to be 1.9 percent for both fiscal 2024 and fiscal 2025, and 2.1 percent for fiscal 2026. 4/7 BIS - Central bankers' speeches While the effects of the pass-through to consumer prices of cost increases led by the past rise in import prices are expected to wane, the rate of increase in the CPI (all items less fresh food) is projected to be affected by factors such as the government's measures and the dissipation of their effects through fiscal 2025. Underlying CPI inflation is expected to increase gradually. This is because the output gap will improve as the economy recovers, and medium- to long-term inflation expectations will rise as the virtuous cycle between wages and prices intensifies. Then, in the second half of the projection period, underlying CPI inflation is likely to be around the 2 percent level, which is generally consistent with the price stability target. B. Risks As I have outlined, I believe that Japan's economy is likely to achieve a virtuous cycle between wages and prices, supported by high levels of corporate profits. Of course, the outlook for economic activity and prices that I mentioned entails a range of uncertainties. In what follows, I will describe three risk factors to the outlook that I am paying particular attention to. The first is upside risks to prices. I explained earlier that the impact of both the significant inflation that has occurred to date overseas and the higher import prices due to the yen's depreciation was expected to wane gradually. However, if the year-on-year rate of change in import prices turns positive again, due mainly to the factors I mentioned earlier, firms may become more aggressive in passing on cost increases to prices. Tight labor market conditions may also cause wages to rise, and the risk that wages and prices will rise beyond the price stability target warrants attention. The second is downside risks to overseas economies. Inflation rates in the United States and Europe, which were at high levels, have been steadily declining recently. However, there are uncertainties as to how the past policy interest rate hikes by overseas central banks will affect the real economy and financial activity over time. Moreover, at the beginning of August 2024, data suggesting a possible slowdown in the U.S. economy triggered market developments over concerns of a sharp economic downturn, or a hard landing. Attention is warranted over the risk of continued excessive movements and adjustments in financial markets -- stemming from these concerns over a slowdown in overseas economies -- exerting further downward pressure on overseas economies and eventually spreading to Japan's economy. The third risk is that delayed improvement in consumer sentiment will disrupt the virtuous cycle from income to spending. Households have so far been defensive about spending, mainly because the rate of increase in the price of everyday goods such as food and daily necessities has been relatively high and growth in real income has been negative. It is true that private consumption has shown resilience thanks to improvement in the income situation, with the year-on-year rate of change in real wages turning positive recently, together with firms' initiatives and the effects of various government measures. However, I believe it is still necessary to monitor this situation carefully, as the previous prolonged negative growth in real income may hamper future improvement in consumer sentiment. III. The Bank's Conduct of Monetary Policy 5/7 BIS - Central bankers' speeches Next, I would like to talk about the Bank's decisions made at the July 2024 MPM and share my views in this regard. The first point concerns the change in the Bank's guideline for money market operations (Chart 12). Specifically, the Bank decided to raise the target for its policy interest rate, the uncollateralized overnight call rate, from the previous level of "around 0 to 0.1 percent" to "around 0.25 percent." At the July MPM, the Bank assessed that, while Japan's economic activity and prices had been developing generally in line with its outlook presented in the Outlook Report, upside risks to prices required attention given that, for example, the year-on-year rate of change in import prices had recently turned positive again. In view of these circumstances, the Bank judged it appropriate to raise the policy interest rate and adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the 2 percent price stability target. Meanwhile, real interest rates are expected to remain significantly negative even after the change in the policy interest rate, and accommodative financial conditions will continue to firmly support Japan's economic activity. The second point concerns the plan for a reduction of the Bank's purchase amount of Japanese government bonds (JGBs) (Chart 13). With respect to the monthly JGB purchase amount -- which had been about 6 trillion yen per month -- the Bank decided on a plan to reduce the purchase amount by about 400 billion yen each calendar quarter in principle, to about 3 trillion yen in January-March 2026. The Bank considers that long-term interest rates are to be formed in financial markets in principle and finds it appropriate to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets. At the June 2025 MPM, the Bank will conduct an interim assessment of the plan for the reduction of its JGB purchases; in principle, it intends to maintain the current reduction plan, while it may modify the plan if deemed necessary after reviewing the developments in and functioning of the JGB markets. At that MPM, the Bank will also discuss a guideline for its JGB purchases from April 2026 and announce the results. In the case of a rapid rise in long-term interest rates, the Bank -- as it has done to date -- will make nimble responses by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations of JGBs, both of which can be done regardless of the monthly schedule of JGB purchases, in addition to conducting the Funds-Supplying Operations against Pooled Collateral. The Bank is also prepared to amend the reduction plan at MPMs, if deemed necessary. While the future conduct of monetary policy will depend on developments in economic activity and prices as well as financial conditions, given that real interest rates are at significantly low levels, if the Bank's outlook for economic activity and prices is realized, the Bank will adjust the degree of monetary accommodation with a view to achieving the price stability target of 2 percent in a sustainable and stable manner. Let me note market developments following the July 2024 MPM. U.S. employment statistics released in early August indicated a rise in the unemployment rate. Along with other factors, this triggered growing concerns over a slowdown in the U.S. economy, leading to a rapid weakening of the U.S. dollar and a decline in stock prices worldwide. I do not believe there have been significant changes in economic fundamentals in Japan since the July MPM, as seen in corporate profits being at historically high levels, 6/7 BIS - Central bankers' speeches as I mentioned earlier. However, I think it is necessary to look back at market developments in the wake of July's policy change when considering further adjustments to the degree of monetary accommodation. In the course of this consideration, the Bank should, as it has done to date, base its decisions on a careful assessment of how changes in financial markets are affecting the outlook for economic activity and prices -for example, how changes in market functioning and firms' fund-raising behavior are affecting the likelihood of realizing the outlook and the speed at which it is realized. Thank you. 7/7 BIS - Central bankers' speeches
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Speech by Mr Naoki Tamura, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Okayama, 12 September 2024.
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September 12, 2024 Bank of Japan Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Okayama TAMURA Naoki Member of the Policy Board (English translation based on the Japanese original) I. Economic Activity and Prices A. Economic Activity I will begin my speech by talking about economic activity in Japan. The Bank of Japan assesses that the economy has recovered moderately on the whole, although some weakness has been seen in part. In terms of the median of the Policy Board members' forecasts -- as presented in the July 2024 Outlook for Economic Activity and Prices (Outlook Report) -Japan's real GDP growth rate is expected to be at 0.6 percent for fiscal 2024, 1.0 percent for fiscal 2025, and 1.0 percent for fiscal 2026 (Chart 1). While the projected growth rate for fiscal 2024 appears to be low, this reflects the impact of the negative growth registered toward the end of fiscal 2023, partly due to the effects of a suspension of production and shipments at some automakers. That said, looking at the growth rates during the course of fiscal 2024 on a quarter-on-quarter basis suggests that Japan's economy is likely to achieve firm growth. Thereafter, the economy is projected to keep growing at a pace above its potential growth rate, as a virtuous cycle from income to spending gradually intensifies. Chart 1: The Bank's Forecasts for Real GDP s.a., ann., tril. yen FY 2026 +1.0% FY 2025 +1.0% FY 2024 +0.6% FY 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Note: Forecasts are medians of the Policy Board members' forecasts in the July 2024 Outlook Report. Real GDP values for fiscal 2024 onward are calculated by multiplying the actual figure for fiscal 2023 by all successive projected growth rates for each year. Sources: Cabinet Office; Bank of Japan. As background to what I just outlined, let me now explain developments in private consumption and business fixed investment in detail. First, private consumption as a whole has been resilient, although consumption of nondurable goods, such as food and clothes, has followed a decreasing trend in real terms after excluding price rises, amid households' defensive attitudes toward spending in reflection of high prices (Chart 2). As for these defensive attitudes, while some households have shifted toward less expensive products due to high prices, many of them appear to be selective in their consumption -- that is, they actively spend on products or services that meet their values and cut back other spending. Given that consumer behavior could have changed in response to the COVID-19 pandemic, I feel that the actual condition of private consumption may not be as weak as the statistics suggest. With respect to income, real wages have improved recently, although for some time nominal wage growth was not keeping up with inflation. Regarding the outlook, private consumption is projected to increase moderately, underpinned by an improvement in real wages. This is in view of the following: (1) the results of the annual spring labor-management wage negotiations this year revealed that the wage growth rate was significantly higher than the previous year, including among small and medium-sized firms and (2) anecdotal information from firms -- which was gathered through the Bank's Head Office and branches -- suggests that a wider range of firms have actually been raising wages, partly because they Chart 2: Private Consumption Consumption Activity Index Nominal Wages 110 s.a., CY 2019 = 100 6 y/y % chg. Nominal wages Total real private consumption Services Nondurable goods CY 19 CPI (less imputed rent) -2 -4 CY19 Notes: 1. In the left panel, figures for "total real private consumption" are for the real Consumption Activity Index and are based on Bank staff calculations. The figures exclude inbound tourism consumption and include outbound tourism consumption. 2. In the right panel, figures for "nominal wages" are based on continuing observations following the sample revisions. Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Bank of Japan. are feeling the need to retain and recruit human resources to address labor shortages (Chart 3). Moreover, the fact that a rapid and one-sided depreciation of the yen -- which had a negative impact on consumer sentiment -- has been corrected to a certain extent is expected to promote the moderate increase in private consumption. Chart 3: Results of the Annual Spring Labor-Management Wage Negotiations 6 y/y % chg. Actual regular wage increase Actual base pay increase CPI inflation -1 -2 CY 91 Notes: 1. Figures for "CPI inflation" are for all items less fresh food, excluding the effects of the consumption tax hikes. 2. Figures for "actual base pay increase" and "actual regular wage increase" from 1991 to 2014 are those published by the Central Labour Relations Commission, while those from 2015 to 2024 are figures released by the Japanese Trade Union Confederation (Rengo). Figures are based on the wage negotiation results of labor unions for which the base pay increase is clear. Sources: Central Labour Relations Commission; Ministry of Internal Affairs and Communications; Rengo. Next, I will turn to business fixed investment. On the back of favorable corporate profits on the whole, business fixed investment has been on a moderate increasing trend; as for the business fixed investment plans in the June 2024 Tankan (Short-Term Economic Survey of Enterprises in Japan), the reported rate for fiscal 2024 indicates a relatively high increase compared with past June Tankan surveys (Chart 4). Under such circumstances, the remaining orders for machinery and construction have stayed on an increasing trend, as there have been some cases where firms postponed fixed investment in response to labor shortages. Regarding the outlook, although the amount of business fixed investment could be pushed down due to these postponements, such investment is likely to follow a long-term uptrend. This is due to firm demand for fixed investment, such as investment to address labor shortages and digitalrelated investment, as well as investments associated with the green transformation and with strengthening supply chains. Chart 4: Business Fixed Investment Planned and Actual Investment Remaining Orders y/y % chg. 40 tril. yen Tankan (planned investment in current fiscal year as of the June survey of each year) Private nonresidential investment (SNA, nominal) Tankan (actual) tril. yen 30 Machinery (excluding orders for ships, left scale) Construction (right scale) -10 -20 FY08 CY19 Notes: 1. In the left panel, Tankan figures include software and R&D investments and exclude land purchasing expenses. Figures are for all industries including financial institutions. 2. In the left panel, the figure for "private nonresidential investment" for fiscal 2024 is for 2024/Q2. 3. In the right panel, figures for "construction" are based on a survey of 50 major construction companies. Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism; Bank of Japan. B. Price Developments Turning to Japan's price developments, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been lower than before, in the range of 2.53.0 percent recently; that for all items excluding fresh food and energy, for which prices fluctuate significantly, has been at around 2 percent (Chart 5). The contribution of goods Chart 5: Consumer Prices 5 y/y % chg. Energy Food Goods (less food) Services CPI (less fresh food) CPI (less fresh food and energy) -1 -2 CY19 Source: Ministry of Internal Affairs and Communications. prices to the rate of increase in the CPI has been declining due to the waning effects of a passthrough to consumer prices of cost increases led by the past rise in import prices. On the other hand, the CPI has been pushed up by increases in services prices resulting from the passthrough of higher personnel expenses to consumer prices. In terms of the median of the Policy Board members' forecasts, the CPI (all items less fresh food) is projected to continue to see a year-on-year rate of increase of around 2 percent -specifically, 2.5 percent for fiscal 2024, 2.1 percent for fiscal 2025, and 1.9 percent for fiscal 2026 (Chart 6). Although there could be an upward or downward deviation in CPI figures, price developments have been on track to achieve the price stability target. The Bank therefore assesses that the likelihood of realizing this target has continued to rise. Chart 6: The Bank's Forecasts for the CPI Notes: 1. Figures are the CPI for all items less fresh food, excluding the effects of the consumption tax hikes. 2. The locations of , △, and ▼ in the chart indicate figures for each Policy Board member's forecasts. The risk balance assessed by each Policy Board member is shown by the following shapes: indicates that a member assesses "upside and downside risks as being generally balanced," △ indicates that a member assesses "risks are skewed to the upside," and ▼ indicates that a member assesses "risks are skewed to the downside." The dotted lines show the medians of the Policy Board members' forecasts presented in the July 2024 Outlook Report. Sources: Ministry of Internal Affairs and Communications; Bank of Japan. Regarding the outlook for prices, I am concerned that risks are possibly becoming more skewed to the upside. The first risk concerns the impact of labor shortages. The June Tankan suggests that firms perceive labor shortages to be at substantially high levels (Chart 7). My impression is that such shortages have become supply-side constraints, thereby causing some industries to face short supply and excess demand. For example, the hotel industry inevitably has to limit occupancy rates while the taxi industry has been suffering from a shortage of drivers. Furthermore, some manufacturing firms have been unable to operate at full capacity due to labor shortages. Such a situation could cause prices to deviate upward from the baseline scenario. Second, firms could make further progress than anticipated in passing on increased personnel expenses to selling prices, in a situation where wage growth is expected to be higher than the previous year. That said, firms, especially small and medium-sized firms, have continued to report that it has been difficult to pass on their employees' higher wages to selling prices. Third, import prices, which had once settled down, have been on an uptrend again, partly because the yen has depreciated from the beginning of this year, despite being corrected to a certain extent recently. In terms of passing on higher import prices, the cost pass-through rate -- which shows the extent to which firms pass on cost increases to product prices -- has been on the rise in recent years. Thus, the uptrend in import prices could have a greater impact on the CPI than before. Chart 7: Firms' Perception of Labor and Production Capacity Shortages (Tankan) -40 inverted, DI ("excessive" - "insufficient"), % points -30 -20 -10 CY 07 Employment conditions DI Production capacity DI Note: Figures are for all industries and enterprises. Source: Bank of Japan. II. Conduct of Monetary Policy A. July 2024 Monetary Policy Meeting (MPM) Now, I would like to turn to the Bank's conduct of monetary policy. The Bank conducts monetary policy with the aim of achieving the price stability target of 2 percent in a sustainable and stable manner. Since the changes in the monetary policy framework made in March 2024, it has regarded guiding the short-term interest rate as a primary policy tool. While the Bank intends to adjust the degree of monetary accommodation in response to an increase in the likelihood of achieving the price stability target, it decided at the July MPM to raise the target level of its short-term policy interest rate by 0.15 percentage points, to around 0.25 percent (Chart 8). Chart 8: Change in the Guideline for Money Market Operations (July 2024) Japan's economic activity and prices have been developing generally in line with the Bank's outlook. Moves to raise wages have been spreading. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention. Medians of the Policy Board members' forecasts (y/y % chg.) Fiscal 2024 Fiscal 2025 Fiscal 2026 Real GDP 0.6 (-0.2) 1.0 (—) 1.0 (—) CPI (all items less fresh food) 2.5 (-0.3) 2.1 (+0.2) 1.9 (—) 1.9 (—) 1.9 (—) 2.1 (—) CPI (all items less fresh food and energy) Risk balance assessments on prices Fiscal Fiscal Fiscal Upside Upside Balanced Note: Figures in parentheses indicate changes from the April Outlook Report. Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent Short-term interest rate: raised to "around 0.25%" (uncollateralized overnight call rate) (previously "around 0 to 0.1%") Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity. If the outlook presented in the July Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation. The Bank also decided on a plan for the reduction of its purchase amount of Japanese government bonds (JGBs) covering the period until March 2026, aimed at enhancing the predictability of its future JGB purchases and allowing long-term interest rates to be determined by the market (Chart 9). It should be noted, however, that the Bank has continued with JGB purchases to avoid bringing about discontinuous changes from the large-scale monetary easing conducted in the past, and not as an active monetary policy tool. Going into the details of the plan, the Bank intends to gradually reduce the amount of its monthly outright purchases of JGBs -- which amounted to about 6 trillion yen up until the July 2024 MPM -7 Chart 9: Plan for the Reduction of the Purchase Amount of JGBs (July 2024) The concept of the plan for the reduction until March 2026 1. Long-term interest rates: to be formed in financial markets in principle 2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets Reduction in a Predictable Manner Amount of monthly JGB purchases tril. yen (approximate amount) Interim assessment 5.7 5.3 4.9 4.5 4.1 3.7 3.3 The Bank's JGB holdings In principle, the Bank will reduce the planned amount of its monthly outright purchases of JGBs by about 400 billion yen each calendar quarter. 2.9 Jul-24 Oct Jan-25 Apr Jul Oct Roughly a 7-8% decrease From April 2026 The Bank will discuss a guideline in the interim assessment and announce the results. tril. yen CY 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Jan-26 Apr Allowing Enough Flexibility 1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM. 2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases. 3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary. to about 3 trillion yen over a period of around a year and a half. Moreover, with a view to allowing a certain degree of flexibility in the plan, the Bank's decisions included the following: (1) it would conduct an interim assessment of the plan in June 2025 and (2) in the case of a rapid rise in long-term interest rates, would make nimble responses by, for example, increasing the amount of JGB purchases regardless of the monthly schedule of such purchases. While the amount outstanding of the Bank's JGB holdings stands close to 600 trillion yen, the amount in terms of the ratio to nominal GDP is larger by far relative to the United States and Europe (Chart 10). Since JGBs are redeemed at maturity, reducing the purchase amount so that it falls below the redemption amount would lower the amount outstanding of the Bank's JGB holdings. Reducing the purchase amount at the pace decided at the July MPM, however, will require considerable time for the Bank to normalize its balance sheet -- that is, to reduce the amount outstanding of its JGB holdings to a level where further reductions are no longer necessary. That said, it is appropriate for the Bank to set the pace of reduction at this level to proceed with the reduction without causing market disruption. The degree of JGB market functioning has stayed low, albeit having improved, and such side effects of the Bank's large amount of JGB holdings will likely remain for some time in the process of normalizing the balance sheet (Chart 11). Chart 10: Government Bond Holdings of Major Central Banks ratio to nominal GDP, % BOJ FRB ECB CY10 Sources: Cabinet Office; Eurostat; Federal Reserve Board; U.S. Bureau of Economic Analysis; Bank of Japan. Chart 11: Degree of Bond Market Functioning DI, % points DI, % points -20 -10 -40 -20 -60 -80 CY15 Degree of bond market functioning (current situation, left scale) Bid-ask spread (current situation, left scale) Lot size (current situation, right scale) -30 -40 Notes: 1. The DIs for "degree of bond market functioning," "bid-ask spread," and "lot size" are calculated as "high" - "low," "tight" - "wide," and "large" - "small," respectively. 2. The survey from February 2018 onward includes responses from major insurance companies, asset management companies, etc., in addition to those from eligible institutions for the Bank's outright purchases and sales of JGBs. Regarding the figures for February 2018, the reference data, which are based on responses only from eligible institutions for the Bank's outright purchases and sales of JGBs, are also indicated. Source: Bank of Japan. In my view, the Bank's future policy conduct will be crucial to normalizing large-scale monetary easing, and there is still a long way to go. Moreover, I have come to recognize once again the need for the Bank to carefully examine the balance between the positive effects and costs of quantitative monetary easing -- should the situation require reconsideration of such a policy measure in the future -- as well as the steps toward an exit I discussed earlier. B. Conduct of Monetary Policy over the Projection Period Let me return to the guiding of the short-term interest rate as a primary policy tool. Underlying CPI inflation is expected to increase gradually; in the second half of the projection period presented in the July Outlook Report -- which covers the period through fiscal 2026 -- it is likely to be at a level that is generally consistent with the price stability target. If this outlook is realized, I think it will be necessary for the Bank to raise the short-term policy interest rate to a level that is neutral to economic activity and prices -- i.e., the nominal neutral interest rate -- by the second half of the projection period that runs through fiscal 2026. The reason is that, if the short-term interest rate stays below the level that is neutral to economic activity and prices, this will push up inflation higher than necessary. Conceptually, the neutral interest rate is the sum of the natural rate of interest -- which is the real interest rate level that is neutral to economic activity and prices -- and the expected rate of inflation. That said, the natural rate of interest is not directly observable, and estimates of it vary widely depending on the estimation method employed (Chart 12). The real interest rate -- calculated as the nominal interest rate minus the expected rate of inflation -- has been Chart 12: Natural Rate of Interest and Real Interest Rate Estimates of the Natural Rate of Interest Real Interest Rate (1-Year) 1.5 % 1.5 % 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 Real interest rate -1.0 -1.0 Holston, Laubach, Williams Nakajima et al. Imakubo, Kojima, Nakajima Okazaki, Sudo Del Negro et al. Goy, Iwasaki -1.5 -2.0 -2.5 CY 10 Nominal interest rate -1.5 -2.0 -2.5 CY10 Notes: 1. In the left panel, natural interest rate estimates are based on Bank staff calculations using models proposed in the respective papers. The shaded area indicates the range of natural interest rate estimates from the minimum to the maximum. 2. In the right panel, the real interest rate is calculated as government bond yields minus the composite index of inflation expectations (Bank staff estimates). Sources: Bloomberg; Cabinet Office; Consensus Economics Inc., Consensus Forecasts; Ministry of Finance; Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; QUICK, QUICK Monthly Market Survey <Bonds>; Bank of Japan. clearly negative, falling below all estimates of the natural rate of interest. This implies that the current short-term interest rate level provides accommodative financial conditions; in other words, it is at a level that will push up economic activity and prices. My sense is that the neutral interest rate would be at least around 1 percent. Therefore, I think it is necessary for the Bank to raise the short-term interest rate to at least that level by the second half of the projection period that runs through fiscal 2026 to contain upside risks to prices and achieve the price stability target in a sustainable and stable manner. However, how economic agents in Japan, which has long experienced a state without meaningful interest rates, react to interest rates is an issue that warrants careful attention without any preconceptions. Thus, bearing in mind that the short-term interest rate should be at the 1 percent level by the second half of the projection period that runs through fiscal 2026, I think the Bank needs to gradually raise this rate in response to the increase in the likelihood of achieving the price stability target. While doing so, it also needs to determine the appropriate level of the short-term interest rate by paying attention to how the economy and prices respond to the rate hikes. Stock prices in Japan and foreign exchange rates saw large fluctuations at the beginning of August. While this was likely due to a depreciation of the U.S. dollar and a fall in stock prices on a global scale, triggered by concerns over a slowdown in the U.S. economy reflecting weak economic indicators, some have associated the fluctuations with the Bank's monetary policy. Some have argued that the policy revision made at the end of July was a step taken too early, while some have argued it was a step too late. Taking a brief look back on monetary policy, since April, the Bank has been consistent with its intention that, if the outlook for economic activity and prices is realized, it will adjust the degree of monetary accommodation. However, I believe it is important for the Bank to take stock -- even if only in retrospect -- of whether this intention was adequately conveyed to the market and whether there was a more appropriate way for the Bank to respond to market reactions, and thereby continuously seek to improve its communication with the market. I also think the Bank needs to continue to keep a close watch on developments in financial and capital markets and their impact on economic activity and prices. The market currently expects the pace of short-term interest rate hikes to be moderate (Chart 13). Of course, the pace of the Bank's rate hikes could only be at this level depending on developments in economic activity and prices. If the Bank does raise the short-term interest rate at this pace, however, the rate will likely not reach the neutral interest rate by the second half of the projection period. In addition, the possibility that this could further heighten upside risks to prices, which are of concern, or result in the Bank having to conduct rapid interest rate hikes at a later stage, cannot be ruled out. To avoid such risks, I think the Bank needs to raise the policy interest rate in a timely and gradual manner, while giving due consideration to developments in financial markets as well as paying attention to how the economy and prices respond. Chart 13: Market Expectations for the Bank's Policy Interest Rate 2.0 % Underlying CPI inflation is likely to be at a level that is generally consistent with the price stability target. 1.5 Second half of projection period 1.0 0.5 0.0 present [Dec-24] [Mar-25] [Jun-25] [Sep-25] [Mar-26] [Sep-26] months 36 ahead [Sep-27] Notes: 1. The figure for the present is the 3-month yen OIS rate. Figures for 3, 6, and 9 months ahead are 3-month forward rates, those for 12 and 18 months ahead are 6-month forward rates, and those for 24 and 36 months ahead are 12-month forward rates, all calculated from the yen OIS rates. Figures are as of September 5, 2024. 2. The projection period is from fiscal 2024 to fiscal 2026. Source: Bloomberg. I would also like to consider the impact on various economic agents of raising the short-term interest rate. Roughly speaking, since net borrowers pay interest and net savers receive interest, raising the short-term interest rate increases the burden on net borrowers and increases interest income for net savers. Therefore, the impact of raising the short-term interest rate differs depending on, for example, whether a household has a housing loan and whether a firm has borrowings or has savings in excess of its borrowings. Furthermore, I think it is necessary to pay attention both to the channels through which short-term interest rate hikes affect economic activity and to the changes in the economic and price situation that led to the rate hikes, in addition to interest rate developments. For example, looking at household savings and liabilities by age group of the household head, households in their 40s or younger have larger liabilities, while those in their 50s or older have larger savings (Chart 14). Thus, disregarding various assumptions, interest rate hikes, on average, tend to increase the burden on households in their 40s or younger and be more beneficial for those in their 50s or older. When considering the impact of interest rate hikes, however, it is also necessary to take into account the fact that (1) the extent to which shortterm interest rate hikes are reflected in mortgage rates depends on the decisions of the lending financial institutions and, in many cases, a mechanism is in place to prevent sudden increases in monthly loan repayments and (2) many households with a housing loan are working households, some of which benefit from wage increases. Chart 14: Household Savings and Liabilities 30 mil. yen Savings Liabilities Average Less than 40-49 50-59 60-69 70 years 40 years years old years old years old old and old over Note: Figures are 2023 averages for two-or-more-person households. Source: Ministry of Internal Affairs and Communications. Households in their 50s or older have significant net savings, and their interest income is expected to increase in line with a rise in deposit interest rates -- although the extent of the rise will depend on the decisions of financial institutions. Moreover, an increase in stable interest income is highly likely to improve the sentiment of households that have been reluctant to withdraw the principal of their deposits, preferring to save up for retirement. Turning to the corporate sector, while firms have long been net savers on a flow basis, reducing borrowings and accumulating funds on hand, the proportion of debt-free or de facto debt-free firms -- defined as firms whose cash and deposits exceed their total amount of borrowings -- has been increasing (Chart 15). Hence, the corporate sector is likely to be more resilient to the impact of short-term interest rate hikes than in the past. In addition, solid corporate profits are expected to mitigate the effects of higher interest payments if the outlook for Japan's economy mentioned earlier is realized -- namely, that the economy will grow at a pace above its potential growth rate, as a virtuous cycle from income to spending gradually intensifies. Furthermore, on a different note, if interest rates rise and function effectively as a hurdle rate, firms, to survive, will be pressured to concentrate their business resources in areas that earn enough profits to cover the interest cost -- in other words, businesses with high added value. 1 Consequently, this is expected to stimulate business metabolism and raise productivity. Chart 15: Firms' Financial Condition Savings-Investment Balance 80 tril. yen Number of Firms 6 mil. firms Excess savings Excess borrowings De facto debt-free Debt-free Number of firms -20 -40 -60 -80 FY 90 Firms Households Government CY 90 Notes: 1. In the left panel, figures are based on the Flow of Funds Accounts. 2. In the right panel, figures show the number of privately owned establishments from the Economic Census for Business Frame and the Economic Census for Business Activity (Establishment and Enterprise Census up to 2006, interpolated for years with no data), decomposed using the shares of each group based on data from Teikoku Databank. Figures cover privately owned establishments (single-unit establishments and head offices). Sources: Ministry of Internal Affairs and Communications; Small and Medium Enterprise Agency; Teikoku Databank; Bank of Japan. Regarding the hurdle rate function of interest rates, see Tamura, N., "Economic Activity, Prices, and Monetary Policy in Japan," speech at a meeting with local leaders in Aomori, March 27, 2024, https://www.boj.or.jp/en/about/press/koen_2024/ko240403a.htm. Interest rate hikes will also have an impact on the government. Speaking in general terms, it is important to steadily ensure the market credibility of fiscal management. The Bank will continue to attentively assess the impact of changes in the policy interest rate, including the effects described earlier, and conduct monetary policy as appropriate, in response to developments in economic activity and prices as well as financial conditions. Thank you.
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Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at a meeting with business leaders, Osaka, 24 September 2024.
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September 24, 2024 Bank of Japan Japan's Economy and Monetary Policy Speech at a Meeting with Business Leaders in Osaka UEDA Kazuo Governor of the Bank of Japan (English translation based on the Japanese original) Introduction It is my great pleasure to have the opportunity today to exchange views with a distinguished gathering of business leaders in the Kansai region. I would like to take this chance to express my sincerest gratitude for your cooperation with the activities of the Bank of Japan's branches in Osaka, Kobe, and Kyoto. I look forward to hearing your candid opinions, which will be useful in the Bank's policy decisions and business operations. Before hearing from you, I would like to talk about developments in Japan's economic activity and prices and explain the Bank's thinking on the conduct of monetary policy. I. Economic Activity and Prices Current Situation of and Outlook for Economic Activity Let me start by talking about the current situation of and outlook for economic activity in Japan. As shown in Chart 1, real GDP for the April-June quarter of 2024 increased clearly. The Bank assesses that the economy has recovered moderately, although some weakness has been seen in part, and expects that it will continue to recover moderately. Looking at the corporate sector, business sentiment has stayed at a favorable level and corporate profits have continued to increase. As shown in Chart 2, while the improvement in corporate profits is particularly notable among large manufacturers, which have benefited from the weaker yen, corporate profits in the nonmanufacturing industry also have been on an increasing trend, including at small and medium-sized firms. Against this background, firms have indicated that they are planning to maintain strong business fixed investment. Specifically, they have planned medium- to long-term investment projects, including projects related to digitalization and vehicle electrification, projects to address climate change, and projects associated with urban redevelopment. In addition, firms have made business fixed investments in response to factors such as the increase in inbound tourism, and have increased labor-saving investment given the ongoing labor shortages. Thus, the Bank expects the virtuous cycle in the corporate sector to continue, in which high levels of profits lead to increased business fixed investment. Turning to the household sector, Chart 3 shows that private consumption, particularly of services, has been on a moderate uptrend, although price rises have affected consumption of nondurable goods, such as food products and daily necessities, for which price hikes have been especially large. Against this backdrop, looking at nominal wages in Chart 4, scheduled cash earnings have risen at a higher rate, reflecting the outcome of the annual spring labor-management wage negotiations, and summer bonuses have increased firmly in response to firms' strong business performance last year. Moreover, the government's cuts in income tax and inhabitant tax as well as emergency measures against higher electricity and gas charges, for example, have pushed up households' disposable income in real terms. Although private consumption is expected to be affected in the short run by factors including the natural disasters that occurred this summer, it is likely to increase moderately with rising income. Of course, there are a variety of both upside and downside risks to this baseline scenario. Here, I would like to highlight two. The first is developments in overseas economies, especially the U.S. economy, and their impact on financial and foreign exchange markets. As shown in Chart 5, while the policy interest rate in the United States has remained high at over 5 percent, the economy has nevertheless generally been solid, led by private consumption. Recently, inflation has been declining as labor market conditions have eased, and last week the Federal Reserve decided to cut its policy rate. If the Federal Reserve's decision leads to a soft landing for the U.S. economy, in which the inflation rate declines toward 2 percent while a significant slowdown in the economy is avoided, this will likely have a positive impact on Japan's economy. However, uncertainty remains about the future course of the U.S. economy. In particular, there is uncertainty regarding how the earlier policy rate hikes and other factors will affect the labor market, and it is necessary to closely examine the impact of easing labor market conditions on private consumption. The Bank of Japan will continue to closely monitor how future developments in the U.S. economy and developments in financial and capital markets in Japan and abroad will affect Japan's economic activity and prices. The second risk concerns the outlook for private consumption. As I mentioned earlier, a precondition for the scenario in which private consumption rises moderately is that wages continue to show solid growth and household income increases. I will discuss this point later, along with the outlook for prices. Current Situation of and Outlook for Prices Let me now turn to developments in prices. As shown in Chart 6, the year-on-year rate of change in the consumer price index (CPI) for all items excluding fresh food was 2.8 percent in August 2024. A breakdown of the year-on-year rate of change in the CPI shows that the rates of increase in the prices of food products and of other goods, which had been pushing up overall prices substantially until last year, have declined. This is because cost-push pressure from the rise in import prices after the pandemic has eased. On the other hand, prices of services, in which labor costs account for a large share of costs, have continued on a moderate uptrend. A more detailed look at developments in services prices by item, as depicted in Chart 7, clearly shows that the impact of wage increases has intensified. That is, while notably large price increases were seen last year for items such as dining-out due to the impact of higher import prices, prices for items with a high labor cost share did not rise much. In contrast, recently, price increases of around 2 percent can be observed for a wide range of items. These goods- and services-level price developments suggest that the reason for price increases has shifted from the rise in import prices to wage increases that reflect continued improvement in economic activity. Under these circumstances, the trend in inflation excluding short-term fluctuations, which the Bank calls underlying inflation, is gradually rising toward 2 percent. This is confirmed by the various estimates of underlying inflation shown in Chart 8. Looking ahead, underlying inflation is likely to continue rising and in the second half of the projection period through fiscal 2026 to be at a level that is generally consistent with the price stability target of 2 percent. This projection is based on the assumption that the changes in firms' wage- and price-setting behavior that have been underway for the past several years will take hold in society and that wage increases will continue into the next fiscal year and beyond. Meanwhile, the macroeconomic environment that has supported wage increases to date, such as labor shortages and favorable corporate profits, has remained in place. Please take a look at Chart 9. Labor market developments show that the room for further increases in labor supply is becoming limited, partly reflecting demographic developments, so that the structural shortage of labor is likely to intensify. Moreover, as I mentioned earlier, corporate profits have been favorable, and although labor costs have increased, the labor share has in fact fallen to a level not seen since the first half of the 1990s. However, it is necessary to carefully examine whether developments in overseas economies and other factors will have an impact on Japan's corporate profits and corporate behavior. In addition, attention is warranted on the fact that even if the corporate sector as a whole is performing well, the business environment faced by individual firms varies amid the substantial changes in economic activity and prices. The Bank will continue to closely monitor whether sustained wage hikes and their pass-through to selling prices will be achieved in a wide range of firms and whether the linkage between wages and prices will strengthen steadily. II. The Bank's Conduct of Monetary Policy July 2024 Monetary Policy Meeting Next, I will talk about the Bank's conduct of monetary policy. At the July 2024 Monetary Policy Meeting (MPM), the Bank decided on a plan for the reduction of its purchase amount of Japanese government bonds (JGBs) and changed the policy interest rate. I will first briefly explain the background to these decisions. Please take a look at Chart 10. Let me start with the plan for the reduction of the purchase amount of JGBs. The Bank had already decided at the June MPM that it would reduce its purchase amount of JGBs, based on the understanding that, in principle, long-term interest rates are to be formed in financial markets. After carefully collecting views from market participants, at the July MPM, the Bank decided on a detailed plan for the reduction. Going forward, it will reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets. Let me move on to Chart 11. The Bank raised the policy interest rate by around 0.15 percent, deciding to "encourage the uncollateralized overnight call rate to remain at around 0.25 percent." This decision was based on the aforementioned assessment that Japan's economic activity and prices had been generally in line with the Bank's outlook and that underlying inflation had risen moderately. In addition, the Bank took into account that import prices had risen again, reflecting the yen's depreciation since the beginning of this year, and that this had posed an upside risk to prices. In this situation, the Bank judged it appropriate to raise the policy interest rate and adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent. Market Developments since August and Future Conduct of Monetary Policy After the turn of August, the U.S. dollar weakened and stock prices declined worldwide, triggered by a growing concern over a slowdown in the U.S. economy. The U.S. dollar-yen exchange rates exhibited more volatility, since large positions that had been built up on a weaker yen were unwound, partly due to the Bank of Japan's policy change. Stock prices in Japan declined significantly for a time compared to other economies. I am aware of the criticism that one of the reasons for such large market fluctuations in August is that the Bank's thinking on the conduct of monetary policy was not shared widely enough with the public. The Bank has explained its basic thinking on policy conduct through, for example, the Outlook for Economic Activity and Prices (Outlook Report), speeches, and press conferences, and will continue to provide detailed explanation and communicate carefully to the public. I will take this opportunity today to describe two points regarding the future conduct of monetary policy, taking account of the change in situation since August. The first is the Bank's basic thinking on the conduct of monetary policy. The Bank considers that, if underlying inflation rises in line with its outlook, it will be appropriate to accordingly raise the policy interest rate and adjust the degree of monetary accommodation. The real interest rate, that is, the nominal interest rate minus the expected rate of inflation, has been significantly negative even after the policy interest rate hike in July, and it is likely that this will keep stimulating economic activity and pushing up the inflation rate. In the phase where underlying inflation is around 2 percent, it will become less necessary to further push up inflation, and thus it will be desirable to bring the policy interest rate closer to the level that is neutral to economic activity and prices. In other words, if the outlook for economic activity and prices presented in the Outlook Report is realized, the Bank will accordingly raise the policy interest rate. The second point concerns the actual conduct of monetary policy based on this basic thinking. Given the high uncertainties surrounding economic activity and prices, unexpected situations may occur. Actual policy needs to be conducted in a timely and appropriate manner while taking account of various uncertainties, rather than based on a fixed schedule set in advance. In the current situation, the Bank needs to monitor with utmost vigilance developments in overseas economies, particularly the U.S. economy, and those in financial and capital markets, which have remained unstable. It also needs to carefully examine how these developments will affect the outlook for Japan's economic activity and prices, risks surrounding them, and the likelihood of realizing the outlook. Moreover, since Japan has remained under a low interest rate environment for an extended period of time, it is important for the Bank to strive to examine how economic activity and prices will respond to interest rate hikes. Meanwhile, the yen's one-sided depreciation has been retraced since August and the rise in import prices has slowed recently. Accordingly, the upside risk to prices reflecting higher import prices has become smaller. In making policy decisions, the Bank will need to carefully assess factors such as developments in financial and capital markets at home and abroad and the situation in overseas economies underlying these developments. We have enough time to do so. Achieving price stability through appropriate policy conduct is the basis for sustainable economic growth. Last year at this meeting, I stated that "achieving the virtuous cycle between wages and prices could be significantly beneficial both for individual firms and the overall economy." I am more convinced of this, given that the results of extensive surveys among firms indicated that many preferred a situation in which wages and prices rise moderately to a deflationary period in which neither rise. Japan's economy must avoid returning to deflation. On the other hand, looking back at the history of Japan and overseas, it is clear that when high inflation takes hold in society or inflation accelerates, this has a negative effect on economic activity. The Bank will conduct monetary policy as appropriate, aiming to achieve the price stability target of 2 percent in a sustainable and stable manner, while taking account of upside and downside risks to economic activity and prices, and I believe that this stance will bring about positive effects on the national economy as a whole. Concluding Remarks Today, I have talked about economic and price developments and the Bank's conduct of monetary policy. I would like to conclude my speech by touching on the review of monetary policy from a broad perspective, which began last year. Through the review, the Bank aims to deepen its understanding on various unconventional monetary policy measures it has adopted since the late 1990s and to gain insights that will be useful for future policy conduct. In proceeding with this review, the Bank has incorporated diverse expertise and has made a particular effort in enhancing the review's objectivity and transparency by gathering views from professionals in each field, including at this meeting last year. Currently, the Bank is compiling the findings from the initiatives just mentioned and internal analyses. It plans to publish the results by the end of the year after the discussions at the MPMs. I believe that the process of objectively looking back on the past has allowed us to better understand why it is taking considerable time to achieve price stability, as well as the positive effects and side effects of unconventional monetary policy. The results of the review are not supposed to affect the Bank's conduct of monetary policy in the near term, but from a somewhat long-term perspective, they are expected to provide valuable inputs that will allow us to gain deeper insight into monetary policy. Thank you very much for your attention. Japan's Economy and Monetary Policy Speech at a Meeting with Business Leaders in Osaka September 24, 2024 UEDA Kazuo Governor of the Bank of Japan Introduction I. Economic Activity and Prices II. The Bank's Conduct of Monetary Policy Concluding Remarks Chart 1 I. Economic Activity and Prices Real GDP s.a., ann., tril. yen FY 13 Source: Cabinet Office. Chart 2 I. Economic Activity and Prices Corporate Sector Business Fixed Investment Current Profits Manufacturing Non-manufacturing s.a., tril. yen Large firms 10 s.a., tril. yen y/y % chg. Planned investment in the June 2024 survey :+10.8% Small and medium-sized firms -5 -10 -15 Large firms Small and medium-sized firms CY10 24 CY10 -20 FY 08 10 12 14 16 18 20 22 24 Notes: 1. Figures for current profits are based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude "finance and insurance" and pure holding companies. 2. In the right-hand chart, figures are based on the Tankan, including software and R&D investments and excluding land purchasing expenses. R&D investment is not included before the March 2017 survey. Figures are for all industries including financial institutions. Sources: Ministry of Finance; Bank of Japan. Chart 3 I. Economic Activity and Prices Household Sector Real Private Consumption s.a., CY 2019 = 100 Total real private consumption Of which, services (travel, dining-out, etc.) Of which, nondurable goods (food products, clothes, daily necessities, etc.) CY 19 Note: Figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound tourism consumption and include outbound tourism consumption. Source: Bank of Japan. Chart 4 I. Economic Activity and Prices Nominal Wages y/y % chg. Scheduled cash earnings of full-time employees -1 CY 19 Note: Figures are based on continuing observations following the sample revisions. Source: Ministry of Health, Labour and Welfare. Chart 5 I. Economic Activity and Prices U.S. Economy Employment and Prices Policy Interest Rate % y/y % chg. % Target range for the federal funds rate Unemployment rate (left scale) CPI (all items, right scale) CY 19 CY 19 Sources: Bloomberg; Haver. Chart 6 I. Economic Activity and Prices Price Developments CPI y/y % chg. Energy Food products Goods (less food products) Aug. 2024 Services +2.8% CPI (less fresh food) +2.0% CPI (less fresh food and energy) -1 -2 CY 19 Source: Ministry of Internal Affairs and Communications. Chart 7 I. Economic Activity and Prices Developments in Services Prices Price Change Distribution of General Services 2. April 2024 1. April 2023 share of the number of items, % share of the number of items, % Low labor cost ratio Low labor cost ratio High labor cost ratio High labor cost ratio -2 or less -2 or less or more y/y % chg. or more y/y % chg. Notes: 1. Figures show the CPI for general services (less housing rent). Figures are staff estimates and exclude the effects of policies concerning the provision of free education and the effects of travel subsidy programs. 2. CPI items are matched to the items in the 2015 Input-Output Tables for Japan and grouped in terms of the share of "wages and salaries" and other labor costs in the domestic output of those items. Figures for items with a high (low) labor cost ratio are for items that fall into the top (bottom) 50 percent in general services (less housing rent). Source: Ministry of Internal Affairs and Communications. Chart 8 I. Economic Activity and Prices Developments in Underlying Inflation 1. Low-Volatility Items and Trend Component for Services (Reference) CPI y/y % chg. 2. Inflation Expectations CPI (less fresh food) 4 % 4 % CPI (low-volatility items) Trend component of the CPI for services Scheduled cash earnings of full-time employees -1 CY 12 Sub-index for households Sub-index for firms Sub-index for economists and market participants -1 CY 12 Composite index of inflation expectations (10-year ahead） -1 CY 12 Notes: 1. In the left-hand chart, figures are staff estimates and exclude mobile phone charges and the effects of the consumption tax hikes, policies concerning the provision of free education, and travel subsidy programs. 2. For details of the approaches on which the middle and right-hand charts are based, see Box 4 of the April 2024 Outlook Report. In the middle chart, figures for scheduled cash earnings of full-time employees from 2016 onward are based on continuing observations following the sample revisions. Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg. Chart 9 I. Economic Activity and Prices Labor Market Working-Age Population and Number of Employed Persons 9,000 ten thous. persons Labor Share ←Deflation→ 4-quarter backward moving avg., % Projection 8,000 7,000 6,000 (1) Aged 15-64 (working-age population) (2) Employed persons 5,000 3,000 (1) - Projection 2,000 1,000 -1,000 FY 70 CY 84 Notes: 1. In the left-hand chart, the projection for the working-age population is by the National Institute of Population and Social Security Research. The projection for the number of employed persons is calculated based on projections by the Japan Institute for Labour Policy and Training. 2. In the right-hand chart, figures are based on the Financial Statements Statistics of Corporations by Industry, Quarterly. Figures exclude "finance and insurance" and those for 2009/Q2 onward also exclude pure holding companies. Labor share = Personnel expenses / Value-added, and Value-added = Operation profits + Personnel expenses + Depreciation expenses. Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research; Japan Institute for Labour Policy and Training; Ministry of Finance. Chart 10 II. The Bank's Conduct of Monetary Policy Decisions at the July 2024 MPM (1): Plan for the Reduction of the Purchase Amount of JGBs The concept of the plan for the reduction until March 2026 1. Long-term interest rates: to be formed in financial markets in principle 2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets Reduction in a Predictable Manner Amount of monthly JGB purchases tril. yen (approximate amount) Interim assessment 5.7 5.3 4.9 4.5 4.1 In principle, the Bank will reduce the planned amount of its monthly outright purchases of JGBs by about 400 billion yen each calendar quarter. 3.7 3.3 2.9 Roughly a 7-8% decrease From April 2026 The Bank will discuss a guideline in the interim assessment and announce the results. Jul-24 Oct Jan-25 Apr Jul The Bank's JGB holdings tril. yen Oct Jan-26 Apr CY 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Allowing Enough Flexibility 1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM. 2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases. 3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary. Chart 11 II. The Bank's Conduct of Monetary Policy Decisions at the July 2024 MPM (2): Change in the Guideline for Money Market Operations Japan's economic activity and prices have been developing generally in line with the Bank's outlook. Moves to raise wages have been spreading. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention. Medians of the Policy Board Members' forecasts (y/y % chg.) Fiscal 2024 Fiscal 2025 Fiscal 2026 Real GDP 0.6 (-0.2) 1.0 (―) 1.0 (―) CPI (all items less fresh food) 2.5 (-0.3) 2.1 (+0.2) 1.9 (―) CPI (all items less fresh food and energy) 1.9 (― ) 1.9 (―) 2.1 (―) Risk balance assessments on prices Fiscal Fiscal Fiscal Upside Upside Balanced Note: Figures in parentheses indicate changes from the April Outlook Report. Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent Short-term interest rate : (uncollateralized overnight call rate) raised to "around 0.25 %" (previously "around 0 to 0.1%") Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity. If the outlook presented in the July Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.
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Speech by Mr Asahi Noguchi, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Nagasaki, 3 October 2024.
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October 3, 2024 Bank of Japan Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Nagasaki NOGUCHI Asahi Member of the Policy Board (English translation based on the Japanese original) I. Economic Activity and Prices A. Economic Developments at Home and Abroad I will begin my speech by talking about recent economic developments at home and abroad. In the wake of global inflation following the COVID-19 pandemic, Japan's economy has been steadily shifting away from the deflation, or low inflation, that had continued from the late 1990s. It is approaching an extremely crucial turning point, in terms of whether the Bank of Japan's price stability target of 2 percent will be achieved in a sustainable and stable manner. This depends on future economic developments at home and abroad and the underlying developments in policy conduct among the various authorities. Turning to overseas economies, many countries and regions have been increasingly shifting the focus of their policy conduct to maintaining economic growth, as the high inflation caused by the post-pandemic reopening of the economies has begun to subside. Major central banks in the United States and Europe maintained high policy interest rates until recently in order to contain inflation. Meanwhile, as their economies have started out on a slowing trend because of this sustained monetary tightening, some of the central banks have gradually begun to reduce their policy interest rates. That said, the degree of economic slowdown in many countries and regions is quite mild, excluding China, which is undergoing real estate adjustments, and high inflation has started to be subdued without an accompanying significant rise in the unemployment rate (Chart 1). In that sense, these countries and regions have come close to containing inflation with a very soft landing. In the United States, the July results of the Current Employment Statistics released in early August were weaker than market expectations, causing an acute increase in concerns over economic deterioration, immediately followed by the sudden depreciation of the U.S. dollar and a fall in stock prices. Nonetheless, many indicators released thereafter showed robustness in the economy, and market disruptions turned out to be only temporary. Despite the temporary or region-specific market disruptions, the global economy as a whole has grown moderately, and is expected to continue to move in line with its potential growth path from 2025 onward, underpinned by stable inflation and declining interest rates (Chart 2). Japan's economy seems to have started out on a moderate uptrend. The GDP for the AprilJune quarter of 2024 rose by 2.9 percent on an annualized quarter-on-quarter basis, after having hovered for some time at a somewhat low level: the GDP for the July-September quarter of 2023 decreased by 4.3 percent, that for the October-December quarter rose by 0.2 percent, and that for the January-March quarter of 2024 decreased by 2.4 percent (Chart 3). In particular, private consumption, which had continued to record negative growth from the April-June quarter of 2023, grew at a relatively high rate. Although this can be mainly explained by the rebound from the previous quarter, it suggests that downward pressure on real consumption from the decline in real wages has finally started to wane. Since the growth rate for real wages at present is heading toward an increasing trend, I personally think that private consumption is likely to be on a clearer expanding trend (Chart 4). B. Price Developments Turning to Japan's price developments, Japan faced typical cost-push inflation in the postpandemic period, due to higher imported goods prices brought about by the impact of global inflation. This was especially evident in the fact that prices of energy and food accounted for a sizable contribution to rises in consumer prices. However, the rate of increase in imported goods prices has become moderate, in line with subsiding global inflation, and the pace of increase in the prices of energy and food has started to regain stability. As a result, the yearon-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been in the range of 2.5-3.0 percent and that for all items excluding fresh food and energy has been at around 2 percent (Chart 5). While the impact of higher imported goods prices has started to diminish, it is services prices that have been steadily rising as a trend. This uptrend is noteworthy, given that services prices tended to decline or barely rise from the 1990s in Japan. Simply put, the reason why services prices did not rise in Japan until recently was that wages, which account for a large share of costs for services, did not rise. The recent rise in services prices is mainly attributable to a rise in the price of dining-out due to higher imported food prices. Nevertheless, the large wage increases observed for the first time in more than three decades are also being gradually reflected in services prices. 1 Recent developments in the services producer price index (SPPI) -- in which higher wages are more easily reflected compared with consumer services prices -- signifies such a trend even more clearly (Chart 6). This suggests, in reality, that the factor pushing up prices is gradually shifting from inflationary pressure resulting from a passthrough of the rise in import prices to consumer prices, or what we call the "first force," to inflationary pressure stemming from wage increases, or the "second force" (Chart 7). II. Monetary Policy A. Shifting Away from Large-Scale Monetary Easing and Its Significance Next, I will discuss the Bank of Japan's policy conduct. From the late 1990s, Japan's economy suffered from what later came to be called the "Japan disease," in which economic and employment growth remained sluggish while prices and nominal wages continued to decline. To overcome this prolonged deflation and achieve its 2 percent price stability target, the Bank in April 2013 introduced quantitative and qualitative monetary easing (QQE) as a large-scale monetary easing policy. Subsequently, to enhance monetary easing in response to developments in economic activity and prices, the Bank decided to implement QQE with a Negative Interest Rate in January 2016 and QQE with Yield Curve Control in September of the same year. As a result, the positive output gap widened, and the employment situation improved substantially before the COVID-19 pandemic (Chart 8). Moreover, although the year-on-year rate of increase in the CPI was still lower than the 2 percent price stability target, it was at least no longer continuously negative. At the Monetary Policy Meeting (MPM) held in March 2024, the Bank judged it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner. It thus decided to discontinue its unconventional monetary easing policies and shift back to a conventional policy framework, in which the degree of monetary accommodation is adjusted by guiding the money market rate (Chart 9). The Bank made this shift for the following reasons. First, due to the impact of global inflation following the pandemic, Japan's inflation rate continued to exceed 2 percent, which also began to raise the See the Bank's research paper on the effect on firms' recent price-setting behavior for services prices in the consumer prices (available only in Japanese, forthcoming in English): Ozaki, T., Yagi, T., and Yoshii A., Bank of Japan Review, no. 2024-J-11 (August 2024). underlying inflation trend. Second, in the process of economic recovery from the pandemic, the tightness in the labor market that had already materialized before the pandemic became even more pronounced, leading to a distinct rise in nominal wages. This means that Japan's economy has finally started to move away from an economy with a "zero norm," in which inflation and wage growth rates of virtually zero become the norm. I will elaborate on this point later. The Bank will gradually adjust its current monetary accommodation, while carefully monitoring price developments to make sure that the year-on-year rate of increase in the CPI stabilizes at around 2 percent, accompanied by wage increases. The primary objective is to reach a potential growth path, in which inflation of around 2 percent is achieved in a stable manner, on as smooth a trajectory as possible. The Bank's March 2024 decision means that the role of such adjustments to monetary accommodation falls exclusively to the money market rate as the policy interest rate. The shift away from large-scale monetary easing also has a secondary effect. It restores a degree of freedom to financial markets, which had been under significant constraint due to the monetary easing policy, in a manner that avoids market disruption. The Bank had increased its involvement in the Japanese government bond (JGB) market through policies such as QQE, the negative interest rate policy, and yield curve control. The reason for this was that, with money market rates -- the target for conventional monetary policy -- having almost reached the lower bound, the Bank had sought to employ long-term interest rates as the main channel for influencing financial conditions. The upshot was that the Bank came to hold a large amount of JGBs on the asset side of its balance sheet. Since the policy shift in March 2024, the Bank has left the formation of long-term interest rates and the yield curve entirely to the market. It therefore needs to reduce its JGB purchases, albeit at a gradual pace, to ensure that there is sufficient depth in the market for JGB transactions, involving a large number of market participants. What I would like to emphasize is that the purpose of reducing JGB purchases is solely to restore market depth, and not to shrink the Bank's balance sheet or adjust monetary accommodation. This entails two aspects. First, unlike the period of scarce reserve balances prior to the global financial crisis in 2008, when the Bank guided and maintained money market rates exclusively through money market operations, the Bank now controls short-term interest rates through the interest rate it applies to current account balances held by financial institutions at the Bank. Thus, monetary policy conduct is essentially independent of the Bank's balance sheet. Second, even if the extent of the reduction in the Bank's JGB purchases leads to some degree of monetary tightening or easing, these effects will ultimately be absorbed by an adjustment in money market rates. In other words, it can be said that, in terms of this policy tool, the exit from large-scale monetary easing has already been completed. B. Reduction of the Purchase Amount of JGBs and the Bank's Basic Thinking behind the Reduction At the July 2024 MPM, the Bank decided on a plan for the reduction of its purchase amount of JGBs for the period until March 2026, taking into account discussions with market participants (Chart 10). The Bank's basic principle here is to achieve both the predictability and the flexibility of its market operations. This predictability is embodied in the plan itself, which states that the planned amount of monthly purchases of JGBs will be reduced by about 400 billion yen each calendar quarter in principle. This means that, since the formation of long-term interest rates is left to the market, there will be no policy-driven changes in the Bank's JGB purchases. On the other hand, the plan also ensures a certain degree of flexibility in market operations, in that it allows for making flexible changes to the amount of JGB purchases in the case of sudden market swings. The reason is that, even though recovery in market functioning is important, this would be meaningless if it ended up fostering or disregarding market turmoil. Another point to note about this plan is its tentative nature, which reflects the difficulty of determining the optimal size of the Bank's balance sheet at this point. Whatever the optimal size is, it is unlikely to be reached by March 2026. Thus, the current reduction plan is inevitably tentative, with a possible extension beyond March 2026. As I mentioned earlier, under the current policy regime, which is premised on ample reserve balances, there are no constraints or obstacles to monetary policy conduct, even if the size of the Bank's balance sheet remains as is. Therefore, the Bank is able to take sufficient time and consideration in reducing the size of the balance sheet. This is also desirable in terms of maintaining market stability. C. Policy Interest Rate Adjustments and Issues regarding Their Implementation At the July 2024 MPM, the Bank decided to raise its policy interest rate by around 0.15 percentage points and encourage the uncollateralized overnight call rate to remain at around 0.25 percent. At the meeting, I voted against the proposal to raise the policy interest rate. I will return to the reason why shortly. Following this decision, the yen appreciated and stock prices fell. These developments further accelerated due to the deterioration in the U.S. employment situation that became apparent immediately thereafter (Chart 11). The July policy interest rate hike turned out to be one of the factors behind the sharp decline in Japan's stock prices, reminiscent of Black Monday in October 1987. Although there is already much debate as to the cause of the market turmoil, I personally believe that there was a discrepancy between the Bank's actual view of the current economic situation and the market's perception of that view, and that this was at the root of the problem. The July policy decision implies that the general consensus at the Bank at that point -- despite some minor disagreement, including my own -- was that Japan's economic activity and prices had been developing in line with the Bank's outlook, and that a slight reduction in monetary accommodation was appropriate in light of the upside risks to prices in the face of rising import prices. I opposed the policy interest rate hike from the standpoint that it was necessary to more carefully assess how the economic situation had improved with wage hikes becoming widespread, based on relevant data. My idea behind this was that Japan's economy was still more vulnerable to downside risks, as underlying inflation had not yet reached 2 percent and inflation expectations were not anchored at 2 percent either. On the other hand, I also thought that, because the economic and price situation was steadily improving, it would not be too long before the Bank needed to make adjustments to its policy interest rate, depending on future data. The market turmoil following the July decision suggests that the Bank's consensus view had not necessarily been sufficiently understood by the market. The market had likely assumed that the Bank had a more cautious view on economic conditions and that it would therefore proceed with policy interest rate hikes at a very slow pace. The market took the Bank's July decision and the presentation of its outlook as a matter of concern because they differed substantially from what it had assumed the Bank's view was. Two main issues can be derived from this experience. First, in its policy conduct, the Bank needs to adequately understand how the market perceives the Bank's thinking behind its policy conduct. Second, if the Bank's consensus view changes mainly due to improvement in economic conditions, and as a consequence a large discrepancy could arise with the market's perception of the Bank's consensus view, then the Bank needs to communicate its view with the utmost care to fill the gap. I believe that such communication efforts are essential to prevent future policy changes from leading to unnecessary market turmoil. III. Moving Away from the Economy with the "Zero Norm" A. Low Nominal Growth and the "Zero Norm" with regard to Prices and Wages From the collapse of the bubble economy in the early 1990s until around 2021, when recovery from the COVID-19 pandemic began, Japan's economy was in a state of low nominal growth, with prices, wages, and nominal GDP barely rising (Chart 12). Indeed, prior to the pandemic, the large-scale monetary easing implemented from spring 2013 brought down the unemployment rate to a level close to full employment. Nonetheless, nominal wages never returned to the clear uptrend observed in the pre-bubble period, and neither did inflation ever reach the 2 percent price stability target. This was probably because, as a result of the prolonged deflation that started in the second half of the 1990s, the widespread belief that prices and wages do not rise -- the so-called "zero norm" -- had become deeply entrenched among firms and households. The price and wage norm refers to the implicit beliefs people have about how prices and wages evolve. The concept was first proposed in the early 1980s by the American economist Arthur Okun.2 The heart of the idea is that people's perceptions on prices and wages exert a significant influence on their developments. From this perspective, prices and wages in Japan did not rise because people simply took it for granted that no such rises occur. This implies that, in order for Japan's economy to overcome low nominal growth through achievement of the 2 percent price stability target, it is necessary above all to move away from the zero norm with regard to prices and wages. B. Relationship between Inflation and Price Rigidity Prices and nominal wages are inherently characterized by so-called rigidity or stickiness, meaning that they are less likely to move either upward or downward. On the other hand, changes in demand and supply factors in the market constantly act to cause prices to change. Therefore, the degree to which the prices of individual goods and services are rigid or change in practice depends on the strength or weakness of the relationship between the factors that make prices rigid and those that cause them to change. This implies that price rigidity is generally stronger in an economy with lower inflation, since higher inflation means that the factors that cause prices to move upward, such as rising incomes, are stronger. This relationship between inflation and price rigidity can easily be observed by comparing the situation in Japan with other advanced economies, where consumer price inflation has trended higher. For example, when comparing the price change distribution by item between Japan and the United States, there is a significant difference in both the position of the peak of the distribution and its dispersion, particularly for the pre-pandemic period in September 2019 (Chart 13). Specifically, in Japan, many items cluster around the point where the rate of change in prices is 0 percent, and the degree of concentration is high. By contrast, in the United States, the largest number of items cluster around the rate of increase in prices of about 2 percent, but the degree of concentration is low, and the overall dispersion of price changes is significant. The price change distribution in the post-pandemic period in December 2023 shows a shift to the right for both Japan and the United States, reflecting higher inflation. What is of particular Arthur M. Okun, Prices and Quantities: A Macroeconomic Analysis, The Brookings Institution (1981). note is that, in Japan, the shape of the distribution has also changed significantly. In other words, compared with the pre-pandemic period, there is far less clustering around 0 percent, while a new peak has begun to form in the range of a 2-4 percent price change. This suggests that global inflationary pressure in the post-pandemic period has acted to weaken the price rigidity of goods and services, which grew stronger during Japan's deflationary recession period. In fact, after the pandemic, the share of items falling in the 0 percent price change category declined, while the frequency of price revisions increased for both goods and services (Chart 14). This indicates that the persistent zero norm in Japan's economy may be on the verge of dissipating. As Japan's experience shows, rigidity in the prices of goods and services is stronger in economies with lower average rates of inflation.3 However, even in the United States, where the underlying inflation rate is higher than in Japan, the peak at 0 percent in the price change distribution is quite high (Chart 13). This shows that factors that make prices rigid are universal, regardless of the level of inflation. Such factors may include menu costs (i.e., costs associated with changing prices), firms' strategic complementarity with competitors in setting prices, and adherence to reasonable standards with regard to pricing for customers. 4 Increases in the prices of goods and services indicate that the advantages for firms when they raise prices to an appropriate level outweigh the disadvantages of such price increases. C. Why It Is Necessary to Move Away from the Zero Norm Economic sluggishness coupled with ongoing deflation or low inflation has often been referred to as the "Japan disease." Japan's experience may indeed be the archetypical instance The following working paper on causes and implications of increased price rigidity during the deflationary period was the first to point this out in the context of the deflationary period in Japan (available only in Japanese): Watanabe, T. and Watanabe, K., Bank of Japan Working Paper Series, no. 16-J-2 (February 2016). 4 The fact that firms' price-setting behavior often involves incentives to avoid raising prices as much as possible has long been explained using the concept of a kinked demand curve. The reason behind the kinked demand curve is usually thought to be a so-called strategic complementarity, or the strategy of firms vis-à-vis their competitors. Okun, on the other hand, argues that the reason why firms are more averse to raising prices than lowering them is the fear of damaging the relationship of trust with customers as a result of raising prices. Meanwhile, Takashi Negishi attributes kinked demand to asymmetry in the communication of information to customers. See Okun, op. cit, ch. 4, and Negishi, T., Microeconomic Foundations of Keynesian Macroeconomics, North-Holland Publishing Co. (1979). of this situation, in that the economy saw increasing price rigidity under the trend of low inflation and this led to a kind of norm in which people took it for granted that prices do not rise. Simply put, in an economy with such a zero norm, in which prices are seen not to change, prices are less likely to be able to play their primary role of facilitating the more appropriate allocation of resources across the economy overall, through the incentives they provide. In a market economy, cost structures are changing constantly as a result of increased productivity, and the effects of such changes are usually adjusted through changes in prices. For example, the prices of goods whose production costs decline as a result of improvements in labor-saving technology will fall relative to those of products for which labor-saving advances are less prevalent. In fact, in many countries and regions, the rate of increase in the prices of services almost always exceeds the rate of increase in those of goods (Chart 15). This is because the relative prices of services have to rise in order to attract labor and other factors of production to the services sector, where labor-saving advances are less prevalent. However, after deflation and low inflation took hold in Japan's economy, because of the higher price rigidity, especially in the services sector, such relative price adjustments did not function well (Chart 14). The reason for this was that firms made every effort to avoid raising prices and sought to secure profits by suppressing wages and other variable costs. This tendency to keep wages down is known as "wage markdowns."5 The kind of economy that subsequently took hold in the country came to be referred to as a "cost-cutting economy." In the second half of the 2010s, labor market conditions in Japan grew increasingly tight and labor shortages became a major issue. Despite this, the economy failed to see either a smooth rise in wages or a sufficient increase in the prices of labor-intensive services. This was probably due to the fact that, amid ongoing deflation and low inflation, the belief that prices and wages do not rise had become firmly ingrained in the minds of consumers and corporate managers. See Aoki, K., Hogen, Y., and Takatomi, K., "Price Markups and Wage Setting Behavior of Japanese Firms," Bank of Japan Working Paper Series, no. 23-E-5 (April 2023). This zero norm with regard to prices and wages likely had a negative impact on the supply side of Japan's economy. The reason is that, although higher wages indeed mean higher costs for firms, they also impel firms to develop new technologies and make fixed investments aimed at labor-saving and productivity improvements. Conversely, the more firms suppress wages, the less incentive they have to enhance productivity. This may be one of the reasons for the stagnation in technological advances in Japan, once known as a technological superpower. D. Toward the Establishment of a New Perception with regard to Prices and Wages As I mentioned, the zero norm with regard to prices and wages became deeply entrenched in Japan's economy amid deflation and low inflation. This prevented the country from achieving the kind of growth it had undeniably enjoyed until the 1980s, during which people's real income rose steadily on the back of increased productivity. Turning this situation around will probably require the establishment of a new perception among households and firms regarding how prices and wages should be. As the widespread perception that prices and wages do not rise strengthened amid Japan's prolonged period of deflation and low inflation, consumers more strongly rejected price hikes and hence corporate managers avoided raising wages as well. Such responses served to make prices and wages even more rigid. This, in essence, is the zero norm. Conversely, when prices and wages actually start to change and perceptions adapt to this situation, the economy becomes more flexible, which in turn gives increasing impetus to improving resource allocation and productivity. Due to the impact of global inflation, CPI inflation in Japan has already exceeded 2 percent for more than two years. Against this background, nominal wages, which had hardly risen for nearly three decades, have also started to move on a clear upward trajectory. Although temporary factors such as an increase in special cash earnings have played a part, positive real wage growth was finally achieved in June 2024 (Chart 4). In this situation, the perceptions of corporate managers in Japan have started to shift, from thinking that they cannot raise wages because raising prices is impossible to thinking that they will raise prices and wages when necessary. They seem to be taking a positive view of this development in the wage trend (Chart 16). However, as suggested by the ongoing stagnation of real consumption during the recent period of inflation, the belief that prices do not rise still appears to be entrenched among some consumers. I personally consider that it will take more time for such a belief to dissipate and for society as a whole to reach a perception consistent with the 2 percent price stability target. Until then, it is of utmost importance to continue to patiently maintain accommodative financial conditions. Thank you. Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Nagasaki October 3, 2024 NOGUCHI Asahi Member of the Policy Board Bank of Japan Chart 1 Overseas Economies Unemployment Rate CPI y/y % chg. United States Euro area United Kingdom China % United States Euro area United Kingdom China -2 CY 18 Note: Figures for the CPI are for all items. Sources: BLS; Eurostat; NBSC; ONS. CY 18 Chart 2 IMF Forecasts for Global Growth Major Economies' Growth Rates Global Growth Rate y/y % chg. y/y % chg. CY 2023 IMF forecasts World 3.3 3.2 3.3 1.7 1.7 1.8 United States 2.5 2.6 1.9 Euro area 0.5 0.9 1.5 United Kingdom 0.1 0.7 1.5 Japan 1.9 0.7 1.0 4.4 4.3 4.3 China 5.2 5.0 4.5 India 8.2 7.0 6.5 ASEAN-5 4.1 4.5 4.6 Advanced economies CY 2024 CY 2025 [Forecast] [Forecast] CY1990-2019 average: +3.6% Emerging market and developing economies -1 -2 -3 -4 CY 00 Note: Figures are as of July 2024. Source: IMF. Chart 3 Real GDP Annualized Quarterly Growth Rate Quarter-on-Quarter Changes s.a., q/q % chg. s.a., ann., q/q % chg. Apr.-Jun. Jul.-Sep. Oct.-Dec. Jan.-Mar. Apr.-Jun. GDP 0.7 -1.1 0.1 -0.6 0.7 Domestic demand -1.0 -0.8 -0.1 -0.1 0.8 Private demand -1.0 -1.1 0.0 -0.2 0.7 -0.8 -0.3 -0.3 -0.6 0.9 1.4 -1.2 -1.1 -2.6 1.7 -2.0 -0.2 2.1 -0.5 0.8 -0.9 0.1 -0.4 0.1 0.8 3.2 0.1 3.0 -4.6 1.5 -4.1 1.3 2.0 -2.5 1.7 -5 Private consumption -10 -15 Private residential investment Private non-resi. investment Domestic demand -20 Net exports -25 -35 CY 20 Public demand Real GDP -30 Source: Cabinet Office. Exports of goods & services Imports of goods & services Chart 4 Wage Growth y/y % chg. Real wages Nominal wages CPI -1 -2 -3 -4 -5 CY 18 Note: Figures for the CPI are for all items excluding imputed rent. Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications. Chart 5 Consumer Prices y/y % chg. Energy Food Goods (less food) Services CPI (less fresh food) CPI (less fresh food and energy) -1 -2 CY 19 Source: Ministry of Internal Affairs and Communications. Chart 6 Services Producer Prices Index Year-on-Year Changes CY 2020=100 All items y/y % chg. Services with a low labor cost ratio All items Services with a high labor cost ratio Services with a high labor cost ratio Services with a low labor cost ratio -1 -2 -3 CY 00 -4 -5 CY 00 Note: Figures exclude the effects of consumption tax hikes. Source: Bank of Japan. Chart 7 Two Forces Acting to Raise Inflation First Force: Pass-through of the rise in import prices to consumer prices (cost-push factor) Second Force: Intensified virtuous cycle between wages and prices Chart 8 Domestic Economy Unemployment Rate and Number of Employed Persons Output Gap inverted, DI ("excessive" - "insufficient"), % points % Labor input gap (left scale) Capital input gap (left scale) Output gap (left scale) Tankan factor utilization index (right scale) -40 6 s.a., mil. persons s.a., % Unemployment rate (left scale) Firms' forecast Employed persons (right scale) -30 -20 5 -10 -2 -4 -6 -8 CY 00 CY 00 Note: Figures for the output gap are Bank staff estimates. The Tankan factor utilization index is calculated as the weighted average of the production capacity DI and the employment conditions DI for all industries and enterprises. The capital and labor shares are used as weights. There is a discontinuity in the data for December 2003 due to a change in the survey framework. Sources: Ministry of Internal Affairs and Communications; Bank of Japan. Chart 9 Changes in the Monetary Policy Framework (March 2024) As recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged it was now within sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report. It considers that its large-scale monetary easing measures have fulfilled their roles, including the negative interest rate policy and the yield curve control. With the price stability target, the Bank will conduct monetary policy as appropriate, guiding the short-term interest rate as a primary policy tool, in response to developments in economic activity and prices as well as financial conditions, from the perspective of sustainable and stable achievement of the target. Short-term interest rate (uncollateralized overnight call rate) 0.3 % <After> <Before> % Rate on the current account balances (+0.1%) 0.2 0.1 Around 0.1% increase 0.0 -0.1 (Guideline for market operations) -0.2 The Bank will encourage the rate to remain at around 0 to 0.1% -0.3 Long-term interest rates Rate on the Policy-Rate Balances (-0.1%) March MPM (The rate had been in the range of -0.1 to 0%) 1.0 0.0 <Before> <After> Upper bound for 10-year JGB yields as a reference In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses, such as increasing the amount of JGB purchases The Bank will continue its JGB The Bank will continue its purchases at broadly same JGB purchases withthe broadly amount as amount before as before the same March MPM ETFs and J-REITs The Bank will discontinue purchases Chart 10 Plan for Reduction of Purchase Amount of JGBs (July 2024) The concept of the plan for the reduction until March 2026 1. Long-term interest rates: to be formed in financial markets in principle 2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets Reduction in a Predictable Manner Amount of monthly JGB purchases tril. yen (approximate amount) Interim assessment 5.7 5.3 4.9 4.5 4.1 3.7 3.3 The Bank's JGB holdings In principle, the Bank will reduce the planned amount of its monthly outright purchases of JGBs by about 400 billion yen each calendar quarter. 2.9 From April 2026 The Bank will discuss a guideline in the interim assessment and announce the results. Jul-24 Oct Jan-25 Apr Jul Oct Apr Jan-26 Apr tril. yen Roughly a 7-8% decrease CY 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Allowing Enough Flexibility 1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM. 2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases. 3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary. Chart 11 Nikkei 225 Stock Average and U.S. Dollar/Yen Exchange Rates 43,000 yen yen 39,000 35,000 Nikkei 225 Stock Average (left scale) U.S. dollar/yen (right scale) 31,000 Jan. 24 Source: Bloomberg. Apr. 24 Jul. 24 Chart 12 Nominal GDP, Wages, and Prices CY 1980＝100 Nominal GDP Wages Prices CY 80 Notes: 1. Figures for wages are based on average monthly cash earnings per regular employee (establishments with 30 employees or more). 2. Figures for prices are the CPI for all items. Sources: Cabinet Office; Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications. Chart 13 Distribution of Consumer Price Changes Japan United States share of the number of items, % share of the number of items, % December 2023 December 2023 September 2019 September 2019 -10 or less -5 or more y/y % chg. -10 or less -5 or more y/y % chg. Note: Figures for Japan are based on items excluding fresh food and energy. Those for the United States are based on items excluding energy. Sources: BLS; Ministry of Internal Affairs and Communications. Chart 14 Price Revisions Share of Items for Which Prices Were Unchanged Frequency of Price Revisions weight in the CPI for all items excluding fresh food, % % per month Housing rent Services (less housing rent) Goods Services Energy Goods (less fresh food and energy) All items (less fresh food) FY91 CY 91 Notes: 1. In the left panel, figures are the share of items for which year-on-year price changes were within plus or minus 0.5 percent. 2. In the right panel, figures are calculated based on the proportion of cities where the average price of individual items changed from the previous month (12-month backward moving averages). Data exclude fresh food, electricity, manufactured and piped gas, water charges, and housing rent. Temporary price changes due to, for example, consumption tax hikes and special sales are not incorporated. Source: Ministry of Internal Affairs and Communications. Chart 15 Ratio of Services Prices to Goods Prices Jan. 2010＝100 United States United Kingdom Euro area Japan CY 10 Note: Figures for the euro area exclude owner-occupied housing costs. Sources: BLS; Eurostat; Ministry of Internal Affairs and Communications; ONS. Chart 16 Firms' Views on Price and Wage Increases: Survey regarding Corporate Behavior since the Mid-1990s Preferable State of Prices and Wages for Business Activities Reasons for Preferring a Moderate Rise in Prices and Wages Note: In the right panel, figures are ratios among firms that responded "prices and wages rising moderately" as a preferable state in the left panel. Source: Bank of Japan.
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Speech by Mr Seiji Adachi, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Kagawa, 16 October 2024.
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October 16, 2024 Bank of Japan Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Kagawa ADACHI Seiji Member of the Policy Board (English translation based on the Japanese original) I. Economic Activity and Prices A. Economic Activity I would like to start my speech by talking about the current situation of Japan's economy. In my view, while conditions in Japan's economy cannot be regarded as favorable, the economy has been resilient on the whole. To examine this point in detail, let me describe Japan's economic situation from two aspects: the household sector and the corporate sector. I will start with the household sector. There have been comments that private consumption remains somewhat lackluster (Chart 1). That said, I believe that this can mostly be attributed to weakness in durable goods consumption, which reflects setbacks in automobile production caused by various unexpected incidents. Disregarding this as a temporary factor, I consider that private consumption has generally been following the projected trend. Indeed, in response to price rises, households' thriftiness has intensified in the consumption of food and daily necessities in particular, which resulted in consumption of nondurable goods being on a decreasing trend; for example, some anecdotal information from supermarkets and other stores indicates that household demand has been shifting to lower-priced private-label products. On the other hand, however, services consumption has been viewed as being solid, and business performance in the foodservice industry has been favorable. What is particularly interesting is that, amid the continued decline in real wages and the resulting severe income conditions, households have been managing by cutting back on fundamental expenditures, rather than by reducing their selective expenditures. This implies that households are starting to change their spending patterns, becoming more selective in their consumption -- that is, they actively spend on goods or services that they place priority on, while cutting back on other spending, depending on their respective circumstances. In response to these changes in household spending patterns, firms are also diversifying the sales strategies for their products and services, thereby expanding the selling price range. In other words, while Japan's economy has been subdued in some respects because of higher prices, this situation seems to be generating room for households and firms to harness their creativity in their day-to-day activities. In this sense, it is possible to argue that the economy is in a way heading toward normalization. Next, I will turn to the corporate sector. While production, exports, and business fixed investment have been solid, I have the impression that they are somewhat lacking in momentum. Starting with business fixed investment, the Bank of Japan's September 2024 Tankan (Short-Term Economic Survey of Enterprises in Japan) shows firms' appetite for such investment remains strong; however, actual results suggest that fixed investment conditions have been mixed (Charts 2 and 3). In terms of specific business fixed investment projects, there has been a wide variety, including (1) those associated with manufacturers' moves to transfer their overseas production sites back home, reflecting the yen's depreciation and heightened concerns over economic security; (2) investment in urban redevelopment projects; and (3) climate change-related investment. Moreover, given the historically low levels of real interest rates and the favorable business fixed investment environment that reflects strong business performance and steady stock prices, firms' fixed investment should increase further. Why then have some firms been reluctant to make fixed investments? I would like to point out two contributing factors. First is the bottleneck in human resources; there have been shortages of technical experts and the labor necessary for setting up facilities or constructing factories, stores, and other premises. This factor has also likely affected firms' production activity. That is, anecdotal information suggests that, due to severe labor shortages, firms have inevitably had to pursue business realignment and integration through such means as shifting production sites of unprofitable businesses to emerging economies with lower labor costs, or engaging in business restructuring by selling unproductive businesses to other firms, including foreign firms. In my view, this has resulted in the production index remaining below the pre-pandemic level. The second reason why firms have been reluctant to make fixed investment is high uncertainties regarding the outlook. For instance, firms' inflation outlook for general prices for five years ahead, as presented in the September 2024 Tankan, shows that over 40 percent of firms responded that they "do not have clear views" on general prices because of high uncertainties over the outlook (Chart 4). This figure is considerably higher than past results. Setting selling prices is one of the vital elements of a firm's business strategy. As is the case with general prices, if the future course of selling prices remains unpredictable, this also holds true for the outlook for corporate profits. In such a situation, firms are probably hesitant to make fixed investment as this will inevitably weigh on them as a significant source of fixed costs. Let me now move on to exports. Despite the continuing depreciation of the yen, exports have shown mixed developments, affected by a lack of momentum in the Chinese and European economies (Chart 5). Rather than being affected by the price factor (the weaker yen), Japan's exports have been greatly influenced by the quantitative factor (overseas demand), which is determined by developments in the global economy. Global economic developments will therefore have to be taken into account when considering future developments in exports, as these, for the time being, entail uncertainties that should not be overlooked. U.S. economic policy may change drastically, depending not only on the outcome of the U.S. presidential election in November, but also on how the results of the concurrent Congressional elections affect the balance of power between the parties in the two houses of Congress. There may also be a substantial change in geopolitical risks. Since developments in the international situation just mentioned entail the possibility of triggering a significant change in Japan's corporate behavior, these developments warrant greater attention. B. Price Developments in Japan 1. Price situation I will now talk about price developments in Japan. Looking at recent price developments, it can be said that prices have thus far been on track, as the virtuous cycle between wages and prices has finally begun to operate. In other words, prices seem to be steadily following the path expected by the Bank toward achievement of 2 percent underlying inflation. However, there now seem to be points that warrant some attention, although they do not yet suggest a need to change the Bank's outlook. Let me now share my view on prices. When examining price developments, I always adopt a method of separating the categories in the consumer price index (CPI) into two: "sticky" consumer prices, mainly composed of services prices for which the price changes relatively infrequently; and "flexible" consumer prices, mainly composed of goods prices for which the price changes relatively frequently. 1 Sticky consumer prices are significantly affected by wage developments, whereas flexible consumer prices are considerably affected by developments in yen-denominated import prices. Based on this categorization, I would like to briefly outline developments in the CPI to date. The rate of increase in flexible consumer prices has decelerated considerably, mainly due to a pause in the rise in international commodity prices. On the other hand, sticky consumer prices have been rising in reflection of higher personnel expenses, but the pace of the rise has remained only moderate. As a result, the CPI inflation rate has followed a declining trend (Chart 6).2 Latest developments suggest that sticky consumer prices are finally starting to rise, reflecting to some degree the results of the 2024 annual spring labor-management wage negotiations; what is more, the slowdown in flexible consumer prices has shown signs of rebound due to the effects of the yen's depreciation. Given a projected faster rise in both sticky and flexible consumer prices, upside risks to prices have increased. In light of this, at the July 2024 Monetary Policy Meeting (MPM), the Bank considered it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent and decided to raise the policy interest rate. 2. Points to note in examining future price developments Still, I believe that future price developments in Japan will continue to warrant some attention for the following reasons. The first is the possibility that the yen's depreciation will be retraced with greater momentum. In particular, if U.S. monetary policy enters a full-fledged rate-cutting cycle, this may result in an intensified retracement of the yen's depreciation against the U.S. dollar. This could become a factor driving down import prices with a time lag and, as a result, put downward pressure on flexible consumer prices, chiefly composed of goods prices. Strictly speaking, services prices and goods prices do not necessarily fall into sticky consumer prices and flexible consumer prices, respectively. This is because these consumer prices are categorized automatically based on a threshold for the extent of price changes. 2 Here, CPI mainly refers to "core-core-CPI," which excludes fresh food and energy. The second reason is that, because I take a somewhat cautious view about whether sufficient wage hikes will be sustained in 2025, I think it is necessary to adequately examine these developments. According to the final aggregate results of the 2024 annual spring labormanagement wage negotiations compiled by the Japanese Trade Union Confederation (Rengo), the rate of increase in wages (including seniority- and performance-related wages) was 5.10 percent, significantly higher than expected. Moreover, the Financial Statements Statistics of Corporations by Industry, Quarterly for the April-June quarter of 2024, which has a wider sample coverage, showed that the year-on-year rate of increase in personnel expenses was 4.8 percent, for all industries and enterprises excluding the finance and insurance industries. The rate was also up 6.7 percent on the same basis for enterprises with capital of 10 million yen or more but less than 100 million yen, which are assumed to be mainly small enterprises. As just outlined, this year indeed saw significant wage increases. At the same time, in the Financial Statements Statistics of Corporations by Industry, Quarterly for the April-June quarter, current profits for all industries and enterprises excluding the finance and insurance industries were up 13.2 percent year on year, which means that firms are earning profits far in excess of their wage hikes. In other words, wage hikes are limited within the scope of growth in business earnings and, as a result, labor share is still on the decline (left panel of Chart 7). When comparing developments in labor share and wage increases, the two are generally negatively correlated. However, even since the exit from deflation, starting in 2013, the pace of wage hikes has trailed far behind the pace of decline in labor share (left and right panels of Chart 7). Moreover, although the ratio of personnel expenses to sales is no longer declining, with almost no difference between manufacturers and nonmanufacturers or between enterprise sizes, this is not a major departure from past trends (Chart 8). This implies that the significant wage increases in the 2024 spring negotiations were by no means a generous allowance on the part of firms, at least from a macroeconomic perspective. Rather, these increases, for the most part, are a reflection of favorable business performance, suggesting that firms have not necessarily made a clear shift in their stance toward raising wages from that of the deflationary period. To avoid any misunderstanding, let me stress that I certainly do not mean that the wage hikes by firms are inadequate. If firms implement unreasonable wage hikes that outpace growth in their business earnings, and labor share consequently rises, this could trigger a drop in stock prices, given the past relationship between labor share and stock prices. Because developments in stock prices affect factors such as firms' fixed investment stance, unreasonable wage hikes could end up in an economic downturn. Put differently, wage hikes from 2025 onward will ultimately depend on firms' business performance and, in turn, economic conditions. Given the high degree of the uncertainties that I mentioned earlier, mainly concerning the international situation, how wage hikes will play out next year remains very unclear. I therefore think it is necessary to carefully examine their developments. There is absolutely no need for pessimism, though. The ratio of break-even point to sales, calculated from the Financial Statements Statistics of Corporations by Industry, Annually has come down significantly (Chart 9). This shows that firms' earning power has been boosted substantially, and that they are making headway in improving their fundamental business structure to achieve higher profitability. In other words, firms' fundamental business structure has become more conducive to wage hikes, in line with the improvement in their earning power. Given these factors, the extent of wage hikes in 2025 will ultimately be determined by business performance in fiscal 2024, which in turn depends on whether there will be greater room for expansion in external demand and business fixed investment. II. Conduct of Monetary Policy Steps toward Normalizing Monetary Policy So far, I have talked about Japan's economic and price developments. I would now like to move on to explaining the Bank's current conduct of monetary policy and share my thoughts on the Bank's policy stance after the termination of the negative interest rate policy and yield curve control. With respect to the current conduct of monetary policy, the Bank decided at the March 2024 MPM to (1) terminate the negative interest rate policy and yield curve control, and (2) shift to a framework in which it conducts monetary policy by guiding the short-term interest rate, the uncollateralized overnight call rate, as a primary policy tool. Subsequently, at the July MPM, the Bank decided to raise the uncollateralized overnight call rate by 0.15 percentage points, encouraging it to remain at around 0.25 percent. It also decided on a plan to gradually reduce its monthly purchase amount of Japanese government bonds (JGBs) so that it will be about 3 trillion yen in January-March 2026 (Charts 10 and 11). With these measures, the Bank is proceeding with efforts to normalize monetary policy, aiming to achieve the price stability target of 2 percent in a sustainable and stable manner. It seems to me that some people may have doubts about the current conduct of monetary policy, as to whether the Bank was premature in entering into a normalization process of gradually raising its policy interest rate, and as to whether this step runs the risk of Japan falling back into deflation. I would therefore like to share my thoughts on both of these points. To come straight to the point, I believe Japan's economy has already met the conditions needed for monetary policy to initiate normalization. As experience suggests, I believe the key conditions are that (1) the distribution of the year-on-year rate of change in the price of individual items constituting the CPI no longer has the shape typical of a deflationary period, and (2) the level of CPI inflation has surpassed its pre-deflation peak. Indeed, these conditions have already been fulfilled (Chart 12). Another essential condition in proceeding with normalization is to avoid any drastic policy changes that could raise concern over the risk of a fall back into deflation.3 In fact, as I will next discuss, this condition is precisely why I think it is appropriate to undertake gradual hikes in the policy interest rate in normalizing monetary policy. I would like to note one point that warrants caution when raising the policy interest rate in a gradual manner: until the underlying inflation rate achieves the target of 2 percent in a See Gauti B. Eggertsson and Benjamin Pugsley, "The Mistake of 1937: A General Equilibrium Analysis," Monetary and Economic Studies, vol. 24, no. S-1 (December 2006): 151-190, https://www.imes.boj.or.jp/research/papers/english/me24-s1-8.pdf. The authors point out that the reason the United States failed to exit the Great Depression was that policy changes caused a significant shift in the public's beliefs about the future inflation target policy of the authority (the Federal Reserve). sustainable and stable manner, the Bank will raise the policy interest rate at an extremely moderate pace while basically maintaining accommodative financial conditions. The Bank needs to raise the policy rate before the sustainable and stable achievement of 2 percent underlying inflation, as rapid hikes in the policy rate after the achievement of the target could cause a major shock to the real economy. It is difficult to estimate in advance the extent of the shock such a rapid rate hike would cause. However, if, for example, the Bank maintains a zero interest rate until underlying inflation remains stable near the target of 2 percent, followed by discontinuous and sudden policy rate hikes once the target has been achieved, the risk of this causing an economic slowdown cannot be overlooked, as the slowdown could once again induce a shift to a deflationary regime that will heighten concern over deflation. To avoid such a scenario, gradual policy rate hikes -- that make sure the extent of the hike is kept within a range that will not cause a shock to the real economy -- should more likely allow for a smoother monetary policy normalization. This can be viewed as a form of risk management in monetary policy conduct. The most critical point to keep in mind when proceeding with monetary policy normalization is to maintain accommodative financial conditions while gradually raising the policy interest rate. What is meant by accommodative financial conditions here is a situation where the real policy interest rate is below the natural rate of interest. The key here is the level of the natural rate of interest. The natural interest rate has been an important topic of discussion in considering recent conduct of monetary policy. Unfortunately, at least for now, it is difficult to empirically identify a reliable figure for the natural interest rate. The Bank uses a variety of methods to measure this rate, but since the figures -- as of the first quarter of 2023 -- range widely from around minus 1 percent to around plus 0.5 percent, depending on the methods employed, these are merely estimates. 4 I personally consider it reasonable to assume the lowest figure, since I believe that there is no need at this point to undertake rapid policy rate hikes to curb inflation, and that hasty policy rate hikes should rather be avoided. Even with this assumption, the current real policy interest rate is See Nakano, S., Sugioka, Y., and Yamamoto, H., "Recent Developments in Measuring the Natural Rate of Interest," Bank of Japan Working Paper Series, no. 24-E-12 (October 2024). well below the natural interest rate, suggesting that accommodative financial conditions have been maintained. If underlying inflation becomes increasingly likely to surpass 2 percent once the target of 2 percent has been achieved in a sustainable and stable manner, the Bank will, to curb inflation, raise the policy rate at a faster pace than the inflation rate. Moreover, when the inflation rate remains at around 2 percent in a sustainable and stable manner, it can be assumed that the policy rate at the time is roughly on a par with the level of the neutral interest rate. In this case, the Bank will conduct monetary policy with an eye to maintaining the policy rate at that neutral level. Let me repeat that, when the price stability target is achieved by realizing 2 percent underlying inflation in a sustainable and stable manner, the level of the policy rate can be said to be broadly equivalent to that of the neutral interest rate. To be honest, though, given the uncertainties we may face down the road, it is difficult at this point to project the specific level of the neutral interest rate and the timing of the policy rate approaching that level. Academic and central bank researchers have published a wealth of papers investigating the factors that determine the levels of both the neutral and natural interest rates.5 These have pointed to a variety of determinants; however, one of the strongest determining factors is a country's potential growth rate, and this suggests that demographics and the growth rate of technology hold the key. The savings-investment balance and the level of long-term interest rates are also considered to be determinants. While it is important to continue efforts to refine the estimation method for the natural interest rate, I believe it is also vital to engage in further discussion, including with regard to a qualitative assessment of the individual factors determining the natural interest rate. Thank you. For example, see International Monetary Fund "The Natural Rate of Interest: Drivers and Implications for Policy," World Economic Outlook, ch. 2 (April 2023). Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Kagawa October 16, 2024 ADACHI Seiji Member of the Policy Board Bank of Japan Chart 1 Consumption Activity Index (CAI, Real) CAI (Travel Balance Adjusted) CAI by Type s.a., CY 2015=100 s.a., 2019/Q1=100 Nondurable goods <40.5> Services <50.7> s.a., 2019/Q1=100 CY 14 Durable goods <8.9> CY 19 20 21 22 23 24 19 20 21 22 23 24 Notes: 1. In the left panel, figures exclude inbound tourism consumption and include outbound tourism consumption, and are based on Bank staff calculations. 2. In the right panel, figures in angle brackets show the weights in the CAI. Figures are based on Bank staff calculations. 3. In the right panel, nondurable goods include goods classified as semi-durable goods in the SNA. 4. Figures for 2024/Q3 are July-August averages. Sources: Bank of Japan; etc. Chart 2 Developments in Business Fixed Investment Plans y/y % chg. FY2024 Average (FY2004-2023) FY2020 FY2021 FY2022 FY2023 -3 -6 -9 Mar. June Sept. Dec. Forecast Actual Notes: 1. Based on the Tankan. All industries including financial institutions. 2. Figures include software and R&D investments but exclude land purchasing expenses. R&D investment is not covered as a survey item before the March 2017 survey. 3. There are discontinuities in the data for December 2021 and December 2023 due to changes in the survey sample. Source: Bank of Japan. Chart 3 Business Fixed Investment Coincident Indicators of Business Fixed Investment s.a., ann., tril. yen Leading Indicators of Business Fixed Investment s.a., CY 2020=100 s.a., ann., tril. yen Machinery orders (private sector, excluding volatile orders) Construction starts (private, nonresidential, estimated construction costs) Private nonresidential investment (SNA, real, left scale) Domestic shipments and imports of capital goods (right scale) Private construction completed (nonresidential, real, right scale) CY 09 CY 09 Notes: 1. The figure for domestic shipments and imports of capital goods for 2024/3Q is the July-August average. The figure for private construction completed for 2024/3Q is for July. 2. Figures for real private construction completed are based on Bank staff calculations using the construction cost deflators. Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land, Infrastructure, Transport and Tourism. Notes: 1. Volatile orders are orders for ships and those from electric power companies. 2. The figure for machinery orders for 2024/3Q is for July. The figure for construction starts for 2024/3Q is the July-August average. Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism. Chart 4 Firms' Inflation Outlook for General Prices share of firms, % CY 14 Notes: 1. Figures show the share of firms having no clear views on general prices due to high uncertainty over the outlook, based on the inflation outlook for general prices (all industries and enterprises, 5 years ahead) in the Tankan. 2. Specifically, when asked about their inflation outlook, firms are those that selected "Uncertainty" among firms responding that they "do not have clear views" on general prices in the Tankan. Source: Bank of Japan. Chart 5 Exports Total Real Exports Real Exports by Region s.a., CY 2020=100 s.a., 2019/Q1=100 CY 09 s.a., 2019/Q1=100 United States <20.1> EU <10.3> CY China <17.6> NIEs, ASEAN, etc. <34.4> Other economies <17.6> 19 20 21 22 23 24 19 20 21 22 23 24 Notes: 1. Based on Bank staff calculations. 2. Figures for 2024/Q3 are July-August averages. 3. In the right panel, figures in angle brackets show the share of each country or region in Japan's total exports in 2023. Figures for the EU exclude those for the United Kingdom for the entire period. Sources: Ministry of Finance; Bank of Japan. Chart 6 CPI (Excluding Temporary Factors) 4.5 y/y % chg. Goods 4.0 General services (less housing rent) Housing rent (private and imputed rent) Administered prices 3.5 3.0 2.5 2.0 CPI (less fresh food and energy) 1.5 1.0 0.5 0.0 -0.5 CY 19 Notes: 1. Administered prices exclude energy prices and consist of public services and water charges. 2. The CPI figures are Bank staff estimates and exclude mobile phone charges and the effects of the consumption tax hike, free education policies, and travel subsidy programs. Source: Ministry of Internal Affairs and Communications. Chart 7 Developments in Labor Share and Wage Increases Personnel Expenses Labor Share 4-quarter backward moving avg., % y/y % chg. -5 CY 91 Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry, Quarterly. Excluding the finance and insurance industries. 2. Labor share = personnel expenses / value-added. Value-added = operating profits + personnel expenses + depreciation expenses. Source: Ministry of Finance. -10 CY 91 Note: Based on the Financial Statements Statistics of Corporations by Industry, Quarterly. Excluding the finance and insurance industries. Source: Ministry of Finance. Chart 8 Ratio of Personnel Expenses to Sales By Size (All Industries Excluding Finance and Insurance) By Industry (Enterprises of All Sizes) 25.0 % 25.0 % Manufacturing Non-manufacturing 20.0 20.0 15.0 15.0 10.0 10.0 5.0 5.0 Large enterprises Medium-sized enterprises Small enterprises 0.0 FY 07 0.0 FY 07 Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry, Annually. Excluding the finance and insurance industries. 2. Personnel expenses = directors' remuneration + bonus for directors + salaries and wages + bonus for employees + welfare expenses 3. In the right panel, large enterprises are those with capital of 1 billion yen or more, medium-sized enterprises are those with capital of 100 million yen or more but less than 1 billion yen, and small enterprises are those with capital of less than 100 million yen. Source: Ministry of Finance. Chart 9 Break-Even Ratio % FY 07 Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry, Annually. Excluding the finance and insurance industries. Enterprises of all sizes. 2. Break-even ratio = break-even sales / sales. Break-even sales = fixed costs / marginal profit ratio. Fixed costs = personnel expenses + interest expenses, etc. + depreciation expenses + rent on movable property and real estate. Personnel expenses = directors' remuneration + bonus for directors + salaries and wages + bonus for employees + welfare expenses. Marginal profit ratio = (sales – variable costs) / sales. Variable costs = sales – fixed costs – current profits. Source: Ministry of Finance. Chart 10 Decisions at the July 2024 MPM (1): Change in the Guideline for Money Market Operations Japan's economic activity and prices have been developing generally in line with the Bank's outlook. Moves to raise wages have been spreading. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention. Risk balance assessments on prices Medians of the Policy Board members' forecasts (y/y % chg.) Fiscal 2024 Fiscal 2025 Fiscal 2026 Real GDP 0.6 (-0.2) 1.0 (―) 1.0 (―) CPI (all items less fresh food) 2.5 (-0.3) 2.1 (+0.2) 1.9 (―) CPI (all items less fresh food and energy) 1.9 (―) 1.9 (―) 2.1 (―) Fiscal Fiscal Fiscal Upside Upside Balanced Note: Figures in parentheses indicate changes from the April Outlook Report. Adjusting the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 percent Short-term interest rate : raised to "around 0.25%" (uncollateralized overnight call rate) (previously "around 0 to 0.1%") Real interest rates are expected to remain significantly negative, and accommodative financial conditions will continue to firmly support economic activity. If the outlook presented in the July Outlook Report is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation. Chart 11 Decisions at the July 2024 MPM (2): Plan for the Reduction of the Purchase Amount of JGBs The concept of the plan for the reduction until March 2026 1. Long-term interest rates: to be formed in financial markets in principle 2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while allowing enough flexibility to support stability in the JGB markets Reduction in a Predictable Manner The Bank's JGB holdings Amount of monthly JGB purchases tril. yen (approximate amount) Interim assessment 5.7 5.3 4.9 4.5 4.1 In principle, the Bank will reduce the planned amount of its monthly outright purchases of JGBs by about 400 billion yen each calendar quarter. 3.7 3.3 2.9 Jul-24 Oct Jan-25 Apr Jul tril. yen Roughly a 7-8% decrease From April 2026 The Bank will discuss a guideline in the interim assessment and announce the results. Oct Jan-26 Apr CY 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Allowing Enough Flexibility 1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM. 2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the amount of JGB purchases. 3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary. Chart 12 Conditions Required for Monetary Policy to Enter into a Normalization Process CPI (Less Fresh Food and Energy) CPI Price Change Distributions share of the number of items, % 110 2020-Base Consumer Price Index CY1991 CY1999 CY2012 Aug. 2024 8 to 10 6 to 8 4 to 6 more than 10 y/y % chg. 2 to 4 0 to 2 -2 to 0 -4 to -2 -6 to -4 -8 to -6 -10 to -8 -10 or less Notes: 1. Figures are calculated using long-term time series data for each item in Japan's CPI (2020-base). 2. Figures for CY1991, 1999, and 2012 are calculated using annual average data. Source: Ministry of Internal Affairs and Communications. CY 90 Note: Figures are annual averages. Source: Ministry of Internal Affairs and Communications.
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Speech by Mr Shinichi Uchida, Deputy Governor of the Bank of Japan, at the International Association of Deposit Insurers (IADI) Annual Conference, Tokyo, 14 November 2024.
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Shinichi Uchida: Challenges to the financial system during and after the pandemic and a way forward Speech by Mr Shinichi Uchida, Deputy Governor of the Bank of Japan, at the International Association of Deposit Insurers (IADI) Annual Conference, Tokyo, 14 November 2024. *** Introduction It is a great honor and pleasure to be invited to the IADI (International Association of Deposit Insurers) Annual Conference. Today, I would like to talk about economic and financial developments during and after the COVID-19 pandemic, with the hope of deriving some lessons for financial stability. Over the past several years, the global economy and financial conditions have changed dramatically. The pandemic had a significant effect on society and the economy. Governments around the world took strict and wide-ranging public health measures to prevent the spread of the virus, together with large-scale fiscal spending. Central banks aggressively pursued monetary easing and provided ample liquidity domestically as well as globally through the swap line arrangements among central banks. Some governments went further to assume part of credit risks. These measures contributed to maintaining the stability of financial markets and the financial system, facilitated the intermediation functions, and hence supported the real economy. There was no major bank failure during this period. Thereafter, however, as the economy was returning to normal, we faced supply-side constraints due to disruptions in global supply chains and a rise in commodity prices owing to heightened geopolitical risks, which led the global economy to inflation. Central banks raised their policy interest rates. Then, in 2023, a few banks fell into trouble, including the failure of Silicon Valley Bank and the acquisition of Credit Suisse, as they suffered from liquidity and interest rate risks. Thanks to swift efforts made by the authorities, financial stability was maintained. Governments and central banks paid careful attention to financial stability during the pandemic, but it was difficult to predict that these troubles would have arisen. At the time, we were worried about deflation rather than inflation. We were worried about credit risks rather than liquidity and interest rate risks. These episodes tell usthat, even if we understand the economic and financial situations and the risks associated with them, we can hardly foresee the nature of possible future shocks. But still, as our mandate is to ensure financial stability, we have to prepare for them. What we can do is to learn from the past and use the lessons for the future. I. Developments during the Pandemic and Responses of Authorities Policy Mix 1/6 BIS - Central bankers' speeches Let me first look back at the developments during the pandemic. When COVID-19 spread globally in the spring of 2020, governments around the world implemented strict public health measures to contain it. Although the measures were necessary to protect people's health and safety, economic activity was severely constrained, and households and businesses were deeply concerned about uncertainties over the economy. It was a shock to the real economy, unlike the global financial crisis (GFC) in 2008. Naturally, the core of the measures to address the difficulties in the economy was macroeconomic policies. Governments spent more, and central banks introduced accommodative monetary policy measures. Many jurisdictions adopted this policy mix, which was necessary to support the economy. When central banks resorted to unconventional tools, how to conduct government bond purchases in the face of increasing bond issuances became a delicate issue, as this may have raised questions of monetary finance. In Japan, under the yield curve control framework that had been introduced four years before the pandemic, the Bank of Japan set the target level of 10year JGB yields at around zero percent, which we thought was appropriate to meeting our own mandate of price stability. As for the amount of purchases, the Bank lifted the upper limit and stood ready to purchase any amount necessary to achieve the target interest rates, while the actual amount of purchases turned out to remain largely unchanged during the course of the pandemic. Stabilizing Financial Markets We also needed to avoid a negative feedback loop between the financial system and the real economy. From late February 2020, global financial and capital markets became unnerved, as seen in the plunge in stock prices. The "dash for cash" led to a sharp increase in U.S. dollar funding premiums. In response, six major central banks, including the Bank of Japan, coordinated to expand U.S. dollar funds-supplying operations. Ample supply of funds to markets and central banks' strong commitment to securing financial market stability gave market participants a sense of security. U.S. dollar funding premiums soon began to decline. As such, confidence in financial markets recovered in a relatively short time, thanks to the internationally coordinated liquidity provisioning. I appreciate the nimble actions and vigorous efforts made by the Federal Reserve and the collaborations of our central bank colleagues. This demonstrates the effectiveness of central banks' extended "lender of last resort" function - that is, the "global lender of last resort," or GLLR, and the "market maker of last resort," or MMLR - which has been developed since the GFC. Supporting Corporate Financing In many jurisdictions, governments and central banks also took extraordinary measures to support corporate financing. At the time, economic activity was severely restricted, and it was important to avoid further downward pressure on the real economy from the financial side. In Japan, the government introduced measures to assume the credit risk of bank lending to small and medium-sized enterprises. The Bank of Japan established the Special Program to provide support for corporate financing, with a total size exceeding 100 trillion yen. In this program, the Bank back-financed bank lending with 2/6 BIS - Central bankers' speeches favorable conditions and increased the amount of purchases of corporate bonds and CPs. This is an example of cooperation between the government and central bank to support corporate financing, with a clear demarcation of their respective roles. I would also like to emphasize the role played by financial institutions. They showed stress resilience with sufficient capital bases, so as to maintain robust lending activities during the pandemic. In this regard, strengthened financial regulations since the GFC, Basel III in particular, were pivotal. In all, it is fair to say that the measures by governments and central banks and the initiatives by financial institutions acted together to prevent a negative feedback loop between the financial system and the real economy. II. Inflation and the High Interest Rate Environment after the Pandemic Normalization of Economic Activity and Inflation During the pandemic, governments and central banks, as well as many market participants, were concerned that the deterioration in the real economy could be prolonged, and that the problem for corporate financing could shift from liquidity to solvency. However, before such risks materialized, economic activity resumed earlier than expected, owing to progress in vaccinations and governments' fiscal support, particularly in the United States and Europe, while there remained supply-side constraints globally. These demand and supply developments, together with heightened geopolitical risks arising from Russia's invasion of Ukraine, drove high inflation. In an effort to contain this high inflation, many central banks started to raise policy interest rates at an unprecedented pace. Bank Troubles In March 2023, following the failure of Silicon Valley Bank (SVB), Credit Suisse was acquired by UBS after falling into financial difficulties. The reasons why these two banks fell into difficulties were idiosyncratic. In particular, SVB's balance sheet structure was quite unique. It depended on uninsured deposits mainly from the technology sector on the liability side, and held fixed-rate and held-to-maturity bonds on the asset side. Interest rate risk built up, and once deposits started to be withdrawn, concern over valuation losses on bonds has caused further deposit outflows. Turning to Credit Suisse, there had already been concerns over its business model and governance for several years, as seen in a series of loss cases, and media reports saying that Credit Suisse was having difficulties in raising capital triggered deposit outflows in a short period of time. Although the failures of these banks were idiosyncratic shocks, these events posed the tail risk of contagion. In the United States, authorities announced that all deposits of failed banks, including SVB, would be protected and the Federal Reserve introduced the Bank Term Funding Program, which allowed financial institutions to pledge assets as collateral at par. In Switzerland, upon the takeover of Credit Suisse, the Swiss National Bank announced liquidity assistance based on the Federal Council's 3/6 BIS - Central bankers' speeches Emergency Ordinance. While these were rather exceptional measures at times of crisis, they contributed to eliminating uncertainty in the market and to preventing an adverse impact on the real economy. Developments in Japan's Financial System Let me briefly touch upon developments in Japan's financial system during these periods. As for the impact of the pandemic on the loan portfolios of Japanese banks, their credit costs have remained low. In the Financial System Report published this October, the Bank examined the bankruptcies and default events of borrowers. The default rate of vulnerable firms declined during the pandemic due to the various support measures I just mentioned, but it rose again after the pandemic, suggesting the possibility that past vulnerability has materialized with a time lag. We judged, however, that the quality of banks' loan portfolios has been maintained overall, as firms' financial conditions have continued to improve, while we should note heterogeneity among firms. As for the effects of the change in interest rate environments after the pandemic, the Report simulated the impact of rising yen interest rates on banks' deposits and lending. Higher interest rates will likely improve banks' profits in the long run, while it may temporarily suppress margins of some banks, especially those with a large amount of fixed-rate loans and long-maturity securities. In any case, the rise in interest rates was much milder in Japan than in the United States and Europe, as was the impact on banking businesses and the financial system. On the whole, Japan's financial system has been maintaining stability. Financial institutions have sufficient capital bases and stable funding bases to withstand various types of risks, including the global rise in interest rates and GFC-type stress. Financial intermediation has continued to function smoothly. III. Lessons Learned and Challenges Ahead Before I conclude, I would like to talk about the lessons learned and the challenges ahead. As I said at the outset, even if we understand the economic and financial situations and the risks associated with them, it is difficult to predict what kind of shocks will happen in the future. But this does not mean that we cannot prepare for unknowns. On the contrary, the episodes I mentioned today all highlight the importance of what we do during normal times in order to react nimbly when we face a crisis. The Role of Central Banks Prompt enhancement of the swap lines was possible based on the experience at the time of the GFC and day-to-day communication and collaboration among central banks. The market instability during the pandemic and the banking sector turmoil after the pandemic showed that, when the financial system is under stress, market conditions can deteriorate rapidly due to liquidity and funding concerns, and the risk of a negative feedback loop increases. In such a situation, it is important for central banks to maintain market confidence by fulfilling the GLLR and MMLR functions. Recently, we are required to respond to crises even more rapidly and on a larger scale. So, close communication among central banks during normal times is key. 4/6 BIS - Central bankers' speeches A central bank also needsto keep close communication with financial institutions and monitor risks on a daily basis to fulfill its LLR function in a timely manner. Allow me to talk a bit about my own experience. Back in the early 2000s, when Japan's financial system was still unstable, I was leading a team in charge of monitoring financial institutions and coordinating LLR functions at the Bank. We tried to get as detailed information on individual banks as possible, including the expected daily inflow and outflow of deposits in the near future, eligible collaterals, and so on. As you know well, every bank is different. Whether we decide to rescue or resolve a troubled bank, we need to have detailed and technical information in making plans to implement that decision in an orderly way. Good preparation pays off. On financial regulations, authorities have had wide-ranging discussions and have tried hard to reach a consensus since the GFC. The strengthened capital base of the banking sector proved effective during the pandemic, following the transition to Basel III. Financial institutions carried out their roles to support their borrowers, with some help from the government. Let me therefore emphasize the importance of implementing all aspects of the Basel III framework globally, in full, consistently and as soon as possible. Underlying Trends in the Financial System In addition to the impact of the pandemic and global inflation, there are several underlying trends in the financial system we should note, such as increasing global interlinkages among financial systems, the growing presence of non-bank financial intermediaries (NBFIs), and digitalization. First, as the interlinkage among financial systems has been increasing globally and shocks have been spreading across borders at greater speed, central banks and supervisory authorities are under pressure to assess the situation and provide liquidity in a very limited amount of time, as I mentioned earlier. International coordination is especially critical in jurisdictions like Japan, where financial markets open ahead of other regions due to the time difference. Secondly, the growing presence of NBFIs also warrants attention. Some reports show that NBFIs account for almost half of financial intermediations globally. Financial and capital markets are often affected by NBFIs' strategies and activities, as we observed very recently. They usually do not have direct access to central bank money, and authorities have less information on NBFIs than on deposit-taking institutions. However, as the relationship between NBFIs and the banking sector deepens, deterioration in the non-bank sector could spill over to the entire financial system via financial markets. Finally, digitalization and advances in IT have had a significant impact on the businesses and risk management of financial institutions. Recently, the pandemic brought about an acceleration in digitalization through the rapid increase in remote work, online conferences, and so on. The proliferation of social media and the improvement in online banking platforms have drastically increased the speed and volume of deposit flows. Financial institutions and authorities must be ready for any sudden outflow of deposits, since information spreads so rapidly across these platforms. They should also be attentive to operational and cybersecurity risks. 5/6 BIS - Central bankers' speeches These trends are not new. We have been aware of the problems and have discussed measures to address them. The trends will continue, and we should continue our efforts as well. Concluding Remarks Today, I have talked about pivotal events in recent years, especially from a central bank perspective. Of course, there are many other issues to be discussed. I am sure that you will cover a wide range of topics at this conference, including issues regarding the framework of a deposit insurance system. The deposit insurance system is a critical safety net not only for the orderly resolution of troubled banks, but also for the stability of the financial system as a whole. The very existence of deposit insurance contributes to maintaining the confidence of depositors and makes banking businesses possible, which inherently involves maturity transformation and liquidity risks. In operating a deposit insurance system, we need to strike a balance between the stability of the financial system and the risk of moral hazard, as this balance will affect the businesses of banks as well as nonbanks. Deposit insurance is also relevant to the functions of a central bank, the LLR function in particular, as both serve to complement the liquidity of banks. How central banks react at times of stress will affect how the deposit insurance system is designed and operated, and vice versa. The recent events and the underlying trends I have mentioned today pose challenges for both the deposit insurance system and central banks. Some are new and some are rather conventional. I know it is a big question. Well, I wish I could share my ideas with you, but since time is running out, I will leave further consideration to you. I hope today's discussion will be a steppingstone toward achieving a further enhancement of a deposit insurance system. Thank you very much for your attention. 6/6 BIS - Central bankers' speeches
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Remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the Paris Europlace Financial Forum 2024, Tokyo, 21 November 2024.
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Kazuo Ueda: Opportunities and challenges for financial intermediation functions brought about by technological advancements Remarks by Mr Kazuo Ueda, Governor of the Bank of Japan, at the Paris Europlace Financial Forum 2024, Tokyo, 21 November 2024. *** Introduction It is a great pleasure and an honor to be invited to the Paris Europlace Financial Forum in Tokyo. Paris Europlace brings together a diverse group of participants from the French financial sector, and has contributed greatly to the advancement of financial services and financial markets. It is my privilege to have the opportunity to speak to you today. This summer Paris hosted the Olympic and Paralympic Games, following the Tokyo Games in 2021. Athletes delivered thrilling performances, supported by cutting-edge technologies that played a pivotal role in the seamless operation of the games and creating an engaging experience for viewers worldwide. These technologies contributed to the safety of the athletes and spectators, and helped referees make accurate decisions through high-tech cameras and artificial intelligence (AI). Viewers around the globe were able to enjoy the competition highlights, edited by AI in multiple languages, with immersive video and commentary that made them feel as if they were right there in the venues. Such advanced technologies are now an essential part of the sports industry. Similarly, technological advancements have driven substantial progress in the financial sector. Recent acceleration in digitalization, coupled with societal transformations due to the pandemic, has had a profound impact on financial businesses. Conversely, financial institutions have played a vital role in promoting technological developments. Today, I will address both the opportunities and challenges for financial intermediation functions brought about by these evolving technologies. I. Opportunities for Financial Intermediation Functions The financial sector has continuously transformed and developed, greatly influenced by technological advancements. These innovations have not only increased operational efficiency and reduced costs for financial institutions, but have also elevated and diversified financial intermediation functions. As technology evolves, funds with various preferences and risk tolerance are distributed more efficiently across the economy. Technological advances have redefined financial services that once depended on physical infrastructure, such as branches and ATMs, allowing them to be delivered online through tools like the internet and smartphones. This shift has enhanced customer experience and the operational efficiency of financial institutions, and has 1/3 BIS - Central bankers' speeches expanded the customer base. In capital markets, where financial dealers and brokers facilitate transactions, increased processing capabilities have given rise to sophisticated trading methods, including derivatives and algorithmic trading, further diversifying financial intermediation. In the field of FinTech, the role of IT firms and startups has grown, as they harness new information technologies for financial innovation. A notable example is decentralized finance (DeFi), where automated systems provide efficient financial services without the need for a central administrator. The financial industry is set to undergo even more transformation with the recent rise of generative AI. While still in its early stages, institutions in Japan and Europe are making strides in leveraging this technology. For example, generative AI has been used to improve internal processes, such as minute-taking, document summarization, translations, and compliance checks. In Japan, it is also seen as a valuable tool to mitigate labor shortages. Additionally, generative AI is beginning to support customer data analysis, transaction monitoring for fraud detection, and other critical operations, all contributing to enhanced profitability and productivity within the financial sector. So far, we have seen how technology has diversified financial intermediation. The reverse is also true: financial intermediation supports technology by providing essential investment for R&D and commercialization. Financial entities, not just banks, but also venture capital and private equity and debt funds now play a significant role in fostering innovation. They provide funding across a wide spectrum of industries and risk profiles, creating a positive feedback loop between financial intermediation and technological advancement, essential for economic growth and productivity enhancement, in both Japan and Europe. II. Challenges for Financial Intermediation Functions It is necessary to keep in mind, however, that technological advancements bring new risks to financial stability. For example, during the banking turmoil of March 2023, we saw how concerns over a bank's credit status could spread rapidly, leading to accelerated deposit withdrawals due to online banking and social media. As financial services grow more diverse and complex, the channels of risk transmission have become less transparent, and current financial regulations may not be fully equipped to manage new types of financial services. This environment underscores the need for operational resilience, including robust management of cybersecurity and third-party risks. With the rise of generative AI, there are also specific challenges, including the risk of "hallucinations" (that is, non-factual responses), black box issues, and data protection concerns. It is crucial that central banks and other authorities monitor these evolving financial intermediation functions, encourage relevant entities to establish sound governance, and build management frameworks to address the new risks. A regulatory and supervisory framework that adapts to technological advancements is also essential. In Japan, for example, crypto-asset regulations and stablecoin legislation were introduced ahead of other jurisdictions, with cybersecurity guidelines established in 2024. Meanwhile, the European Union enacted the Artificial Intelligence Act, the 2/3 BIS - Central bankers' speeches world's first regulation for trustworthy AI. As AI continues to spread globally, the Bank of Japan closely follows regulatory responses across jurisdictions. Concluding Remarks Let me conclude by adding that central banks are also embracing technology to enhance risk management and analytical capabilities. To ensure a future that reaps the full benefits of technology, it is essential to build on the insights gained from the expertise and trial-and-error of financial professionals. This forum is a unique opportunity for financial professionals from Japan and France to exchange knowledge. In the spirit of the Paris 2024 Olympic and Paralympic Games' slogan, "Games Wide Open (Ouvrons Grand Les Jeux)," I hope that this gathering becomes a vibrant platform for sharing ideas and fostering fruitful discussions. Thank you for your attention. 3/3 BIS - Central bankers' speeches
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Speech by Mr Toyoaki Nakamura, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Hiroshima, 5 December 2024.
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December 5, 2024 Bank of Japan Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Hiroshima NAKAMURA Toyoaki Member of the Policy Board (English translation based on the Japanese original) I. Economic Developments at Home and Abroad I will begin my speech by talking about recent developments in and the outlook for overseas economies. Overseas economies have grown moderately on the whole, although uncertainties surrounding these economies have continued to be high, such as a delay in the recovery of the European and Chinese economies, and the prolonged situation in Ukraine and the Middle East (Chart 1). The U.S. economy, despite the impact of successive policy interest rate hikes, has been firm, mainly due to resilient private consumption, and is increasingly expected to make a soft landing. However, the economy has also shown some signs of deceleration, such as declining trends in the number of job openings and the consumer confidence index, and a significant rise in credit card delinquency rates. Moreover, attention should be paid to the risk of a resurgence of inflation as a result of, for example, future economic developments and policy conduct. European economies have kept slowing moderately due to the continued impact of factors such as successive policy interest rate hikes in the past. There is concern over economic recovery being delayed in Europe due not only to the economic stagnation in Germany -- which has seen a decline in industrial strength and an increase in downward pressure on wages -- but also to chronic labor issues in European economies. The pace of recovery in the Chinese economy has slowed, reflecting an increase in households' thriftiness. The increase is mainly due to (1) prolonged sluggishness in the real estate market, intensified price competition, (3) the high youth unemployment rate, and (4) people's concerns over future wages and their post-retirement years. I believe that further deterioration in the Chinese economy will be avoided through expansion in fiscal spending and monetary easing. However, as adjustment pressure in the real estate and labor markets remains, there is concern over a lower economic growth rate in the future, due to intensified price competition brought about by higher supply capacity and to growing trade friction. Let me move on to recent developments in Japan's economic activity and prices. The economy has recovered moderately, although some weakness has been seen in part. In the corporate sector, goods exports have been more or less flat. Meanwhile, services exports have continued to increase at a pace almost surpassing the record high, given an increase in inbound tourism demand reflecting factors such as a higher number of foreign visitors. Industrial production has been more or less flat. Corporate profits have been on an improving trend. Business fixed investment has also been increasing moderately, due to growing demand for investment such as efficiency-improving investment and investments associated with digital transformation (DX) and green transformation (GX). That said, with aggregate demand remaining below aggregate supply, some of the business fixed investment plans may be postponed, and thus future developments warrant attention. With respect to the household sector, the income situation has improved moderately, as seen in the year-on-year wage growth continuing to be in the range of 2.5-3.0 percent. However, I am closely monitoring future developments in wage growth, as there seems to be a polarization between (1) growth-oriented firms -- large and medium-sized ones as well as some small ones -- making "virtuous" wage hikes and the majority of small firms -- whose recovery of earning power has trailed behind -- making "defensive" wage hikes. Private consumption has been lacking momentum, mainly due to the impact of price rises and households' thriftiness. Turning to prices, the year-on-year rate of increase in the consumer price index (CPI) for all items excluding fresh food has been in the range of 2.0-2.5 percent recently, as services prices have continued to rise moderately, reflecting factors such as wage increases, although the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices have waned. As for the outlook, the Bank of Japan's October 2024 Outlook for Economic Activity and Prices (Outlook Report) forecasts that Japan's economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions (Chart 2). However, because I am not yet confident in the sustainability of wage hikes, my projection for real GDP growth rates for fiscal 2024 to 2026 is lower than the medians of the Policy Board members' forecasts presented in the October Outlook Report. My projection is based on factors such as the following: (1) private consumption that reflects an intensified thriftiness among households; (2) the possible postponement of implementing business fixed investment plans; and mounting international competition triggered by the slowdown in overseas economies, particularly China. In the October Outlook Report, the median of the Policy Board members' forecasts for the year-on-year rate of increase in the CPI for all items excluding fresh food is around 2.5 percent for fiscal 2024, and around 2 percent for fiscal 2025 and 2026. However, in my view, the rate may not reach 2 percent in fiscal 2025 and thereafter. II. Conduct of Monetary Policy in Line with the State of the Economy's Return to a Growth Path The purpose of the Bank of Japan's monetary policy is to achieve the 2 percent price stability target in a sustainable and stable manner, thereby contributing to the sound development of the national economy. Factors such as U.S. monetary policy and developments in overseas economies and exchange rates impact economic activity and prices in Japan, and thus require consideration. However, I believe what is essential in the conduct of monetary policy is to contribute to improvement in Japan's economic fundamentals from a medium- to long-term perspective in line with the state of the economy's recovery, as the economy faces low profitability due to changes in demographics and the industrial structure. Keeping this view in mind and drawing from my own experience, I will overview topics such as the changes in Japan's industrial structure from a somewhat long-term perspective. A. Changes in Japan's Industrial Structure and the State of Economic Recovery During the Showa era's post-war period of rapid economic growth in Japan, export industries quickly flourished in a weak yen environment by realizing high performance, high quality, and low prices via a business model of mass production and vertical integration. Household income also continued to experience rapid growth. Meanwhile, as firms pursued greater production efficiency, the system of lifetime employment and seniority-based wages took shape. Trade friction subsequently broke out between Japan and the United States, while the yen began to appreciate rapidly following the 1985 Plaza Accord. This led firms, especially large ones, to actively expand their overseas sites. As Japan entered the Heisei era in 1989, even under a strong yen, it seemed as if the bubble economy offset the downturn in export industries. However, as advances in IT drove greater digitalization and globalization, business models involving a horizontal division of labor proved increasingly superior. In this situation, the international competitiveness of Japan,1 which globally ranked first until 1992, gradually declined because Japanese firms trailed behind in restructuring their business portfolios (Chart 3). Corporate earnings deteriorated, due in part to the collapse of the bubble economy in early 1992 and the financial system crisis. These developments prompted large firms with high productivity to actively invest overseas and relocate their supply chains to China, Southeast Asia, and other countries and regions, in pursuit of lower costs and higher growth. On the other hand, in Japan, large firms reformed their cost structures, by, for example, closing factories, downsizing, restraining investment, encouraging voluntary retirement, and cutting wages. The trends of cutting costs and restraining investment also spilled over to small firms, which faced dwindling orders as well as intensified price competition. As a result, despite an aging and declining population, the issue of labor shortages did not surface (Chart 4). Employment was prioritized over wages, and firms made little headway with restructuring their business portfolios to strengthen their ability to create added value. Under these circumstances, intensified price competition led to lower growth and profitability for domestic industries, and Japan's economy fell into deflation in which it was difficult for wages and prices to rise. The ensuing three decades of an economy oriented toward contraction, characterized by a deflationary mindset and cost-cutting, gave rise to a persistent vicious cycle in which the output gap fell into negative territory. Firms in Japan grew more cautious in their wage- and price-setting behavior, falling behind in terms of business fixed investment and digitalization. Thriftiness among households also seemed to take root. Looking at trends in the trade balance, Japan's terms of trade have deteriorated, due to lower exports of industrial products and higher imports of goods such as mineral fuels, and this has propelled a decline in firms' profitability (Chart 5). Moreover, Japan's wage levels, even those of large firms, is low compared to the Group of Seven (G7) countries and major Asian economies (Chart 6), and private consumption is lacking momentum. However, bold monetary easing and flexible fiscal policies have helped to bring about a situation where the economy is no longer in deflation. The IMD World Competitiveness Booklet published by the International Institute for Management Development (IMD) shows that Japan ranked first in international competitiveness until 1992, but is now ranked quite low, in 38th place. Furthermore, the rise in global inflation and the yen's depreciation after the onset of the COVID-19 pandemic gave rise to inflation in Japan as well, sparked by a rise in import prices. Firms, large ones in particular, have achieved stronger earning power due to their implementation of business portfolio restructuring. That is why in 2024, Japan saw its highest wage growth in 33 years, stock prices that exceeded the level of the bubble economy, and business fixed investment totaling more than 100 trillion yen. Such vigorous business activities have yielded initial signs of a significant shift toward "a growth-oriented economy driven by wage increases and investment" that is capable of keeping up with inflation. Regulatory reforms that had been sluggish have also begun to move ahead. That being said, real GDP has recently experienced quarter-on-quarter increases and decreases, and it is still too early to judge whether the economy is on a stable growth path. B. Conduct of Monetary Policy in Line with the State of Economic Recovery Since the recovery phase from the pandemic, labor shortages have grown more acute, fueling greater mobility in employment and wage hikes. Structural issues remain, however, including weak demand and supply-side constraints -- both due to the aging and declining population -- and low profitability of the industrial structure. As the recovery in investment has trailed behind for small firms in particular, I personally do not yet have confidence in the sustainability of the wage hikes. Achieving the 2 percent price stability target in a sustainable and stable manner will require changes to Japan's economic structure so that it will inspire confidence in the economy's expected return to a growth path driven by the stronger earning power of firms. I should note that this will take a considerable amount of time. However, there are already initial signs of a significant shift toward "a growth-oriented economy driven by wage increases and investment" that is capable of keeping up with inflation. To ensure that this shift maintains momentum and does not subside, I think it is now vital for the Bank to examine a wide range of data and cautiously adjust the degree of monetary accommodation to reflect the state of economic recovery. Specifically, I would like to carefully confirm the state of Japan's economic recovery with reference to a wide range of data and anecdotal information, including (1) whether the level of earning power of small firms, for which recovery has trailed behind, is higher than before the pandemic, (2) whether firms are able to pass on costs to prices at a higher rate, (3) whether progress is made in stepping up business fixed investment as well as wages and bonus payments, (4) whether more small firms are making virtuous wage hikes, (5) whether households' thriftiness has improved, and (6) whether Japan's exports have become more competitive. I will return to these points later, along with a discussion of the structural issues facing Japan. III. Toward Sustainable Economic Growth that Overcomes Structural Issues I would now like to share my personal views from a medium- to long-term perspective on the "dynamism" of firms, employment, and households needed to achieve sustainable growth in Japan's economy, which is facing structural issues. A. Improving Japanese Firms' Earning Power and Capacity for Raising Wages As discussed so far, employment was prioritized over wages in Japan. This hindered business metabolism, generated delays in productivity gains, and led to stagnant wages. Following the 2008 Global Financial Crisis, many large firms shifted the focus of their management from reforming their cost structures to restructuring their business portfolios, thereby strengthening earning power. To secure human capital,2 I think large and medium-sized firms that have boosted productivity will strengthen their mid-career hiring by offering higher wages than those of existing employees, and they will continue to raise wages at high rates to bridge the gap between the wages of existing employees and wages formed in the labor market. Labor shortages among large firms spur the movement of labor from small firms to large firms, creating employment dynamism (Chart 7). Developments in the following components of nominal wage growth show positive signs: the inflation rate (maintenance of living standards), the labor productivity growth rate (fruits of productivity gains), and changes in labor share (capacity for raising wages) (Chart 8). Nonetheless, I believe that the benefits of restructuring at large firms have not yet sufficiently spilled over to small and medium-sized firms. According to the Financial Statements Statistics of Corporations by Industry, Annually, for fiscal 2023, operating profits per employee among medium-sized firms was around 40 percent of that of large firms, and only around 10 percent among small firms (micro firms "Human capital" is a term coined to express the idea that human resources are valuable for corporate management. excluded). Personnel expenses per employee among medium-sized firms was around 70 percent of that of large firms, and around half among small firms (micro firms excluded). In terms of per-employee operating profits, business fixed investment, and personnel expenses by firm size, for large and medium-sized firms, operating profits per employee -- an indicator of earning power -- grew significantly compared with the pre-pandemic period of fiscal 2018. It appears that these firms are implementing virtuous wage hikes, which are accompanied by productivity gains achieved through active business fixed investment (Chart 9). Meanwhile, the earning power of small firms (micro firms excluded) is still on its way to recovery from the pandemic and remains below pre-pandemic levels. These firms are also taking a waitand-see approach to fixed investment, and many seem to have raised wages as a defensive step that aims at retaining employees and is not accompanied by productivity gains. This trend was unchanged in the July-September 2024 Financial Statements Statistics of Corporations by Industry, Quarterly. Furthermore, at the October 2024 meeting of the general managers of the Bank's branches, there were many reports that small firms had raised wages as a defensive step to retain employees. A March 2024 follow-up survey on the Price Negotiation Promotion Month organized by the Small and Medium Enterprise Agency found that the proportion of small firms that engaged in price negotiations was 59 percent, only a slight increase from the previous survey. The rate of passing on costs to prices was 46 percent -- largely unchanged from the previous survey, and the rate of passing on labor costs was 40 percent. These figures suggest that there has been a polarization between firms that have been able to pass on costs to prices, while others remain unable to do so. If the recovery in small firms' earning power does not progress while they continue to raise wages at high rates, they could theoretically start operating at a loss within several years. This indicates their lack of capacity for raising wages. A June 2024 survey by the Japan Chamber of Commerce and Industry found that only 30 percent of small firms had implemented virtuous wage hikes, while 44 percent had raised wages as a defensive step, and 26 percent reported being undecided or having no plans to raise wages. Thus, there is still a long way to go before sustainable and structural wage hikes are achieved. With a view to securing funds for raising wages, economic growth and improvement in corporate profits are important. In terms of corporate earnings of listed firms for the first half of fiscal 2024, according to media reports, those of nonmanufacturers increased for four consecutive years, led by the finance and shipping industries. However, among manufacturers, firms in the automobile and steel industries in particular, earnings decreased for the first time in four years, mainly due to the slowdown in China and other overseas economies and to intensified price competition. Japan's trade balance deficit continued in October, making it the fourth consecutive month; consequently, the nominal GDP growth rate for the JulySeptember quarter remained low at a 0.5 percent quarterly increase. However, many listed firms have been conducting business portfolio restructuring that strengthens the earning power of core businesses. I am closely monitoring the progress in this restructuring, and hope that its benefits will spill over to small firms. Japan's economy is expected to head toward a growth path, albeit at a moderate pace, mainly led by growth-oriented large, medium-sized, and small firms. The Bank will gradually adjust its monetary policy accordingly. In response, small firms will need to move away from closed innovation, which relies on in-house expertise, and hasten structural reforms to step up the scale of their businesses, in order to reinforce the management resources necessary for growth-oriented business development. From this perspective, I am also paying attention to developments that feed into greater earning power, such as those in business fixed investment and exports, as well as mergers and acquisitions (M&As) and third-party business succession (Chart 10). B. Improving the Dynamism of Firms and Employment to Make Industries Highly Profitable If firms improve their capacity for innovation to make Japan's industrial structure highly profitable and enhance export competitiveness, these firms will be able to capture growth in overseas markets to a greater extent. This, in turn, will generate sustainable demand for business fixed investment in Japan and promote industrial clusters. Such moves are expected to spill over across small and medium-sized firms. Research and development (R&D) expenses -- which are critical in terms of boosting the declining international competitiveness I mentioned earlier -- were sluggish, amounting to 200.7 billion U.S. dollars in Japan in 2022, reflecting stagnation in its economic growth. In comparison, R&D expenses for the United States and China increased in line with their economic growth, standing at 923.2 billion U.S. dollars and 811.8 billion dollars, respectively. One reason for this sluggishness in Japan's R&D expenses is that, due to the historical background I explained earlier, the innovation required of advanced economies has stagnated in Japan, forcing firms to face price competition with emerging economies and to cut costs. For example, while software investment has grown 11-fold in the United States since 1990, it has barely grown in Japan over the same period, indicating a widening disparity between the two (Chart 11). In addition to expanding business performance, it is important for advanced economies to play a leading role in making active investment in R&D, human capital, and digitalization to accelerate future growth, while providing greater value through generating innovation. I expect reforms to the industrial structure to progress through continued expansion in investment, including firms' actions currently underway to foster and develop leading industries and strengthen human capital development. It is also vital to support the development of small and medium-sized firms and startups that aspire to expand overseas. Many large firms started out as so-called unicorns and then grew rapidly. From 2011 to 2021, about 30 percent of medium-sized firms in the United States and Europe grew into large firms, but this proportion in Japan was only about 10 percent, suggesting the weakening growth potential of small and medium-sized firms in Japan that form the backbone of domestic economic activity and investment. Compared with the 1990s, while large firms' operating profits per employee grew 2.4-fold and those of medium-sized firms grew 1.9-fold, profits of small firms remained flat (Chart 9). Increasingly acute labor shortages are also a major supply-side constraint. Furthermore, there are concerns that, if firms face delays in productivity gains due to the postponement of business fixed investment, they may move supply chains offshore. Therefore, my hope is to see growth in the following two types of firms especially: medium-sized firms aiming to grow into large firms, and small firms aiming to reach annual sales of 10 billion yen. This is also in line with the policy laid out by the Japanese government. In addition, compared with the 1990s, large firms' labor costs per employee increased 1.1fold, while those for small and medium-sized firms remained flat (Chart 9). As wages represent employee value, firms need to continue with their strenuous efforts to improve their earning power and implement virtuous wage hikes, thereby enhancing employee value. Investment in human resource development, including reskilling efforts, is important in enhancing employee value. If firms find it difficult to do this on their own, one option is to entrust the management of the businesses to their best owners. 3 Nowadays, employees themselves must also make efforts to enhance their own value, and it is natural for employees to consider changing jobs as an option, if they are unable to enhance their value at their current employment. Therefore, I believe that the key to sustainable wage increases is how growthoriented small and medium-sized firms implement structural reforms to step up the scale of their businesses. Admiration for growth-oriented firms will be inspired through the growth of small firms into medium-sized firms, the growth of medium-sized firms into large firms, and the rapid expansion of startups into unicorns, especially unicorns that use new technologies to generate new markets. I believe that this will draw both funds and talent to these firms, creating a growth spiral that reinforces the dynamism of firms and employment characterized by continuing rises in wage levels (Chart 12). Through such developments, I hope to see a virtuous cycle of growth and profit sharing. In addition, the growth of small firms -- whose employees account for about 70 percent of the total workforce in Japan -- is indispensable to raising wage levels nationwide, revitalizing the attractiveness of regions struggling with population outflows, and improving job satisfaction. I expect regional financial institutions familiar with the situation in their respective regions and their client firms to play their part in supporting them by reinforcing their earning power through a strengthening of cooperation with support organizations, such as the Organization for Small & Medium Enterprises and Regional Innovation, the National Center for Industrial Property Information and Training (INPIT),4 university research centers, and consulting firms. Regional financial institutions should also provide in-depth business The "Practical Guidelines for Group Governance Systems" issued by the Ministry of Economy, Trade and Industry on June 28, 2019, highlights the importance of focusing on which company is the best owner to realize the potential of each business, when optimizing the business portfolio of the group firm as a whole, by identifying and strengthening core businesses, while also streamlining noncore businesses. INPIT is an institution that offers various services such as providing information on intellectual property rights, including patents, and other support services for users of the system of industrial property rights. matching for M&As and third-party business succession, and other value-added services. These efforts in turn would propel the structural reforms to step up the scale of the small firms' businesses and thereby strengthen their earning power. I look forward to the strengthening of support activities dedicated to improving corporate dynamism. C. Improving Household Dynamism to Mitigate Concerns about the Future As Japan's industrial structure relies on imports for most of its resources for production inputs, coupled with today's globalized supply chains, the country's economic structure is therefore susceptible to global inflation. The latest figure for the year-on-year rate of increase in scheduled cash earnings per employee is in the range of 2.5-3.0 percent, reflecting the highest wage increase rate in 33 years (Chart 13). Meanwhile, over the same period, the working age population in Japan has decreased by about 10 percent, while the number of pensioners has increased 2.4-fold. Furthermore, pensioners, whose income replacement ratio is about 60 percent relative to their past wages, now account for around 30 percent of the overall population, resulting in a heavy social burden for the working age population. As a result, the social structure has characteristics of overall sluggishness in households' purchasing power and their tendency toward thriftiness. As Japan's economic structure is subject to low profitability, to dispel concerns about the future, it is essential for growth-oriented large and medium-sized firms, as well as some small ones, to take the lead in driving overall economic growth, and for virtuous wage hikes to spread to the majority of small firms that employ a sizable proportion of the country's workforce. However, the current wage level in Japan is low compared with other major economies. Japan also faces structural issues such as higher hourly cash earnings not leading to higher disposable income, due to the heavier social burden and the so-called annual income barrier. The latter refers to the fact that households' secondary earners or seniors try to adjust their working hours so that their income stays under the ceiling for tax exemption. Meanwhile, Japan's income structure is heavily dependent on employee compensation, which accounts for more than 90 percent of households' disposable income. To alleviate households' concerns about the future, efforts to diversify their earning power are necessary, as in the case with the United States, where employee compensation accounts for about 70 percent of disposable income, with dividend and interest income accounting for about 20 percent (Chart 14). With the launch of the new Nippon Individual Savings Account (NISA) program, households have started to diversify their income sources, enabling them to earn more income not only through better business performance at the firm where they work, but also through greater returns from their investments that reflect the growth of listed firms (Chart 15). Sustained wage increases and higher wages accompanied by job changes, coupled with investment that focuses on the long term, on regular contributions, and on risk diversification, will lead to improved household dynamism, thereby strengthening households' earning power. The hope is that this will feed into improvement in households' consumption patterns (Chart 16). The Bank of Japan will continue to conduct monetary policy as appropriate to support firms' management efforts, enhance the dynamism of firms, employment, and households, and guide the economy's return to a growth path. Thank you. Economic Activity, Prices, and Monetary Policy in Japan Speech at a Meeting with Local Leaders in Hiroshima December 5, 2024 NAKAMURA Toyoaki Member of the Policy Board Bank of Japan Chart 1 IMF Projections in the World Economic Outlook (October 2024) y/y % chg. IMF projections -2 -4 -6 World output Japan United States China India Euro area -8 CY 80 Source: IMF. Chart 2 Forecasts of the Majority of the Policy Board Members y/y % chg. Real GDP CPI (all items less fresh food) (Reference) CPI (all items less fresh food and energy) Fiscal 2024 +0.5 to +0.7 [+0.6] +2.4 to +2.5 [+2.5] +1.9 to +2.1 [+2.0] Forecasts made in July 2024 +0.5 to +0.7 [+0.6] +2.5 to +2.6 [+2.5] +1.8 to +2.0 [+1.9] Fiscal 2025 +1.0 to +1.2 [+1.1] +1.7 to +2.1 [+1.9] +1.8 to +2.0 [+1.9] Forecasts made in July 2024 +0.9 to +1.1 [+1.0] +2.0 to +2.3 [+2.1] +1.8 to +2.0 [+1.9] Fiscal 2026 +0.8 to +1.1 [+1.0] +1.8 to +2.0 [+1.9] +1.9 to +2.2 [+2.1] Forecasts made in July 2024 +0.8 to +1.0 [+1.0] +1.8 to +2.0 [+1.9] +1.9 to +2.2 [+2.1] Notes: 1. Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates). 2. The forecasts of the majority of the Policy Board members are constructed as follows: each Policy Board member's forecast takes the form of a point estimate -- namely, the figure to which they attach the highest probability of realization. These forecasts are then shown as a range, with the highest figure and the lowest figure excluded. The range does not indicate the forecast errors. 3. Each Policy Board member makes their forecasts taking into account the effects of past policy decisions and with reference to views incorporated in financial markets regarding the future conduct of policy. Source: Bank of Japan. Chart 3 IMD World Competitiveness Ranking Overall Score for 2024 Japan's Ranking Singapore=100 rank Singapore Hong Kong Taiwan United States China Canada South Korea Germany United Kingdom France Japan CY 90 Notes: 1. In the left panel, figures in parentheses indicate the ranking of the economy out of all 67 economies analyzed. 2. In the right panel, there is a discontinuity in the data for 1997 due to a change in the survey framework. Source: IMD, "World Competitiveness Ranking 2024." Chart 4 Diffusion Index (DI) for Employment Conditions DI ("excessive" - "insufficient"), % points Forecast -10 -20 -30 Large firms -40 Medium-sized firms -50 Small firms -60 CY 90 Insufficient Peak of total population Peak of working-age population Note: Figures are for all industries, excluding financial institutions. Source: Bank of Japan. Chart 5 Nominal Trade Balance tril. yen -10 Other items Transport equipment -20 Electrical machinery -30 Mineral fuels Trade balance -40 CY 90 Source: Ministry of Finance. Chart 6 Annual Pay Comparison (as of 2024) G7 Countries Asian Economies thous. USD Japan (Japanese firms) thous. USD Japan (Japanese firms) Canada South Korea United States Germany United Kingdom Thailand Vietnam France China (Beijing) Singapore Italy Manager in a large firm Senior manager in a large firm position class Manager in a large firm Senior manager in a large firm position class Notes: 1. The horizontal axis shows the level of the position class as defined by Mercer. Position classes below the executive level at large firms are shown in this chart. The further to the right, the higher the position class. 2. Figures include incentives paid for 100 percent achievement of performance targets and are the medians for each position class. Source: Mercer, 2024 Total Remuneration Survey. Chart 7 Labor Mobility and Wages Number of Job Changers by Size of Enterprise Share of Workers Who Experienced a Wage Increase after a Job Change 10 thous. persons % Increased by 30% or more Increased by 10% or more but less than 30% Increased by less than 10% No change Large enterprise to large enterprise Large enterprise to SME SME to large enterprise SME to SME CY 12 CY 12 Note: In the left panel, small and medium-sized enterprises (SMEs) are enterprises with 5-299 employees. Large enterprises are those with 300 employees or more. Source: Ministry of Health, Labour and Welfare. Chart 8 Three Indicators That Show Signs of Wage Increases Operating Profits per Employee Prices y/y % chg. Labor Share mil. yen % Large firms Medium-sized firms Small firms -1 -2 -3 CY 90 Small firms Medium-sized firms Large firms FY 90 FY 90 Notes: 1. Figures for prices are the CPI (all items less fresh food). Figures for operating profits per employee and labor share are based on the Financial Statements Statistics of Corporations by Industry, Annually, and exclude the finance and insurance industries. Large firms are commercial corporations with capital of 1 billion yen or more. Medium-sized firms are commercial corporations with capital of 100 million yen or more but less than 1 billion yen. Small firms are commercial corporations with capital of 10 million yen or more but less than 100 million yen. The dotted lines show the average values for the 1990s. 2. Labor share = personnel expenses / (operating profits + personnel expenses + depreciation expenses). Sources: Ministry of Finance; Ministry of Internal Affairs and Communications. Chart 9 Recovery Status of Small and Medium-Sized Firms Operating Profits per Employee Fixed Investment per Employee mil. yen Personnel Expenses per Employee mil. yen mil. yen Large firms Medium-sized firms Small firms FY 90 FY 90 FY 90 Notes: 1. Figures are based on the Financial Statements Statistics of Corporations by Industry, Annually, and exclude the finance and insurance industries. Large firms are commercial corporations with capital of 1 billion yen or more. Medium-sized firms are commercial corporations with capital of 100 million yen or more but less than 1 billion yen. Small firms are commercial corporations with capital of 10 million yen or more but less than 100 million yen. The dotted lines show the average values for the 1990s. 2. Personnel expenses include salaries and wages, bonuses, and welfare expenses. Source: Ministry of Finance. Chart 10 Progress in Structural Reforms by Small Firms M&A Cases Number of Business Successions number of cases 3,000 5 largest brokers 2,500 thous. cases thous. consultees 2.5 Number of consultees (left scale) Business Successions Support Center 2.0 Number of contracts (right scale) 2,000 1.5 1.0 0.5 1,500 1,000 FY 14 FY 11 0.0 Notes: 1. The left panel is based on data from the report regarding the promotion of M&As among small firms released by the Small and Medium Enterprise Agency on June 21, 2022. 2. The right panel shows the number of consultees and the number of contracts concluded at the Business Successions Support Center. Source: Small and Medium Enterprise Agency. Chart 11 Investment in Innovation R&D 1.0 Software Investment tril. USD 0.8 0.9 Japan 0.8 United States Japan 0.7 United States 0.6 China 0.7 tril. USD 0.5 0.6 0.4 0.5 0.4 0.3 0.3 0.2 0.2 0.1 0.1 0.0 CY 90 0.0 CY 90 Note: Figures are based on nominal values denominated in U.S. dollars. Source: OECD. Chart 12 Dynamism of Firms and Employment Growth spiral Further growth Rise in wage levels Aspiring for growth Small firms Growth Startups Growth 【Organic growth】 Investment in equipment, human capital, R&D, marketing, etc. Growth Investment funds, financial institutions, firms, R&D institutions 【Inorganic growth】 M&As, third-party business succession Human capital Mediumsized firms Financial and human capital Large firms Growth Financial capital Unicorns Large firms Growth Growth Chart 13 Scheduled Cash Earnings y/y % chg. 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 -1.0 CY 14 y/y % chg. -1.0 Jan. Apr. Notes: 1. In the left panel, Q1=March-May, Q2=June-August, Q3=September-November, Q4=December-February. 2. Figures from fiscal 2016 onward are based on continuing observations following the sample revisions. Source: Ministry of Health, Labour and Welfare. July Chart 14 Household Disposable Income United States Japan tril. yen tril. USD Disposable income Employee compensation Interest income Dividend income CY 90 CY 90 Note: Figures for Japan before 1994 are calculated using year-on-year changes in each item based on the benchmark year of 2000. Sources: Cabinet Office; U.S. Bureau of Economic Analysis (BEA). Chart 15 Household Financial Assets Japan 2,200 International Comparisons tril. yen Financial assets (total) Cash and deposits Equity Investment trusts 2,000 1,800 1,600 1,400 1,200 1,000 % 3.5 (0.5) 24.8 (-1.2) 2.0 Other 2.7 27.7 28.7 Insurance, pension, and standardized guarantees 21.5 Equity 13.7 (2.3) 5.5 (1.0) 40.5 1.3 (0.0) Investment trusts 10.6 3.1 Debt securities 51.2 (-2.7) 12.8 4.6 34.1 11.7 Japan FY 90 United States Euro area Note: In the right panel, figures are as of end-March 2024. Figures for the United States and the euro area are based on "Flow of Funds: Overview of Japan, the United States, and the Euro area," released by the Bank's Research and Statistics Department on August 30, 2024. Figures for Japan in parentheses indicate changes from the previous fiscal year (% points). Source: Bank of Japan. Cash and deposits Chart 16 Dynamism of Households Growth of the firms where people work Household expenditure Expansion in consumption Improving skills through reskilling, etc. Changing jobs to growing firms Higher wages Labor income Expansion in sources of income Pensions, etc. Social burden Increase in dividends Financial income Dividends Savings; hoarding of cash and deposits Investments Listed firms Partial shift Investing through the new NISA Sustainable expansion in investment focusing on the long term, regular contributions, and risk diversification
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Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at the Meeting of Councillors of Keidanren (Japan Business Federation), Tokyo, 25 December 2024.
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December 25, 2024 Bank of Japan Achievement of the 2 Percent Price Stability Target and Japan's Economy Speech at the Meeting of Councillors of Keidanren (Japan Business Federation) in Tokyo UEDA Kazuo Governor of the Bank of Japan (English translation based on the Japanese original) Introduction It is a great honor to have this opportunity to address such a distinguished gathering of business leaders in Japan today. At last year's Keidanren meeting, I said that the likelihood of achieving the Bank of Japan's price stability target of 2 percent in a sustainable and stable manner seemed to be gradually rising. Since then, thanks largely to the determination of corporate senior executives, significant wage hikes were achieved in the 2024 annual spring labor-management wage negotiations. Reflecting these hikes, real wages have been on an improving trend and private consumption, which had been relatively weak, has also shown signs of improvement. In terms of prices, upward pressure stemming from the rise in costs of imported materials has gradually waned. Meanwhile, prices of a wide range of goods and services have begun to rise moderately, in reflection of the increase in wages. Against this background, the Bank changed its large-scale monetary easing framework last March, discontinuing the negative interest rate policy and yield curve control. Then, in July, the Bank decided on a plan for the reduction of its purchase amount of Japanese government bonds (JGBs) and raised the target level of the short-term interest rate to around 0.25 percent. I believe that 2024 has been a year of steady progress toward achieving the price stability target in a sustainable and stable manner, with a virtuous cycle between wages and prices gradually intensifying. Now, what will the year 2025 look like? Our projection is that the virtuous cycle will further intensify and that Japan's economy will move closer to sustainable and stable 2 percent inflation, accompanied by wage increases. Of course, we are fully aware of the high uncertainties surrounding the outlook for economic activity and prices. That said, now is a good time to contemplate what the economy will look like when the 2 percent target is achieved. Today, after looking back at developments over the past decades, I will talk about what the new state of the economy will be for businesses, and how the Bank will conduct monetary policy to make this state happen. I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation Let me look back at Japan's economy under deflation and low inflation. In April last year, the Bank launched a project to conduct a review of monetary policy from a broad perspective. The aim of the review was to analyze, from various angles, why the situation in which prices do not increase easily continued for a long period since the late 1990s, as well as what impact a series of monetary easing measures during this period had on Japan's economy. Our intent was to make use of the findings of this review in the future conduct of monetary policy. After around a year and a half of various initiatives, including relevant studies, surveys, and exchanges of views with experts, the Bank published the findings of the review last week. Why did the situation in which prices do not increase easily remain in Japan for a prolonged period? The review concluded that the reasons can be broadly categorized into three main factors. The first is the demand-side factor. After the burst of the bubble in the early 1990s, growth expectations declined, as shown in Chart 1, and asset prices fell sharply. These developments forced firms' behavior to become more cautious. Subsequently, the deterioration of the financial crisis in the late 1990s and slowing domestic market growth due to the declining population made firms even more cautious in their behavior. Under these circumstances, even when the Bank lowered the short-term interest rate down to zero percent, it became difficult to sufficiently stimulate the economy, resulting in a chronic shortage of demand. The second is the supply-side factor. In addition to an increase in low-priced imports from emerging economies and technological innovations in IT-related industries, the appreciation of the yen against other currencies through the first half of the 2010s also pushed down prices. The third is the entrenchment in Japanese society of behavior and a mindset based on the assumption that wages and prices will not increase easily, brought about by continued downward pressure on prices from both the demand and supply sides. Customers became more sensitive to price increases and firms became cautious about raising prices. Please take a look at Chart 2. The decrease in price markups indicates that firms faced a decline in pricing power, making it difficult to pass on higher costs to selling prices. In such a difficult macroeconomic environment, firms pursued restructuring of their businesses, including cutting labor costs. In the course of this adjustment, priority was put on maintaining employment even if this required reducing wages. While this stance was effective in avoiding a sharp rise in unemployment, it appears to have reinforced the tendency of firms to suppress wages, as shown again in Chart 2. The combination of these factors led to a prolonged period of low growth as well as deflation or low inflation, which had a major impact on firms' behavior. In their business strategies, firms began to prioritize ensuring their financial soundness and cutting costs. They shifted production overseas and curbed strategic investment domestically. In this situation, as shown in Chart 3, the corporate sector became a net saver in a constant manner, with firms' investment remaining below their cash flow. As firms enhanced efficiency by cutting costs, Japan's economy over many years managed to achieve a labor productivity growth rate comparable to other advanced economies, albeit not as high as that of the United States. This is the result of the extraordinary efforts firms made during this period. However, it cannot be denied that the suppression of research and development (R&D) and strategic investment affected Japan's long-term growth potential. The impact of prioritizing cost cutting and constraining positive actions can also be observed in the change in Japan's position in the global trade structure -- that is, changes in the composition of Japan's current account balance and a deterioration in the terms of trade, as shown in Chart 4. Looking at the breakdown of the current account balance, the trade balance has been at around zero or marked a deficit in recent years, due partly to the shift of production overseas. The main driver of the current account surplus has shifted to the income balance, which includes investment income from entities such as overseas subsidiaries. The terms of trade shown at the right of Chart 4 have been deteriorating. Terms of trade are defined as the ratio of export prices to import prices. Deterioration in these terms means that income flows out of the country through the trading of higher-priced imports and lower-priced exports. It should be noted that terms of trade are largely unaffected by foreign exchange rate movements, since they affect both exports and imports. What plays a key role is foreign currency-denominated prices. In fact, Japan's deteriorating terms of trade since the 1990s are mainly attributable to import price rises stemming from higher commodity prices in U.S. dollar terms. Given that Japan is a net commodity importer, the impact of higher import prices was unavoidable. Nonetheless, it also needs to be noted that the rise in commodity prices was brought about by the expansion of emerging economies. If Japanese firms had been able to fully capitalize on the benefits of this expansion by, for example, developing attractive products, they could have raised export prices and increased export volumes, offsetting to some extent the negative impact of higher import prices. What actually happened during this period, however, was a decline in Japan's share of exports in world trade and a lowering of export prices by means of cost cutting. The outflow of income due to the deteriorating terms of trade is one of the reasons why households were unable to enjoy economic growth in their livelihoods. Please take a look at Chart 5. Growth in real wages for households has continued to trail behind labor productivity growth. This owes to the outflow of income due to the deteriorating terms of trade, coupled with a decline in the labor share. Put differently, even though firms managed to increase labor productivity by cutting costs, households were unable to enjoy the benefit of this increase due to rises in energy and other prices. Growth in private consumption remained moderate due to sluggish growth in real wages and income, and weak domestic demand put further constraints on firms' investment behavior. II. Achievement of the 2 Percent Target and Japan's Economy Changes in Economic Activity and Prices Fast-forward to the present. Japan's economic activity and prices have changed considerably. The large-scale monetary easing implemented by the Bank since 2013 succeeded in stimulating the economy by significantly lowering not only short-term but also long-term interest rates. This, combined with the government's fiscal policy and changes in the external environment, such as improvement in overseas economies, contributed to alleviating the chronic shortage of demand. As a result, in the mid-2010s, Japan's economy moved out of a state of deflation. For some time after that, however, the inflation rate remained below 2 percent. This is attributable to two factors: (1) as the economy improved and labor demand increased, more women and seniors entered the labor market, reducing the upward pressure on wages, and (2) change in the entrenched behavior and mindset based on the assumption that wages and prices will not increase easily took time. However, such an increase in labor participation by women and seniors is unlikely to continue. Please take a look at Chart 6. As the room for additional labor supply has been shrinking due to demographic changes, labor shortages now structurally tend to intensify. Although such shortages were already gradually intensifying before the COVID-19 pandemic, they have recently become more pronounced due to factors such as Japan's Baby Boomer generation -- i.e., those born in the late 1940s -- exiting the labor market. Against this underlying trend of tightening labor market conditions, the significant rise in import prices after the start of the pandemic triggered a major change in the behavior and mindset based on the assumption that wages and prices will not increase easily. A survey the Bank conducted around the start of the year as part of its review of monetary policy from a broad perspective revealed changes in firms' wage- and price-setting behavior. Please take a look at Chart 7. Regarding their recent situation, more than 80 percent of firms reported that the difficulties in passing on higher costs to selling prices have eased, and around 90 percent reported that they have shifted their stance toward raising wages. Prices of a wide range of goods and services have begun to rise moderately recently, in reflection of the increase in wages. Against this background, the Bank judges that the sustainable and stable achievement of the 2 percent price stability target is now within sight. Achievement of the 2 Percent Target and Economic Stabilization So, with the achievement of the 2 percent target, what kind of changes can be expected in Japan's economy? In an economy where the 2 percent target has been achieved, it becomes easier to stabilize the economy through monetary policy, and this in turn supports the economic activity of firms and households. Monetary policy affects economic activity mainly through changes in real interest rates, that is, nominal interest rates minus the expected rates of inflation. When inflation expectations are 2 percent, it becomes possible to lower real short-term interest rates even into negative territory by reducing nominal short-term interest rates, facilitating the stimulation of demand. Under deflation and low inflation, Japan's economy faced the zero lower bound, a situation in which the Bank was unable to sufficiently lower real interest rates by guiding the short-term policy interest rate. Against this background, the Bank deployed a wide variety of unconventional monetary policy measures. These included conducting large-scale JGB purchases to push down long-term interest rates and keeping the short-term policy interest rate slightly negative. By doing so, the Bank further lowered real interest rates, including long-term rates, and thereby stimulated the economy. According to various quantitative analyses conducted in the review of monetary policy from a broad perspective, the unconventional monetary policy measures pushed up economic activity and prices to some extent. It should be noted, however, that the transmission channels and effects of the measures are uncertain, and that maintaining such measures for a long period of time could bring about side effects on, for example, financial markets. While the overall effect of large-scale monetary easing on Japan's economy so far appears to have been positive, the possibility cannot be ruled out that the negative effects may become larger in the future if new side effects materialize. This means that unconventional monetary policy measures cannot fully substitute for guiding short-term interest rates, and that it is desirable to conduct monetary policy so that the zero lower bound would not be reached. If inflation remains stable at around 2 percent, simply reducing nominal short-term interest rates would allow for a lowering of real short-term interest rates into clearly negative territory, making possible a nimble response when downward pressure is exerted on economic activity and prices. As it becomes easier for the Bank to stabilize the economy, it will make it easier for firms to take on greater risks and adopt bolder business strategies. Achievement of the 2 Percent Target and Firms' Behavior So far, I have argued that achieving the 2 percent target will afford greater room for monetary policy to stabilize the economy. In and of itself, this will be of great benefit to the economy. In addition, I expect that achieving the target will also have positive effects on firms' management and innovation. It goes without saying that the environment firms face will differ greatly between a state where wages and prices do not move and one in which both wages and prices rise moderately. Please take a look at Chart 8. Over the 20 years from 2000 to 2019, the year before the pandemic, Japan's nominal GDP level rose by a mere 4 percent in total. In contrast, the level over the past three years has grown at an average annual rate of about 3 percent. If this growth rate continues for 20 years, the nominal GDP level will rise by 80 percent. The corporate survey I mentioned earlier suggests that such changes in the economic environment could affect firms' behavior. Please take a look at Chart 9. Feedback from firms in the survey shows that the overwhelming majority of firms preferred a state in which both wages and prices rise moderately in terms of their business activities than a state in which both wages and prices hardly change. This result strongly suggests that an environment where wages and prices rise would lead to more positive corporate behavior. In explaining why a moderate rise in wages and prices is preferable, many respondents noted that this would make it easier to pass on higher costs to selling prices. In addition, many said that such a moderate rise would make it less necessary to cut costs, making strategic investment easier. If it becomes easier for firms to take more positive actions on the back of a moderate rise in wages and prices, this will be significantly beneficial in terms of Japan's long-term economic growth. Let me also mention that, in a situation where prices rise moderately, the real value of cash and deposits tends to decrease, depending on the level of nominal interest rates. Under deflation, the real value of cash and deposits tended to increase. This is one of the reasons why firms during the period of deflation in Japan, especially small and medium-sized firms, adopted a financial strategy of accumulating cash and deposits to prepare for future uncertainties by putting off business investments. However, the costs of such a strategy should likely be higher now. Negative real interest rates and the decreasing real value of cash and deposits are expected to have an impact on households as well. These factors may affect household spending behavior and, coupled with recent institutional initiatives such as the introduction of the new Nippon Individual Savings Account (NISA) program, may also change household asset allocation, which has traditionally focused on cash and deposits. In this way, with moderate inflation taking root, both firms and households will face the need to change their behavior. Under the new environment, it is firms that will take a leading role in increasing the growth potential of the economy over the medium to long term. If firms become more proactive in R&D and other strategic investments, there will be more room for innovation. Let me add that innovation is not limited to manufacturing. Given that structural labor shortages are projected to intensify, firms, regardless of industry, appear to have plenty of room for pursuing labor saving by making use of tools such as artificial intelligence. In addition, there may still be considerable room for providing more services at appropriate prices to, for example, target inbound tourists, after reassessing the value of domestic tourism and other resources. The Bank will firmly support the positive actions of firms from the monetary policy side through achieving the price stability target of 2 percent in a sustainable and stable manner. III. Achievement of the 2 Percent Target and Monetary Policy Lastly, I would like to make two points regarding the Bank's future conduct of monetary policy. The first is that, in the current phase of transition toward achieving the 2 percent target in a sustainable and stable manner, the Bank will maintain accommodative financial conditions by keeping the policy interest rate lower than the neutral interest rate -- a level that is neutral to economic activity and prices -- and will thereby firmly support the economy. We have to make sure that Japan's economy will not return to a deflationary or low-inflation environment. The Bank changed its large-scale monetary easing framework last March, and subsequently decided to raise the policy interest rate in July. As a result, the nominal short-term interest rate has risen from being slightly negative to around 0.25 percent. However, real interest rates, which are the primary channels of monetary easing, have been negative, as shown in Chart 10. In particular, in recent quarters, the real short-term interest rate has been significantly lower than in most of the period of large-scale monetary easing since 2013. This means that the degree of monetary accommodation has actually increased. This situation is attributable to a rise in inflation expectations, indicating that some of the benefit I mentioned earlier of achieving the 2 percent target -- i.e., expanding the room for monetary policy to stimulate the economy -- has already become evident. The second is that, if economic activity and prices continue to improve, the Bank will accordingly need to raise the policy interest rate and adjust the degree of monetary accommodation. The degree may become excessive if the Bank maintains the current low level of the policy interest rate even as economic activity and prices improve. Under such policy conduct, there will inevitably be a heightening of the risk that the inflation rate will accelerate beyond the 2 percent target, forcing the Bank to raise the policy interest rate rapidly at a later time. The acceleration in inflation and the rapid rise in interest rates are harmful in terms of supporting firms' positive actions and thereby achieving long-lasting growth of Japan's economy. The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward. The Bank needs to pay due attention to various risk factors at home and abroad, and to examine how these factors will affect the outlook and risks for Japan's economic activity and prices and the likelihood of realizing the outlook. There are high uncertainties surrounding future developments in the U.S. and other overseas economies, particularly with regard to the economic policies of the incoming U.S. administration. The U.S. economic policies could largely affect not only its economic activity and prices but also the global economy as well as global financial and capital markets. From this perspective, it is also necessary to closely monitor how the policies will affect Japan's economic activity and prices. With regard to Japan's economy, a key issue in the short run is how the annual spring labor-management wage negotiations will develop. Regarding these negotiations, Chairman Tokura of Keidanren noted at a recent press conference that strong momentum for wage hikes began in 2023, and this momentum accelerated significantly in 2024. He continued that, in 2025, he hopes to see this development take hold and achieve structural wage hikes. I fully share his aspiration. What is important is that wage hikes that are consistent with 2 percent inflation take hold in society as a matter of course. Corporate profits have been at high levels, particularly for large firms. To sustain the virtuous cycle, it is essential that these profits be fairly distributed to small and medium-sized firms and eventually to households. The Bank will examine how wage hikes by small and medium-sized firms will evolve, using the network of its Head Office and branches. While keeping an eye on these factors, the Bank is currently updating the outlook for Japan's economic activity and prices for 2025 onward by scrutinizing the latest data available and other information. This outlook will be presented in the Outlook for Economic Activity and Prices to be released in late January next year. I hope you will have a chance to read it. As I said at the outset, 2024 has been a year of steady progress toward achieving the price stability target in a sustainable and stable manner. I would like to close my speech today by expressing my strong hope that the virtuous cycle will continue in 2025, thereby leading to sustainable and stable achievement of the 2 percent target. Thank you very much for your attention. Achievement of the 2 Percent Price Stability Target and Japan's Economy Speech at the Meeting of Councillors of Keidanren (Japan Business Federation) in Tokyo December 25, 2024 UEDA Kazuo Governor of the Bank of Japan Introduction I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation II. Achievement of the 2 Percent Target and Japan's Economy III. Achievement of the 2 Percent Target and Monetary Policy Chart 1 I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation Firms' Growth Expectations Expected Growth Rate Output Gap y/y % chg. % Expected growth rate (real) -2 -4 -1 FY 90 -6 CY 90 Notes: 1. In the left-hand chart, the "expected growth rate" is the average of firms' forecasts of the real growth rate of industry demand over the next five years. The shaded area indicates the 20-80 percentile band of the expected growth rate. 2. In the right-hand chart, figures are staff estimates. Sources: Cabinet Office; Bank of Japan. Chart 2 I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation Firms' Wage- and Price-Setting Behavior and Employment Situation Unemployment Rate Price Markups and Wage Markdowns 1.3 ratio inverted, ratio 0.5 16 s.a., % Japan 1.2 United States 1.0 Sales price suppression/ Wage suppression 1.1 1.5 1.0 2.0 0.9 2.5 Price markups (left scale) Wage markdowns (right scale) 0.8 FY 95 3.0 CY 80 Notes: 1. In the left-hand chart, price markups are the ratio of sales price to marginal cost. Wage markdowns are the ratio of marginal revenue product of labor to wages. Figures for fiscal 2023 are April-December averages. 2. In the right-hand chart, the figure for 2024/Q4 for Japan is that for October. That for the United States is the October-November average. Sources: Research Institute of Economy, Trade and Industry; Ministry of Finance; Cabinet Office; Development Bank of Japan, "Corporate Financial Databank"; Aoki et al. (2024); Ministry of Internal Affairs and Communications; BLS. Chart 3 I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation Firms' Behavior and Productivity Savings-Investment Balance of the Corporate Sector tril. yen Labor Productivity 140 CY 2000 = 100 Excess savings Excess investment -20 Japan -40 United States Euro area -60 CY 85 CY 00 Note: In the right-hand chart, figures are real labor productivity on an hours-worked basis. Sources: Bank of Japan; Cabinet Office; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; Haver. Chart 4 I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation Change in Japan's Trade Structure Current Account Terms of Trade tril. yen CY 1990 = 100 Export price index Import price index -10 -20 -30 CY 85 Trade balance Services balance Income balance Current account balance CY 1990 = 100 Terms of trade (export price index / import price index) ↓Deterioration in terms of trade/ Outflow of income CY 90 Note: In the right-hand charts, figures for export/import price indexes are on a contract currency basis. Figures for 2024/Q4 are October-November averages. Sources: Ministry of Finance and Bank of Japan; Bank of Japan. Chart 5 I. Japan's Economy and Firms' Behavior under Deflation and Low Inflation Real Wages Contributions to Changes in Real Wages Real Wages and Labor Productivity CY 1990 = 100 2.0 ann., y/y % chg. (CY 2000-2023 average) Labor share Real labor productivity 1.6 Terms of trade, etc. Real wages 1.2 0.8 0.4 0.0 Real labor productivity -0.4 Real wages -0.8 CY 90 Japan United States Euro area Notes: 1. Real wages and real labor productivity are on an hours-worked basis. 2. The right-hand chart shows the results of decomposing changes in real wages using the following formula: Real wages = Labor share × Real labor productivity × (GDP deflator / Deflator of consumption of households [= Terms of trade, etc.]). Sources: Cabinet Office; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; Haver. Chart 6 Ⅱ. Achievement of the 2 Percent Target and Japan's Economy Labor Market Projection for Labor Input Labor Market Conditions mil. persons -50 (1) Aged 15-64 (working-age population) (2) Employed persons Projection inverted, DI ("excessive" - "insufficient"), % points -40 -30 -20 -10 "Insufficient" "Excessive" (1) - Projection -10 FY 70 Large enterprises CY 95 Small enterprises Notes: 1. In the left-hand chart, the projection for the working-age population is by the National Institute of Population and Social Security Research. The projection for the number of employed persons is calculated based on projections by the Japan Institute for Labour Policy and Training. 2. In the right-hand chart, figures are the employment conditions DI in the Tankan. There is a discontinuity in the data for December 2003 due to a change in the survey framework. Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research; Japan Institute for Labour Policy and Training; Bank of Japan. Chart 7 Ⅱ. Achievement of the 2 Percent Target and Japan's Economy Results of Large-Scale Corporate Survey Responses regarding Difficulties of Passing on Higher Costs to Prices Difficulties have eased Responses regarding Stance toward Raising Wages Have taken a more active stance Difficulties have not eased Have not taken a more active stance Manufacturing Manufacturing Nonmanufacturing Nonmanufacturing % % Notes: 1. Results of the Survey regarding Corporate Behavior since the Mid-1990s. Respondents were asked about the present compared to the past. 2. In the left-hand chart, figures for "difficulties have eased" are calculated as 100% - share of firms that responded that "difficulties have not eased." 3. In the right-hand chart, figures for "have taken a more active stance" are calculated as 100% - share of firms that responded that they "have not taken a more active stance." Source: Bank of Japan. Chart 8 Ⅱ. Achievement of the 2 Percent Target and Japan's Economy GDP Level Real GDP Nominal GDP s.a., ann., tril. yen CY 85 Source: Cabinet Office. s.a., ann., tril. yen CY 85 Chart 9 Ⅱ. Achievement of the 2 Percent Target and Japan's Economy Results of Large-Scale Corporate Survey Preferred State for Firms' Business Activities Reasons for Preferring a State in Which Prices and Wages Rise Moderately Ease in passing on costs to prices and securing profits Prices and wages rising moderately Ease in adjusting selling prices and wages No need for cost cuts to avoid raising prices, enabling active fixed investment and wage hikes Prices and wages hardly changing Positive effects of higher wages on household sentiment and consumption Decline in repayment burden of existing debt Neither affects business activities More room for interest rates to decline in times of economic downturn Smaller price gap between home and abroad, enabling stable exchange rates Not sure Other % % Notes: 1. Results of the Survey regarding Corporate Behavior since the Mid-1990s. 2. In the right-hand chart, figures are shares of the firms that responded that a state of both "prices and wages rising moderately" is preferable in the left-hand chart. All applicable reasons were allowed. Source: Bank of Japan. Chart 10 Ⅲ. Achievement of the 2 Percent Target and Monetary Policy Nominal and Real Interest Rates 10-Year 1-Year 1.5 % 1.5 % 1.0 Real interest rate Real interest rate 1.0 Nominal interest rate Nominal interest rate 0.5 0.5 0.0 0.0 -0.5 -1.0 -0.5 -1.5 -1.0 -2.0 -2.5 CY 10 -1.5 CY 10 Note: Figures for real interest rates for each maturity are calculated as government bond yields minus the composite index of inflation expectations (staff estimates) for the corresponding maturity. Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg.
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Speech by Mr Ryozo Himino, Deputy Governor of the Bank of Japan, at a meeting with local leaders, Kanagawa, 14 January 2025.
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January 14, 2025 Bank of Japan Japan's Economy and Monetary Policy Speech at a Meeting with Local Leaders in Kanagawa HIMINO Ryozo Deputy Governor of the Bank of Japan (English translation based on the Japanese original) Introduction Thank you for joining us today. Thank you also for your support for the Bank of Japan and its Yokohama Branch. Kanagawa and the Modernization of Japan In 1853, awakened by the blasts of cannons which Commodore Perry’s fleet fired near Uraga, Japan started the process of modernization, opening the port of Yokohama and its window to the world. Yokohama was at the forefront of Japan's drive for "civilization and enlightenment," building steel mills, laying down railroads, and installing gas lamps. Since then, the Japanese economy has surprised the world with two miracles and has retreated from these miracles as a result of two major setbacks (Chart 1). The first miracle was the modernization achieved for the first time in the non-Western world. Within only half a century, a small agricultural nation on the eastern edge of Asia became one of the world's five major powers. However, this achievement was reduced to ashes by World War II. The central area of Yokohama city, for example, was razed to the ground in a major air raid on May 29, 1945. The second miracle was Japan's subsequent post-war reconstruction and rapid economic growth, and the industrial zone between Tokyo and Yokohama played a central role in this. Japan came to dominate world markets, one after another, starting with textiles and spreading to steel, electrical equipment, automobiles, machinery, and semiconductors. The Japanese economy survived the two oil shocks, and in the latter half of the 1980s, Japan was the world's largest creditor, the world's eight largest banks were Japanese, and the world's largest and third largest stock exchanges were those in Tokyo and Osaka. In 1988, I accompanied Toyoo Gyohten, vice-minister of finance for international affairs at the time, who is from Yokohama, to the annual meetings of the IMF-World Bank in Berlin. It is said that Japan played a leading role in these meetings. Gyohten-san said at the press conference after the meetings, "I have never seen Japan attracting so much attention as this time." To resolve the debt problems of developing countries, Japan put forward the Miyazawa Plan, which aimed to substitute the Baker Plan initiated by the United States, signaling that it was prepared to contribute to the governance of the global economy. I was fortunate enough at the beginning of my career to have the opportunity to get a glimpse of the pinnacle of Japan's economic and financial influence and its leadership in the global economy. However, after that, most of my professional life overlapped with the second setback to the Japanese economy. Some argue that the performance of the Japanese economy during this period was not too bad, given the declining population and other headwinds. Since the rapid progress made up to that point had been remarkable, however, the setback made many people in other countries wonder why it had occurred. The Japanese economy was 73% of the size of the United States economy in 1995, but today it is 14%. In terms of per capita GDP, Japan was overtaken by Singapore in 2007, Hong Kong in 2014, South Korea in 2022, and is expected to be overtaken by Taiwan in 2024 (Chart 2). When we visit these countries and regions, we often get the sense that the people living there are wealthier than those living in Japan. Having been involved in economic policy formulation during this period, when Japan lagged behind its peers, I feel that I should share some of the blame. I. Economic Activity and Prices Review of Monetary Policy from a Broad Perspective In April 2023, the Bank of Japan launched a review of monetary policy from a broad perspective. The summary of the outcome of the exercise was published in December last year. In addition, the Bank has posted on its website 46 staff papers and the reports of six conferences attended by experts from Japan and abroad. The review covers the quarter century since the late 1990s, when Japan's period of deflation started. The review was designed to be from a broad perspective and analyzes a wide range of topics from multiple perspectives. I would argue that the rich contents of the review help us explore why the Japanese economy failed to revive even after the bursting of the bubble and subsequent banking crisis had passed. From a monetary policy perspective, the history of the quarter century could be summarized as follows: In the 1990s, the economy fell into stagnation and moderate deflation due to various factors, on both the supply and the demand sides, and monetary policy was faced with the zero lower bound of nominal interest rates. In the 2010s, the quantitative and qualitative monetary easing (QQE) was initiated, and the economy recovered and ceased to be deflationary, but the 2 percent price stability target was not achieved, and the behavior based on the belief that wages and prices do not change persisted. However, since the COVID-19 pandemic, the rapid rise in import prices, the economic recovery, and the tightening of the labor market have triggered a virtuous cycle between wages and prices. It has now become possible to envision achieving the price stability target in a sustainable and stable manner. The review cites various factors on both the supply and the demand sides as reasons for the moderate but prolonged deflation. Looking ahead, it is important to identify which of these factors have been resolved and which remain (Chart 3). First, the burst of the bubble in the early 1990s forced firms to adjust their excess debt, capacity and employment. Banking crises, a credit crunch, and credit withdrawal ensued. These issues, however, were largely resolved in the 2000s. In addition, the Japanese economy suffered from various exogenous shocks, such as the global financial crisis, the Great East Japan Earthquake and the COVID-19 pandemic, but the direct effects of these shocks to the Japanese economy have largely dissipated, though the impact of the Noto earthquake and flood last year continues to be felt. In the wake of the global financial crisis, the Japanese economy suffered from an extreme appreciation of the yen, caused by monetary easing in the United States and Europe among other factors, but from 2022 onward, the yen saw a rapid depreciation as these countries tightened their monetary policy. The review also points out that the conventional monetary policy tool, i.e., the adjustment of short-term rates, ceased to stimulate the economy adequately. There were three reasons: First, the short-term interest rate reached its zero lower bound. Second, real interest rates, or the nominal rates minus the expected inflation rates, rose as the inflation rate turned negative. Third, as a result of the decline in the potential growth rate and other factors, lower real rates than before were needed to stimulate the economy. A combination of the three made the conventional monetary policy tool ineffective. The first of the above three reasons still applies: The level of the short-term rate is still at 0.25 percent and without much room for reduction. However, the second reason no longer applies: with positive inflation rates, it has become possible to keep real interest rates at a reasonably low level. In fact, real interest rates are currently the lowest they have been for 25 years. I would like to discuss the third reason later. The review also cites the behavior based on the belief that wages and prices do not move, as background to the persistence of deflation. Firms prioritized cost cutting in their business strategies and kept prices unchanged even when costs rose. Society prioritized employment stability over wage increases. The public sector provided subsidies to prevent rises in administered prices. I believe, however, that behavior and mindset will change in line with changes in the economic structure. If behavior and mindset that are inconsistent with the new structure persist, reforms will be attempted. Indeed, firms' wage- and price-setting behavior has been changing since the beginning of the 2020s, with the import price shock working as a catalyst and thanks to the efforts of the government, businesses and unions. I would argue that the deflationary factors I have mentioned so far have been largely resolved or are in the process of being resolved. On the other hand, there are some other factors which still linger on. Firstly, the declining birthrate and aging and shrinking population, and secondly, economic globalization. The first factor is becoming more acute. 25 years ago, around 1.2 million babies were born every year, but the number is now 0.7 million, and the decline is accelerating. The baby boomer generation has entered the "late elderly stage," becoming over 75 years old, and the second generation baby boomers are now in their 50s. On the other hand, there are divergent views about the future of globalization. Some argue that globalization in economic activity, which had accelerated since the 1990s, began to slow down after the global financial crisis in 2008, and might have started to unwind in the wake of the COVID-19 pandemic and the escalation of geopolitical tensions. Whatever the pace of change may be, however, the level of economic globalization will remain elevated. Moreover, cyberspace is breaking down national borders and language barriers, and digital globalization may have a bigger impact than the globalization in trade and finance. Japan, however, does not seem to be in the vanguard of the IT revolution. In short, globalization, or the increasing degree of exposure to the relative gap in competitiveness at home and abroad, continues to be a major challenge for the Japanese economy. In sum, many factors have been resolved or are being resolved, but some remain. The question is whether the remaining ones will prevent us from realizing a brighter future. In the following, I would like to briefly review the impact the shrinking population and economic globalization have had on the corporate and household sectors. My conclusion is that the two sectors have addressed these factors by transforming themselves over the years, and excessive pessimism is not warranted. Corporate Sector under Population Decline and Globalization The investment behavior of the Japanese corporate sector is often explained as follows: Investment in Japan, where the population continues to decline, is not profitable, whereas investment in overseas markets can be profitable. Firms’ investment in Japan is therefore limited to the renewal of existing plant and equipment and confined to the amount of depreciation expense. They instead focus on expanding their overseas operations. If this narrative reflects the reality, the stagnation of the domestic economy will not cease as long as the combination of population decline and globalization continues. It is true that Japanese companies have actively expanded their overseas operations (Chart 4). The number of overseas subsidiaries has been growing consistently. Companies that have established overseas subsidiaries have half of their employees and sales proceeds outside Japan. While other jurisdictions have slowed the pace of globalization in the wake of the global financial crisis, Japanese companies have continued to expand abroad. (Chart 5) 1. However, this does not necessarily mean that companies were less profitable in the domestic market than in the overseas market (Chart 6). The profit margins of large domestic companies have been higher than those of their overseas subsidiaries most of the time. Since the global financial crisis, while the profit margins of overseas subsidiaries have remained flat, the profit margins of large domestic companies have continued to improve, and the gap between the two has been widening. In addition, if the main motivation during this period was to invest overseas because of the low profitability of the domestic market, the movements of domestic and overseas capital investment should have been inversely correlated. But if we compare the movement of net domestic investment, or domestic capital expenditure less depreciation, and the movement of outbound direct investment, they seem to have moved rather in tandem. Of course, individual companies must have decided their investment destinations based on various motives, but broadly speaking, when Japanese companies were suffering from excess capacity after the bubble burst, there was weaker activity in both domestic and overseas investment, but as companies overcame this and regained their vigor, both domestic and overseas investment became active. These developments suggest that the pessimism based on the combination of the shrinking population and globalization might not well reflect reality. The past 25 years can be divided into two periods: in the first half, Japanese firms struggled to overcome the aftereffects of the burst of the bubble, while in the second half they have, on the whole, become more and more active, both at home and abroad. Chart 1 of Hogen,Y., Ito, Y., Kanai, K., Kishi, N., "Changes in the Global Economic Landscape and Issues for Japan's Economy, " Bank of Japan Working Paper Series, 24–E–3, 2024. Household Sector under Population Decline and Globalization Now let's turn to the household sector. It is a common perception that the key issues for the household sector are the declining number of workers and sluggish real wage growth. However, the shape of the population pyramid, the way we work, and the pattern of labor force participation are all changing, and the average value statistics might not tell the whole story. For example, suppose that Worker A, who used to work 8 hours a day, retired from her fulltime job and started a part-time work, and that Worker B, who had been on leave of absence, returned to the workplace and resumed a part-time work. A and B work together and complete the job A did before by working 5 hours a day each and 10 hours in total, to cover the time needed for coordination between the two. Finally, suppose the sum of the wages A and B receive is the same as the wages A received before. In this case, wages and labor productivity per worker are halved, and hourly wages and labor productivity are reduced by 20%. Though this change in the average values gives us a negative impression, GDP and total real wages are maintained, and the total amount of wages after tax probably increases. Perhaps this case could be seen as a successful reversal of the effects of a decline in the working-age population. To assess the changes, particularly from a longer perspective, we therefore need to look at households as a whole, not just the average values per person or per hour. After the burst of the bubble, especially after the banking crisis in 1998, firms' efforts to slash excessive debt, capacity, and employment had significant impact on households. However, since 2004, when the firms’ adjustment process has largely been completed (Chart 7), although the working-age population has recorded a steep decline, the decline in total working hours has been moderate. Furthermore, real GDP, which is the total amount of added value created through work, and total real wages, which is the portion of GDP distributed to employees, have been growing steadily, except for the temporary declines due to the global financial crisis and the COVID19 pandemic. It is true that total real wages declined, causing hardship on households, in 2022 and 2023, while real GDP recovered. According to the analysis by the Bank’s staff 2, this gap was mainly due to the deterioration in the terms of trade caused by the rise in energy and other commodity prices. The decline in the labor share contributed to the gap as well. Subsequently, the terms of trade has improved, and the total amount of real wages earned by all employees has picked up in 2024. In sum, contrary to the conventional image that the corporate and household sectors have faced an inescapable impasse arising from the shrinking population and globalization, it may be argued that, after resolving the issues of excess debt, capacity and employment, they have so far succeeded in overcoming the structural challenges reasonably well. II. Monetary Policy Developments in Prices and Monetary Policy Outlook I mentioned earlier that real interest rates rose after deflation began in the late 1990s. Then QQE was introduced in 2013, and since then Japan has no longer been in deflation in the sense of prices continuing to fall. Real interest rates turned negative (Chart 8). The era of the negative nominal interest rate, when you were worse off depositing your money with the Bank of Japan than by keeping it under your mattress, ended in March last year. Real interest rates, however, remain negative. The real value of money lent or deposited continues to decrease as the interest cannot keep up with inflation. Chart 17 of Fukunaga, I., Hogen, Y., Ito, Y., Kanai, K., Tsuchida, S., " Potential Growth in Japan: Issues on Its Relationship with Prices and Wages, " Bank of Japan Working Paper Series, 24–E–16, 2024. A negative real interest rate means that it pays to borrow and invest in a project whose real economic value gradually erodes. There is no consensus among economists on whether real interest rates could remain negative indefinitely. Ben Bernanke, former chairman of the Fed and Nobel laureate, argues that they could not. 3 On the other hand, Lawrence Summers, who served as secretary of the Treasury and president of Harvard University, points out that negative real interest rates are not so uncommon. 4 I have no intention to try present a solution to the dispute, but I would say that in a situation where the economy is being affected by negative shocks or when deflationary factors remain strong, it is necessary and would not be abnormal for real interest rates to be negative. However, I do not think it normal for negative real interest rates to persist once the shocks and deflationary factors are resolved. With regard to Japan, I have argued today that many of the shocks and deflationary factors have been resolved, and that, although the two major structural factors, shrinking population and globalization, persist, they may not be unsurmountable. They may not be unsurmountable, but can we actually surmount them? The road will surely be bumpy. However, more workers today are switching to companies that enhance productivity and raise wages. Both firms and the government are pursuing strategies to adapt to the emerging structure of the international economy. If we continue to overcome the various challenges associated with a declining population and globalization in a creative manner, a future can be envisioned in which real interest rates will no longer be deeply negative. In conducting monetary policy, it is also necessary to pay close attention to short-term developments in economic activity, prices, and financial conditions. Let us look at the recent Ben Bernanke, "Why are interest rates so low, part 2: Secular stagnation" Brookings commentary, March 2015. 4 Lawrence Summers, "On secular stagnation: Larry Summers responds to Ben Bernanke" Brookings commentary, April 2015. developments in prices. The change in the consumer price index (less fresh foods) reached 4 percent in December 2022 and January 2023, due to the sharp rise in import prices and other factors, but has gradually decelerated since then. The main scenario the Bank of Japan envisages is that the inflation rate for the next two fiscal years (April to March) will be around 2 percent (Chart 9). On the other hand, inflation expectation has risen from below one percent to around one and half. The Bank of Japan aims to achieve the price stability target of 2 percent in a sustainable and stable manner. This target cannot be achieved unless the actual inflation rate declines as envisioned. At the same time, if inflation expectation does not rise toward 2 percent, the actual inflation rate will eventually fall below 2 percent, and it thus would not be possible to achieve the target in a sustainable and stable manner. The path we have drawn is a difficult one, in which the actual inflation rate will decline and inflation expectations will rise, and both will land at around 2 percent. So far, however, the developments in prices and inflation expectation, including the economic mechanisms behind them, seem to have been largely on the path. If this outlook will continue to be realized, the Bank will raise the policy interest rate accordingly and adjust the degree of monetary easing, as it did in March and July last year. What I have described so far are the central scenario for the prices and the broad outlook for the monetary policy. But there are various risk factors at home and abroad, both upside and downside, and the policy should be conducted with due attention to them. On the domestic front, one of the issues we should pay close attention to is the outlook for wage increases in fiscal 2025. Each firm faces unique challenges, and raising wages would by no means be a simple matter. But I hope to see strong wage hikes in fiscal 2025 as we did in fiscal 2024, given the high ratio of firms reporting favorable business conditions, strong corporate profits, low labor share ratio, accelerating labor shortages, employees searching and changing jobs increasingly actively, and the minimum wage raised last October. On the occasions of New Year ceremonies, leaders of various sectors gave encouraging messages on wage increases in fiscal 2025. At our branch managers' meeting held last week, we heard many positive reports, and multiple branch managers talked about companies which incorporated plans on continued wage increases in their medium-term business plans. The ratio of companies which respond that they will raise wages in fiscal 2025 and the rate of planned wage increases are broadly at or above the levels seen one year ago, according to many of the relevant surveys. Regarding the overseas economy, one of the issues to look at is the policies of the new U.S. administration and their impact on the U.S., global and Japanese economy. Continuous monitoring will be warranted, but the inaugural address next week will give us an idea on the broad direction of policies the new administration will pursue. Experts will continue their debates on medium- to long-term effects of new policies, but, based on what has been known by today, many expect the U.S. economy to continue performing strong over the coming period, which seems to be in contrast with the outlook entertained around August last year when downside risks were the focus. In any case, including these issues, the Bank is currently updating the outlook for Japan's economic activity and prices for this year onward by scrutinizing the latest data available and other information. The outlook will be presented in the Bank’s report, Outlook for Economic Activity and Prices, to be released next week. In conducting monetary policy, it is difficult but essential to judge the right timing. At the monetary policy meeting to be held next week, the board will have discussion to decide whether to raise the policy rate or not, based on the outlook to be compiled in the Report. Communication on Monetary Policy We often hear requests that the Bank of Japan should strive for more effective communication on the conduct of monetary policy. Let me make three points on this matter. First, in February 1999, facing the zero lower bound on the interest rate, and aiming for additional monetary easing, the Bank of Japan began to provide guidance on the future path of monetary policy, adopting the proposal by Kazuo Ueda, the current governor, who then was a member of the policy board. This strategy, initially dubbed the "policy duration effect", came to be known as forward guidance. As other advanced economies also faced the zero lower bound, this strategy was adopted by central banks around the world, and it became commonplace for central banks to provide certain guidance in advance on the outcome of future monetary policy meetings. However, while forward guidance has been effective, there has been a growing awareness that it may become a constraint when a policy change is necessary, and that in some cases, it may even have the adverse effect of delaying a necessary policy change. For this reason, many central banks withdrew forward guidance in 2022, when they were freed from the zero lower bound. At present, the base line of many central banks' communication is to say that they look carefully at the totality of the data available up to the time of each policy meeting and make decisions on a meeting-by-meeting basis. In Japan, the period with forward guidance lasted much longer than in other jurisdictions, and post-forward guidance communication is newer than in other jurisdictions, as the Bank of Japan dropped language binding the future course of policy from its publications only in March last year. It has therefore not been well acknowledged, and is worth emphasizing, that the transition did happen in Japan as well. Second, it is not desirable for the conduct of monetary policy to intentionally cause surprises, except in times of crisis where perceptions need to be drastically changed. In addition, if market participants' expectations diverge from the central bank's thinking, a market tantrum can occur in the process of resolving the expectation gap. It is therefore desirable to communicate in a way that prevents the excess growth of expectation gaps. Furthermore, the effectiveness of monetary policy depends significantly on how widely and accurately the central bank's intentions are understood. Therefore, it is essential to communicate the policy reaction function and views on the current economic condition so as to help people understand and form expectations about the future conduct of monetary policy. However, this does not mean that the outcome of each monetary policy meeting should be telegraphed in advance so that it can be fully priced in by the market. It is not possible to do so, as the outcome of a policy meeting fully depends on the discussion at the meeting. In addition, if market participants start to assume that each policy meeting will be preceded by communication intended to let them price in the decision in advance, then they will focus more on the language the Bank uses than on the economic developments and outlook. Such would not be desirable. Thirdly, we would like to learn from our experience and improve our communication. The content is of course important, but there can be improvements in the manner of communication as well. For example, there were cases in the past where there were four speeches by board members in two weeks, and then none for a whole month. We would like to even out the timing of the speeches. Also, if the Bank announces the schedule of a speech at the last minute, it may be misunderstood as though the Bank was about to give some urgent message. We intend to announce the schedule of speeches as soon as practicable. We will continue to explore better approaches, benefitting from suggestions from stakeholders and perhaps learning by trial and error. Conclusion Hokusai's Great Wave In July last year, the Bank of Japan issued a series of new banknotes. Your cooperation has made it possible to achieve smooth distribution. I would like to express the Bank's gratitude. The new 1,000-yen bill features Katsushika Hokusai's masterpiece Kanagawa Oki Namiura (Chart 10). There is no consensus yet, but many argue that it depicts the scenery seen somewhere off Yokohama Port. This means that, if we transpose the scenery to a contemporary setting, we may be able to see this meeting venue beyond the waves. This woodprint work, which is said to have been an inspiration to Van Gogh and to Debussy, is known overseas as The Great Wave. Central bankers often call the period since the mid-1980s the Great Moderation. They argue that business cycle fluctuations have become much milder during this period and that – though it may somewhat sound like a self-praise -- the rise of independent central banks and their proper conduct of monetary policy have been the key factors contributing to the moderation. Recently, however, external shocks have struck one after another, and the governor of Banque de France, François Villeroy de Galhau, commented that we may have entered an era of Great Volatility. 5 It might also be named the era of the Great Wave. Hokusai's work depicts small human beings facing the great force of nature, our ancestors enduring rough seas together on a small boat being toyed with by the waves. Far beyond the waves, we also see the immovable figure of Mt. Fuji, which symbolizes a constant, stable, balanced and awakened self to be found amid life’s impermanence and chaos. I do not know what kind of era awaits us, but even if it is the era of the Great Wave, I hope we can stand firm together, with the figure of Mt. Fuji in our mind, as depicted in this picture. Thank you for your kind attention. Now I would like to open the floor. I look forward to hearing your comments and opinions. François Villeroy de Galhau, "Monetary policy in perspective (Ⅱ): Three landmarks for a future of “Great Volatility”" Speech at the London School of Economics, October 2024. Japan's Economy and Monetary Policy Speech at a Meeting with Local Leaders in Kanagawa January 14, 2025 HIMINO Ryozo Deputy Governor of the Bank of Japan Introduction Kanagawa and the Modernization of Japan I. Economic Activity and Prices Review of Monetary Policy from a Broad Perspective Corporate Sector under Population Decline and Globalization Household Sector under Population Decline and Globalization II. Monetary Policy Developments in Prices and Monetary Policy Outlook Communication on Monetary Policy Conclusion Hokusai’s Great Wave Chart 1 Introduction Kanagawa and the Modernization of Japan Commodore Perry’s Fleet Source: Edo-Tokyo Museum, "Samurais Getting Ready to Fight on the Arrival of American Ships." Air Raid on Yokohama Source: U.S. National Archives and Records Administration. “Civilization and Enlightenment” Industrial Zone in Kanagawa Source: Kawasaki City. Source: Yokohama Museum of Art, "Steam Train on the Yokohama Coastal Railway" (painted by Utagawa Hiroshige III, and donated by Ms. Saito Ryu). Chart 2 Introduction Economic Growth of Japan and Peers GDP per capita in Asia GDP of Japan and the U.S. trillion dollars Japan Singapore Hong Kong South Korea Taiwan Japan United States ten thousand dollars 90 CY 95 Note: Figures are for nominal GDP in U.S. dollar terms. Figures for 2024 are IMF projections in the October 2024 World Economic Outlook. Source: IMF. 90 CY 95 Chart 3 I. Economic Activity and Prices Factors behind Prolonged Deflation • • • • Burst of the bubble economy Excessive debt, capacity, and employment Banking crises Credit crunch and credit withdrawal • • • Global Financial Crisis The Great East Japan Earthquake COVID-19 pandemic • Yen appreciation resulting from monetary easing in Europe and the United States • • Zero lower bound, rise in real interest rates, and decline in the natural rate of interest Behavior based on the belief that wages and prices do not move • • Declining birthrate, and aging and shrinking population Globalization of economic activities Chart 4 I. Economic Activity and Prices Overseas Expansion of Japanese Firms Size of Overseas Subsidiaries Relative to Domestic Headquarters Number of Overseas Subsidiaries Number of Employees number of companies 30,000 Sales % % 25,000 20,000 15,000 Domestic headquarters Overseas subsidiaries 10,000 5,000 90 FY 95 FY97 FY22 FY97 FY22 Note: The right-hand chart shows the ratio of domestic headquarters and overseas subsidiaries for firms that have overseas subsidiaries. Source: Ministry of Economy, Trade and Industry. Chart 5 I. Economic Activity and Prices Japan’s Pace of Globalization Compared to Peers Stock of Outbound Direct Investment KOF Globalization Index CY1980=100 % of GDP Japan Japan United States China World 80 CY 80 CY Note: In the left-hand chart, the index is calculated based on several statistical indices, such as trade volume. The shaded area indicates the 10th-90th percentile range of 158 countries. The right-hand chart shows the stock of outbound direct investments from Japan, the United States, and China. Figures are calculated based on Hogen et al. (2024) using the latest data. Sources: UNCTAD; KOF Swiss Economic Institute; BEA. Chart 6 I. Economic Activity and Prices Profits and Investment at Home and Abroad Domestic Fixed Investment and Outbound Direct Investment Profit Margin Ratio % trillion yen Overseas subsidiaries Domestic fixed investment (A) Domestic depreciation (B) Net domestic fixed investment (A-B) Net outbound direct investment Large domestic companies -10 -20 90 FY 95 -30 90 FY Note: In the left-hand chart, large domestic companies are non-financial firms with a capitalization of 1 billion yen or more, including those that do not have foreign subsidiaries. In the right-hand chart, domestic fixed investment and domestic depreciation show the aggregate figures for domestic non-financial firms. Sources: Ministry of Economy, Trade and Industry; Ministry of Finance. Chart 7 I. Economic Activity and Prices Shrinking Population, Work Hours, GDP, and Wages CY2004=100 Real GDP Total real wages Total working hours Working-age population CY Note: Total real wages are real compensation of employees in SNA. Figures for real GDP and total real wages for 2024 are up to Q3. Total working hours is the working hours of the total workforce. Sources: Ministry of Internal Affairs and Communications; Cabinet Office. Chart 8 Ⅱ. Monetary Policy Developments in Real Interest Rate Real Interest Rate (1-Year) Real Interest Rate (10-Year) 1.5 % 1.5 % Real interest rate 1.0 0.5 Real interest rate Nominal interest rate 1.0 Nominal interest rate 0.0 0.5 -0.5 0.0 -1.0 -0.5 -1.5 -1.0 -2.0 -2.5 -1.5 10 CY 12 10 CY 12 Note: Figures for real interest rates are calculated as government bond yields minus the composite index of inflation expectations (Bank of Japan staff estimates). Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg. Chart 9 Ⅱ. Monetary Policy Developments in Consumer Prices and Inflation Expectations year-on-year % change Actual+forecast by the Bank of Japan Inflation expectations Households (10-year ahead) Firms Economists and market participants forecast -1 -2 19 FY Note: The figure for actual for 2024/Q4 is the October-November average. Sources: Ministry of Internal Affairs and Communications; Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus Economics Inc., "Consensus Forecasts"; Bloomberg. Conclusion Chart 10 Hokusai’s Great Wave Depicted on New 1,000 Yen Note Source: National Printing Bureau.
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Presentation by Mr Edgar Barquín, President of the Central Bank of Guatemala, at the JP Morgan Investor Seminar, Central America Panel, on the occasion of the IADB Annual Meetings, Montevideo, Uruguay, 17 March 2012.
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Edgar Barquín: Recent economic trends and policy issues Presentation by Mr Edgar Barquín, President of the Central Bank of Guatemala, at the JP Morgan Investor Seminar, Central America Panel, on the occasion of the IADB Annual Meetings, Montevideo, Uruguay, 17 March 2012. * * * I would like to thank JP Morgan for the opportunity to share my views on this panel. In addressing the recent economic trends in Guatemala and the main policy issues, I would first like to highlight some specific features of the current international context that directly affect Guatemala’s economy. Then I will give you a quick overview of recent trends and prospects of Guatemala’s main economic variables, and finally I will share with you the main policy challenges we are or will be facing in the near future. Regarding the current international context, I would like to highlight six elements: First, the deterioration of global economic prospects, which is already being reflected in the weakening of global trade. Lower economic prospects are also on the horizon for most Latin American countries as well as some key emerging economies such as China and India. Second, high frequency indicators suggest a recovery of economic activity in the United States of America, though the sustainability of this recovery is still uncertain due to high levels of unemployment, problems in some key markets such as the housing market, potential risks due to the problems in the Euro Area and fiscal consolidation issues, among others. Third, uncertainty arising from the Euro Area debt crisis with potential spillover effects to other regions and financial markets. Fourth, declining commodity prices that have contributed to easing of headline inflation in most developing countries. However, prices are still high, particularly oil prices. Fifth, high levels of unemployment remain in most advanced economies including the United States and the Euro Area as a whole. And sixth, insufficient progress in developing medium term fiscal consolidation in advanced economies that could deepen global imbalances. Regarding recent trends and prospects of Guatemala’s main economic variables, first of all I would to highlight that the recovery of economic activity continued in 2011; in that year, GDP increased by 3.8 percent, though still below the pre-crisis levels. For 2012 we are expecting a growth rate between 2.9 percent and 3.3 percent, mainly due to the impact of the international environment I just mentioned. As regards exports, after experiencing negative growth rates in 2009 due to the crisis, the growth rate in 2011 was the highest of the last 13 years or more, at 23.6 percent. This performance was mainly due both to higher prices and higher export volume of Guatemala’s main traditional products. For 2012, prospects we are expecting slightly lower growth rates, though still positive, due to the deterioration in global economic prospects. In the case of imports, the growth rate was quite significant at 20 percent during 2010 and 2011, reflecting a higher domestic demand of goods and services particularly capital goods, fuel and other inputs for the industry. For 2012, a lower growth rate is expected as we are estimating a lower demand for consumption goods and inputs for the industry. Remittances inflows are recovering at a slow pace. In 2011 the amount was a little bit higher, 63.3 million dollars, than the one of 2008 previous the hit of the crisis in Guatemala. For 2012, even though we are expecting a recovery in the amount of inflows, the growth rate is BIS central bankers’ speeches not significant, 5.7 percent, as the Hispanic unemployment rate in the United States, from which about 99 percent or remittances come, is still high. As the Guatemalan economy is more integrated with the global economy and as new investment opportunities arise due to a greater diversification of its production of goods and services, we have experienced an increase of capital flows from Foreign Direct Investment. We expect these flows to keep growing as specific actions are being taken to promote investments in the country on the basis of a public-private strategic alliance which also includes efforts to improve Guatemala’s investment climate. As of today, about 55 percent of Foreign Direct Investment comes from the United States and Mexico. Here it is important to mention that short term capital inflows to the economy have not been significant. Therefore, we have not experienced the problems of other Latin American countries which had to deal with relatively high capital inflows as well as with significant appreciations of their nominal currencies and increases of credit to the private sector that fueled economic activity over its potential levels. International Monetary Reserves have reached highest historical levels, at over USD 6 bn (and expected to reach close to USD 7 bn in 2012), which represents an important liquidity cushion for the Guatemalan economy as well as a good signal to the international markets and credit rating agencies. The banking credit to the private sector has increased, mainly the credit in foreign currency due to lower international interest rates as well as the higher Guatemalan industrial activity experienced in 2011. The main funding of the credit in foreign currency has been commercial lines of credit from American banks. The Economic Activity Confidence Index is improving, particularly in the most recent months. This performance is highly related with positive expectations about the new government that took office in mid January. So far, the government has given clear signals of being a pro-private sector government. In its first month in office the government has launched a competitiveness agenda and an integrated policy for foreign trade, competitiveness and investments. These and other specific actions have contributed positively to expectations about economic growth despite the uncertainty on the global economic prospects. Declining commodity prices have contributed to easing of headline inflation since mid 2011, reaching 6.20 percent by the end of the year, slightly above the top limit of the Monetary Board’s target of 5.0 percent plus minus 1 percentage point. For 2012, inflation estimates are within the range target of 4.5 percent plus minus 1 percentage point, though inflationary expectations are still above this range. Guatemala’s Central Bank main goal is to pursue price stability which is reflected in an inflation range target set out by the Monetary Board, the one I have mentioned. In this context, if inflationary pressures arise or inflationary expectations continue above the target, specific actions will be taken by the Monetary Board in the near future to achieve the 2012 and the midterm inflation targets. In the meantime, the central bank is monitoring the performance and prospects of key external and internal economic variables that may impact headline inflation and inflationary expectations. In addition, coordination with fiscal policy continues to be strengthening as well as the transmission mechanism of monetary policy. Guatemala is known by international organisations and credit rating agencies for its good record of prudent fiscal and monetary management as well as for its low levels of public debt and tax burden. Fiscal revenues were significantly hit during the crisis 2008/2009 so fiscal deficit almost doubled, reaching 3.3 percent of GDP in 2010. To keep public debt at sustainable levels in BIS central bankers’ speeches the midterm, fiscal deficit should be equal or lower than 2 percent of GDP. In this regard, even though further reductions are needed, we can say that the consolidation is underway as the fiscal deficit reached 2.9 percent of GDP in 2011 and is expected to be at 2.6 percent of GDP in 2012. It is worth mentioning that during the first month of the new government Congress has passed two legal provisions aim at strengthening fiscal revenues on a sustainable path. The legal provisions included not just modifications to some taxes but also specific provisions to strengthen the Tax Administration powers to fight against tax evasion and smuggling. Despite the increase in public debt in recent years, total debt to GDP ratio is still below critical values. We expect that the actions that are being taken to strengthen fiscal revenues on a sustainable way will contribute to stabilize this ratio at sustainable levels. Given the uncertainty that remains about the global economic prospects I would say that there are three main policy challenges we are currently facing as policy makers: The first one is to anchor inflation expectations to the midterm target. This means that the Central Bank has to stand ready to take any necessary measures to address inflationary pressures, even in a context of potential deterioration of economic growth at the national level. This is important because if the downside risks to growth materialize and inflation expectations are still above the midterm target, the Central Bank has no room to ease monetary policy and support economic growth. The second main policy challenge is to secure fiscal sustainability in the medium term through the strengthening of tax revenues and the implementation of prudent fiscal policies reflected in the stabilization of the rising debt-to-GDP ratio and the reduction of the fiscal deficit to levels below 2 percent of GDP. This is particularly crucial as we need to restore fiscal maneuver in the short term in order to be able to address a more severe global economic downturn or the impact of a natural disaster which in fact is very likely to happen as Guatemala is among the world’s most vulnerable countries to experience natural disasters. Securing fiscal sustainability is not just an issue of reducing public expenditure as besides high fiscal rigidities; Guatemala has important infrastructure and social needs that need to be addressed in order to foster sustainable economic growth. This drives me to the third main policy challenge which is to foster sustainable economic growth in an uncertain international environment. To address this challenge commitment is needed not just from the government but mainly from the private sector as well as civil society. As I already mentioned, some work has been done to build these strategic alliances through the competitiveness agenda and the integrated policy agenda for foreign trade, competitiveness and investments as both have been endorsed by the private sector. In addition, efforts initiated by the previous government regarding specific programs to address poverty and creation of opportunities for the most vulnerable groups are being taken by the new administration as well as specific actions to address the high levels of crime and violence that also affect sustainable economic growth. Some of these actions will render benefits in the medium term, so in the mean time the main contribution of monetary and fiscal policies would be to preserve macroeconomic stability while maintaining the soundness of the financial system as this has been key to address adverse shocks in the past as well as to create a solid basis to achieve a sustainable economic growth. As a conclusion, allow me to summarise with the following points: As we have and will be discussing these days in different forums, our economies are, again, vulnerable to external shocks arising from other regions. Even though we have made significant improvements, particularly regarding the strengthening of the economic fundamentals of our economies, which is reflected in a lower volatility of the main macroeconomic prices including lower inflation rates, BIS central bankers’ speeches strengthened financial systems, more sound fiscal balances, improvements in productivity and so on, we are not exempt, now and in the future, from experiencing these kind of shocks that at the end affect not just economic and financial variables but most important the well being of our populations. As policy makers, we have the responsibility to preserve those economic fundamentals and to come up with policy actions that may reduce their negative impact, or even better that could make our economies less vulnerable to their effects. In this context, I am glad to be here and looking forward to the discussion of our challenges as we may come up with specific policy actions that may be needed now or in the future to address these challenges. Thank you very much for your attention. BIS central bankers’ speeches
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the opening of the workshop on the compilation of banking statistics, Kenya School of Monetary Studies, Nairobi, 12 June 2007.
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Njuguna Ndung’u: Workshop on the compilation of banking statistics in Kenya Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the opening of the workshop on the compilation of banking statistics, Kenya School of Monetary Studies, Nairobi, 12 June 2007. * * * Mr. Kevin O’Connor, Consultant IMF Mr. Oliver Chinganya, Regional Advisor, GDDS Project The representatives of: Kenya Banker’s Association (KBA), Institute of Certified Public Accountants of Kenya (ICPAK) and Central Bureau of Statistics Distinguished Participants, Ladies and Gentlemen, Let me first and foremost welcome you all to the Kenya School of Monetary Studies and to this very important workshop on the compilation of banking statistics. I must thank you for taking time off to attend this function. I wish to thank the IMF consultant in particular for finding time to participate in this workshop as a resource person. As you may be aware, the IMF has played a major role in the development of monetary statistics in Kenya and in countries around the world. In particular, the Fund, in collaboration with the Department for International Development (DFID), continues to support the General Data Dissemination System (GDDS) project which aims at improving the availability and quality of data in developing countries to conform with international standards. Kenya, as a country, being part of the GDDS project, provides an important avenue for database improvements. This workshop is therefore part of the greater plan towards the improvement of statistics in Kenya with the support of these organisations. I thank them for this contribution. Ladies and Gentlemen, My task today is to open this workshop but before I do that let me draw your attention to the importance of this workshop and statistics in general. You will recall that the financial crisis that hit the Asian economies in the early 1990s was partly occasioned by lack of sufficient statistical information on what was going on in the banking system. I am glad therefore that thereafter, the world economies have taken initiatives to ensure that statistical capacities and developments are at the forefront so as to inform decision making at all levels. We at the Central Bank have not been left behind. Over the past few years, the Bank has been working on the improvement of monetary and financial statistics to meet the international compilation standards guided by the recommendations of the IMF mission on Report for Observance of Standards and Codes (ROSC), and Plans for improvements under the GDDS project. Implementation of some of the recommendations cannot be done without a joint effort with statistical officers in the financial sector, most of whom are present here today. Ladies and Gentlemen, There are varied uses of the banking data. The Government uses it, among other data, for economic planning. The Central Bank uses it for the formulation and implementation of monetary policy and monitoring of the financial system. The challenge currently for example is to monitor portfolio capital flows and disentangle from remittances. I am sure all the institutions represented here make use of data in one way or another. For example, consolidated banking statistics are normally shared with the banking industry. This is not to mention other users of our statistics including the private sector, international investors and researchers. With such an immense use, it is important that the data collected is accurate and reliable. Secondly, the dynamic nature of our economies necessitates that we become dynamic in our approach to data compilation. New innovations, for example, new financial instruments, which impact on the monetary policy formulation and implementation, continue to come up. It is in this regard that the Central Bank has produced a revised draft data reporting form which will be discussed in this workshop. Ladies and gentlemen, Besides the accuracy, and reliability time is of the essence in data compilation and dissemination. Data must be up to date and accurate. I therefore urge you all to observe CBK deadlines for the submission of the various returns as indicated in the various Banking Circulars. As far as having accurate and reliable data is concerned, we are all together, not just as a country, but with the rest of the world. As I conclude, let me welcome you once again to KSMS. To get maximum benefits from this workshop I urge all the participants to actively contribute in discussions and raise with the resource persons any issues that you think present grey areas. It is now my pleasure to declare the workshop officially open. Thank you.
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Talking notes by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the NESC Workshop on the Role of Central Bank in Economic Transformation, Kenya School of Monetary Studies, Nairobi, 29 May 2007.
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Njuguna Ndung’u: The role of the Central Bank of Kenya in Kenya’s economic transformation Talking notes by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the NESC Workshop on the Role of Central Bank in Economic Transformation, Kenya School of Monetary Studies, Nairobi, 29 May 2007. * * * Hon. Amos Kimunya, Minister for Finance, Republic of Kenya Amb. Francis Muthaura, Permanent Secretary, Head of Civil Service and Secretary to the Cabinet, Permanent Secretaries, Mr. Byung Hwa Kim, Deputy Governor, Bank of Korea, Mr. Muhammad Ibrahim, Assistant Governor, Bank Negara Malaysia, Mr. Hemraz Oopuddye Jankee, Director of Research, Central Bank of Mauritius, Distinguished Guests, Ladies and Gentlemen I take this opportunity to warmly welcome you all to the Kenya School of Monetary Studies. It is also a pleasure to specifically welcome our esteemed visitors from Korea, Malaysia and Mauritius who have joined us on this occasion. I also wish to thank the National Economic and Social Council (NESC) for their effort so far in developing the Vision 2030 that provides a roadmap for Kenya to attain middle income status by the year 2030. The Vision, as we have witnessed presented is well thought out. But there are still some building blocks required and this forum is one of those. The importance and significance of it is to situate the role of Central Bank into the Vision. The Central Bank of Kenya is a key institution in this vision and like other key institutions, should learn from other successful countries. Central Banks in the Eastern African region seem to face similar challenges – but the important role the CBK is expected to play in the vision 2030 is critical but some challenges are evident: • Effectiveness of monetary policy instruments and fighting inflation. • Thin markets; foreign exchange and financial markets. • Problems of exogenous shock particularly those arising from bad weather and volatility in oil prices complicates for price stability. • Financial sector stability in a global setting. This workshop is timely and provides an opportunity for the CBK to re-evaluate its role in the Kenyan economic transformation in the context of the Vision 2030. I will come back towards the end to tie up what experiences the CBK will learn and adopt from the experiences of those successful cases. Ladies and gentlemen, let me wish you productive deliberations and hope that we will find the workshop fruitful and informative. Please feel free to bring to our attention the kind of facilitation that you may need to make this workshop successful. Thank you very much.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 10th meeting of the East African Community Monetary Affairs Committee (MAC), Kenya School of Monetary Studies, Nairobi, 24 May 2007.
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Njuguna Ndung’u: The vision of the Monetary Affairs Committee of the East African Community Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 10th meeting of the East African Community Monetary Affairs Committee (MAC), Kenya School of Monetary Studies, Nairobi, 24 May 2007. * * * Mr. Emmanuel Tumusiime-Mutebile, Governor, Bank of Uganda; Mr. Francois Kanimba, Governor, National Banque du Rwanda; Mr. Juma Reli, Deputy Governor, Bank of Tanzania; Mr. Leonard Sentore, Vice Governor, Banque de la République du Burundi; Mrs. Jacinta W. Mwatela, Deputy Governor, Central Bank of Kenya; Distinguished Delegates; Ladies and Gentlemen: On behalf of the Central Bank of Kenya, and on my own behalf, I take this first opportunity to warmly welcome each and every one of you to Nairobi, Kenya, and to the Kenya School of Monetary Studies (KSMS), in particular. I wish to particularly welcome and thank Governor Francois Kanimba of the Banque Nationale du Rwanda and Vice Governor Leonard Sentore of the Banque Nationale du Burundi, and their respective delegates, who are attending this meeting for the first time. Ladies and gentlemen, To begin with, let me say that I am greatly honoured to attend and chair this meeting for the first time. I will therefore be falling back on the institutional memory of my brother Governors who have been here long before me and who have a greater wealth of experience and an edge on monetary integration matters than I have. Fellow Governors, Distinguished Participants, You will agree with me that the coming on board of our two partner states of Rwanda and Burundi will foster the achievement of a large, powerful integrated East African economic bloc. This will of course be in accordance with Articles 6(2) and 44 of the Abuja Treaty that recognizes that achievement of the objectives of harmonisation of monetary, financial and payment systems and boosting intra-community trade in Africa would be predicated on, among others, the strengthening integration efforts of the regional economic community and enhance monetary cooperation among member states for the eventual establishment of a Monetary Union in Africa. We look forward to sharing our experiences in Kenya, Uganda and Tanzania with Rwanda and Burundi in the next two days. Fellow Governors, Ladies and Gentlemen, The Committee of Experts have utilised their energies and minds for three solid days to discuss agenda issues before our meeting as Governors. They have considered the background including Governors’ previous decisions and made observations and recommendations for our consideration and action. I wish to thank them for a job well done. I need not over-emphasise the importance of this meeting. As you are aware, the vision of the Monetary Affairs Committee (MAC) of the East African Community is to have a Monetary Union as a precursor to a political federation. Full implementation of the EAC convergence criteria and finalisation of harmonisation cannot be done without sufficient empirical studies to support our decisions. In view of this, I am glad to note that a number of studies are currently being undertaken by all the partner states to inform our decisions. I therefore urge you all to deliberate on the findings of these studies and the progress made so far by the respective partner states in achieving the convergence indicators. Assessing how far we have gone in meeting the requirements of the convergence criteria is important as it will help us deliberate on areas where we still lag behind and also seek solutions on how to move ahead to create one strong economic and political block. Fellow Governors, Distinguished Participants, Before I conclude my remarks, allow me to highlight a few challenges which we have to address and resolve in order to make monetary and fiscal policy harmonisation in the region successful. 1. First, there is need to minimise slippages and inconsistencies in the performances of member countries regarding attainment of the stipulated macroeconomic targets. The report of the Committee of Experts before us indicates that slippages and inconsistencies still exist in the performance and attainment of the stipulated convergence criteria. A major militating factor across virtually all our countries is expansionary fiscal policies that complicate implementation of monetary policies in our central banks. We therefore need to advise and advocate for greater Fiscal Rectitude and Discipline. We should urge and persuade the respective Treasuries to contain their financing gap within sustainable levels and to emphasise more on efficiency and productivity of the public sector. For our respective central banks, the challenge is to remain focused on our primary goal of maintaining low, stable and predictable inflation, in addition to improving efficiency in monetary management and the requisite infrastructure for transmission of monetary policy actions. We need to work on ensuring stability of the financial systems. One way of addressing this problem is to strengthen the supervision of the banking sector, particularly with a view to reducing the level of non-performing assets in the books of commercial banks. It is incumbent upon us to ensure that appropriate institutions, technical capacity and legal frameworks exist to support the process. We have to take steps to promote effective competition in banking sector by setting appropriate minimum conditions by way of legislation on capital and technical capacity, and adherence to industry standards to ensure that individual banking institutions offer meaningful competition. Related to this is the challenge to deepen and broaden the financial markets and improve the efficiency and effectiveness of the payment systems. 2. Second, currently there seem to be differences in computing macroeconomic convergence indicators, such as inflation, thus making it difficult to compare performance across countries. It is therefore incumbent upon us to come up with standard definitions of these variables to allow a more accurate comparison of performance. Of course, this harmonisation will be possible once methodologies and data bases used are also harmonised. 3. Third, whereas full convertibility of our currencies is a critical element towards the establishment of a single currency, very few of our currencies are convertible even within the existing regional economic communities. We are therefore faced with a big challenge of how we can promote the convertibility of our currencies amidst low volume of cross border trade and investment flows which in turn requires adoption of a regional approach to structural reforms. The key areas of reforms are tariff reduction and harmonisation, legal and regulatory reform, payment systems modernization and rationalisation, financial sector reorganisation, investment incentives, tax system harmonisation and labour market reforms. 4. Finally, the issue of political commitment is yet another key concern in our continuing endeavour towards a Monetary Union. I have in mind the need to give political issues relating to regional integration the requisite weight. We need to draw firm timetables for the pending reforms and the establishment of the required institutions. Above all, we need political will and commitment to evolve national macroeconomic policies that are consistent with the requirement for regional integration. One important issue that is negatively perceived is the impact of tariff reduction and removing non-tariff barriers. The negative perception has prevented some member countries from moving forward. We need to allay such fears and help members to move forward. Fellow Governors, Ladies and Gentlemen, before I conclude please allow me to pose a few questions for the 10th Meeting of this Committee. What is it that we set out to achieve at our inception? What have we achieved so far? What have been the challenges? What remains to be done? And how do we move forward? I believe that these are critical questions that we should ponder over in the next two days. In the meantime, I urge you please to spare time to visit our beautiful city and sample what Nairobi has to offer. Thank you for your kind listening.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the annual luncheon of the Association of Retirement Benefits Scheme, Nairobi, 23 May 2007.
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Njuguna Ndung’u: Savings-investment cycle – supporting pension schemes by protecting the value of pensions and promoting efficiency of the financial sector Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the annual luncheon of the Association of Retirement Benefits Scheme, Nairobi, 23 May 2007. * * * Chairman and Council members of the Association of Retirement Benefits Schemes, Distinguished guests, Ladies and Gentlemen I am happy to be with you today for this luncheon and I deeply appreciate this kind gesture from your association. Coming early in my tenure as Governor of the Central Bank of Kenya, an occasion such as this affords me the opportunity to acquaint myself with so important a building block of the financial sector of the economy as yours. I hope it also affords you an opportunity to understand what I intend to achieve during my tenure and what that means to your Retirement Benefits Schemes. I would like therefore to take this opportunity to share with you a few thoughts on Retirement Benefits Schemes and the Central Bank. I must first acknowledge and commend Retirement Benefits Schemes in which your association is a stakeholder, for the very important role they play in the welfare of the retirees as well as in support to the economy. To the retirees, Retirement Benefits Schemes provide an invaluable vehicle for accumulating savings during the life cycle of earnings and provides an insurance mechanism of a steady stream of payoffs at retirement period, which allows a decent living standard in retirement. This I regard as an important savings-investment cycle. But it works well when the financial sector also works well. To the economy in general, Retirement Benefits Schemes provide a vehicle for pooling financial resources for investment. For instance, I am made to understand that Retirement Benefits Schemes in Kenya have acquired assets amounting to KSh212 billion. This is a significant amount of savings. Retirement Benefits Schemes’ assets require security in two senses. First, the schemes require security in the ordinary sense of actual security of funds – the assurance that funds are available when needed by the beneficiaries. This security is provided by the Retirement Benefits Scheme managers operating within strict governance frameworks and oversight by the regulator of the benefits schemes – the Retirement Benefits Authority. The security is further enhanced by other regulators of the financial system like Capital Markets Authority, Commissioner of Insurance, and (the institution I come from) – the Central Bank. Secondly, I think the main source of security lies in ensuring investment opportunities with rewarding returns that are also predictable, while at the same time protecting the savings from inflation erosion. Retirement Benefits Schemes thus thrive well in stable financial systems and where these benefits can be invested for gain and also develop the financial market. Retirement Benefits Schemes benefit from Central Bank in both scores: stable, predictable low inflation; stable, well-functioning financial sector. The law mandates the Central Bank to play two overriding roles. I would therefore like to say a word or two on how the Central Bank in pursuit of the two overriding goals would be beneficial to the Retirement Benefits Schemes. Let me start with inflation. The Central Bank is committed to pursue effective monetary policy that is consistent with the development agenda of the country and the development of an appropriate financial sector in which you play a role. In particular, the commitment is to a prudent monetary policy that keeps a tight lid on inflation. This should help Retirement Benefits maintain the value of benefits. This is a commitment which the Central Bank will sustain and thus make a meaningful contribution to the economy and to Retirement Benefits Schemes. This environment allows you decide where to invest your funds and assures you that whatever payoffs you make to beneficiaries, they are not eroded by inflation and are mediated efficiently by the financial sector. To ensure financial sector stability, the Central Bank provides prudential guidelines and other regulations to guide the operations of the banks and micro finance institutions to provide proper functioning and orderly exit. The Bank is also charged with the responsibility to promote an efficient and effective payment, clearing and settlement system. This facilitates the proper working of the financial sector and stable payments systems. Note: Effective monetary policy requires an efficient financial sector. This has been identified as a sector to lead the way in the Vision 2030. I also anticipate that the financial sector will require to develop innovative products to tap into these savings provided by your schemes. I have observed the development of fund managers in the market in the last 5 years has been tremendous – a positive development. I am therefore looking forward to a good working relationship with the industry as we strive to achieve the nation’s overall development goals. Thank you.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official opening of the Nakuru Branch of Fina Bank Limited, Nakuru, 26 July 2007.
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Njuguna Ndung’u: Banking sector developments in Kenya Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official opening of the Nakuru Branch of Fina Bank Limited, Nakuru, 26 July 2007. * * * The Chairman, Members of the Board of Directors; Mr. Frank Griffiths, Group Chief Executive, Fina Bank; Distinguished Guests; Ladies and Gentlemen: I wish to begin by thanking the Board and Management of Fina Bank Limited for extending an invitation to the Governor of the Central Bank to preside over the official opening of the Nakuru Branch of Fina Bank. Due to prior engagements, the Governor regrets that he could not attend this function, and has requested me to represent him today. I therefore wish to now turn to the Governor’s remarks intended for this gathering. 1. Mr. Chairman, this invitation is indeed a great honour for the Central Bank, and I wish to thank you most sincerely for this gesture. As the regulatory authority for the banking sector, we are pleased to be associated with the achievements of the banks we regulate, particularly where these developments lead to increased access to banking services for the Kenyan public. 2. In the case of FINA Bank, it is evident that this event is part of a long journey in the bank’s program of expansion and growth. I have been reliably informed that FINA Bank started its operations as a non-bank financial institution and later converted into a commercial bank. I note that the bank has embarked on an ambitious expansion strategy to solidify its position not just in the country but also in the East African region. Our presence here today is a testimony of this strategy. 3. Ladies and Gentlemen, Kenya’s economy has experienced tremendous growth in recent years, with real GDP growing at 6.1% in 2006. This achievement is collaborated by the improved performance of the Banking Sector in Kenya. The Sector remained stable in 2006 with positive developments recorded in all key financial indicators. Total assets expanded by 19.5% from Kshs. 640 billion as at December 2005 to Kshs. 760 billion as at December 2006. As a result of the improved performance, the level of non-performing advances declined from the previous year’s level of 99 billion to 95 billion as at end of December 2006. 4. Kenyan’s long term vision, dubbed the Vision 2030, targets a sustained economic growth of over 10 percent per annum over the next 25 years. In order to contribute to the achievement of these aspirations, the financial sector has to play a clearly defined role, particularly in mobilising resources required to finance the 20 flagship projects worth Ksh 500 billion that will be required over the next five years. This is a significant budget, equivalent to Kenya’s annual budget and hence the need for a strong and vibrant financial sector that will help channelling these savings into the required investments. It is with this in mind that the Government is requiring banks to double their efforts in building a solid capital base capable of supporting product innovation, savings mobilisation and expanded access of financial services to the Kenyan public. Let me add that the heavy infusion of public investment to attract and enhance private sector investment will be important to continue the economic growth acceleration. 5. Although physical bank branch expansion programs play an important role in expanding access, it will be important for the banking sector to complement these programs with increased product innovation. The real challenge for all of us is how to enhance savings mobilisation, and effectively channel society’s savings to its most productive use. We, at the Central Bank would like to encourage banks to offer an expanded range of banking products in order to mobilise savings to support financing of economic activities in the country. This will also provide acceptable options to the investing public who are currently falling prey to schemes being touted by unscrupulous business people in the form of pyramid schemes. We need to guard our successes from these pyramid schemes menace. We will rely on the screening and monitoring roles of the commercial banks like yours to eradicate this menace and with the appropriate savings and investment products in place. 6. The banking sector in this country has, over the last few years, witnessed significant growth in consumer lending. This is evidenced by the growth in real private sector credit of 17.7 % in the twelve months to May 2007. The resultant credit expansion has brought significant benefits to the economy, but the information asymmetry that is prevailing in the lending environment poses a real challenge in the form of credit risk for the banking sector in Kenya. 7. In order to mitigate this risk and promote effective credit provision, consumer protection and strong institutions for these aspects, the Central Bank has been working towards the development of a credit information sharing mechanism in Kenya. The Banking Act has recently been amended to make it mandatory for institutions licensed under the Banking Act to share credit information on nonperforming loans. In this regard, the Central Bank has, in consultation with the Kenya Bankers Association, prepared relevant regulations, which will soon be gazetted in order to provide a framework for the licensing and operation of credit reference bureaus under the Banking Act. We will expect banks to make effective use of this mechanism as a credit analysis tool before extending any credit. 8. The Central Bank recognises the need to bring the legal framework for regulating the banking sector up to speed with international developments. In consultation with the Ministry of Finance and the Kenya Bankers Association, the Central has undertaken a comprehensive review of the Banking Act in order to align it to the best international practices and address some of the weaknesses which have been identified over time. We anticipate that once enacted, the legal framework will provide a conducive environment for a more robust banking sector. 9. Allow me to conclude my remarks by appealing to banks to explore ways of enhancing the efficiency in service delivery. By enhancing efficiency banks are capable of offering more affordable banking services. This has the potential of drawing a larger number of Kenyans to the financial system resulting in an expanded banking clientele. Following the recent study on cost of banking services, the Central Bank will soon be launching the results of the survey and a sensitisation program to educate the public for more effective market discipline. We believe that these measures will encourage efficiency in the banking sector and resultant lowering of bank costs for the benefit of both the banks and the economy. 10. Finally, let me extend my gratitude to the Board of Directors for inviting me to be with you on this auspicious occasion of the opening of the Nakuru Branch of FINA Bank. 11. It now gives me great pleasure and honour to declare the Nakuru Branch of FINA Bank officially open. Thank you all for your attention.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the KCB Biashara Banking Launch, Nairobi, 28 June 2007.
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Njuguna Ndung’u: Innovative products in the banking industry in Kenya Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the KCB Biashara Banking Launch, Nairobi, 28 June 2007. * * * Mrs. Susan Mudhune, Chairman of KCB Group Directors of the Board of KCB Group, Mr. Martin Oduor-Otieno, CEO of the KCB Group Invited Guests Ladies and Gentlemen: It is indeed a great honour for me to stand here during this launch of the KCB Biashara Banking. I feel personally privileged because I am also a long time customer of this bank and one that feels proud of innovative products in the banking industry. KCB has been a major player in the lives of Kenyans and continues to play a pivotal role in the socio-economic development of our nation. KCB as a bank symbolizes the prosperity of indigenous enterprises and its ongoing success is a major boost to our confidence in the Kenyan entrepreneurial spirit. I would like to congratulate the Board and KCB Team for the excellent performance that the bank has been reporting in recent years, a reflection that the bank continues to be a major financial market player in the country today. Allow me also to commend the Board and KCB Team for the excellent corporate social responsibility agenda that you have been undertaking. I am informed that KCB has supported key community initiatives through donations to Operation Smile Kenya, the Kenya Red Cross Society and Ndakaini Dam Environmental Conservation Organization among other worthy causes. I urge you to continue with your sterling Corporate Citizenship efforts. It is now clear that the SME sector is the source of livelihood for majority of Kenyans and there is need to nurture it so that it can grow into a huge sector in the Kenyan economy. It is however widely acknowledged that the sector faces constraints in accessing financial services. It is in this light, that I must commend KCB for launching the KCB Biashara Banking Product that targets this bedrock sector of the economy. I do hope that most entrepreneurs will take advantage of this product to grow their businesses to greater heights. Ladies and Gentlemen, as I had earlier alluded, the SME sector in Kenya has been constrained in accessing credit. One of the key factors responsible for this constraint has been the lack of a “credit history” for these enterprises that can be used by banks in lending to them. The KCB on its part is therefore working hard and fast to create credit reference bureaus that will work towards improving information flow and solve the risk problems in the country. Regulations for the licensing and oversight of the bureaus are expected to be gazetted by the Minister of Finance in the second half of this year. Credit Information Sharing when fully developed and implemented will undoubtedly go a long way in facilitating access to finance by SMEs. Ladies and gentlemen, before I conclude, I would also perhaps warn that with the economic vibrancy around us and innovativeness of banks like KCB, there are crooks that innovate very well but negatively. These are likely to rob us this financial sector dynamism from the jaws of victory and for us to safeguard against this, we need to take several measures: First, conduct due diligence on viable SMEs, they provide growth poles, but only if they are viable. Second, be aware of pyramid schemes as they thrive on ignorance of the public. Do not give them a chance – banks should close their accounts. Third, provide more innovative products that reward depositors and savers that will ultimately raise returns to positive in real terms and squeeze the Interest Rate spread. With these few remarks ladies and gentlemen, it is now my pleasure to officially launch the KCB Biashara Banking. Thank you and God bless.
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Speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya and Chairman of the MEFMI Executive Committee, during the 2007 MEFMI Fellows Graduation and Accreditation Ceremony, Harare, 31 July 2007.
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Njuguna Ndung’u: MEFMI Fellows Department Programme Speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya and Chairman of the MEFMI Executive Committee, during the 2007 MEFMI Fellows Graduation & Accreditation Ceremony, Harare, 31 July 2007. * * * Your Excellencies, Governor Reserve Bank of Zimbabwe, Dr. Gideon Gono, Executive Director of MEFMI, Dr. Ellias Ngalande, Distinguished Invited Guests, Graduated and Accredited Fellows, Ladies and Gentlemen, 1. It is indeed a great honour and privilege for me to be here and witness this memorable occasion as we confer MEFMI Fellows in recognition of their hard work. Congratulations to you all the Graduated and Accredited Fellows! This occasion is especially memorable because of the presence of our distinguished guests; the financial cooperating partners. Your Excellencies once more, you are very welcome to the MEFMI family. Ladies and Gentlemen: Allow me, on behalf of the board and indeed on my own behalf, to thank you for accepting to come to bear testimony to one of the significant outputs of MEFMI. Let me assure you of MEFMI’s commitment in pursuing its objectives and ideals of building sustainable capacity in the region as affirmed by its leadership. I wish also to acknowledge the great hospitality the Institute continues to receive from the Governor of the Reserve Bank of Zimbabwe, Dr. Gideon Gono that enables us to convene effectively in Harare. Your presence here today, Honourable Governor, further demonstrates the very commitment you have for the intended success of MEFMI. 2. Ladies and Gentlemen: MEFMI Fellows Development Programme was conceived as a flagship to address the capacity needs of the region in terms of the development of local and regional expertise. Specifically the programme was set up to meet the following objectives: (i) To develop a critical mass of regional expertise in the priority areas of sovereign debt, macroeconomic and financial management, as a means to gaining sustainable and self-generating capacity; (ii) To create sustainable regional capacity for delivery of MEFMI capacity building products and services to answer the concerns about sustainability of the Institute’s activities; and (iii) To create regional capacity for complementing MEFMI’s capacity building efforts at in-house level in MEFMI member states’ institutions. The Fellows who have graduated today have gone through an intensive programme of customized training, professional exposure to renowned institutions and attachments at exemplary institutions. In addition MEFMI arranged a “one-to-one” mentoring and coaching programme to all Fellows with leading experts in the subspecialty chosen. Having personally participated in these activities as a Resource Person, I can vouch for the quality of the process. 3. Today we have witnessed the largest group of 25 Fellows ever graduating, at once, since the inception of MEFMI. This crop will bring the total number of graduate Fellows to 36. The number for the Accredited Fellows now stands at 19 following the 3 that have qualified today. I am also told that currently there are 12 candidate Fellows under training who will be graduating early in 2008. In addition, tomorrow the Secretariat will be conducting rigorous interviews to recruit a new group of 17 Fellows, which will bring the total number of Fellows under training to 29. These developments are a clear demonstration that the Fellows programme is rising to greater heights than was the case at the beginning. This is evident from not only the number of graduating Fellows but also the diversity of the specialty areas. The diverse areas now include: Post HIPC Debt Strategy Formulation and Analysis; Public Debt Strategy formulation; Financial Supervision of Pension Funds; Payments Systems (oversight); Banking Supervision (Basel II); Financial Programming; and Policy and Economic Modelling that reflect the emerging capacity building needs of the member states. The expertise acquired by the Fellows will be utilized in assisting member states in designing appropriate policies and strategies for enhancing economic growth relevant for poverty reduction. Although MEFMI may have registered success in the Fellows Development Programme because of the notable outputs, the demand for capacity far outstrip the supply. MEFMI’s vision is to realise that dream of a critical mass of Accredited Fellows being available in each institution of the member state. 4. Your Excellencies, distinguished ladies and gentlemen, one of the gains of the Fellows programme is the benefit of high quality expertise at a minimal cost. As you may well know, for decades, Africa has been grappling with problem of limited capacity in specialist areas. Long term technical assistance provided from overseas has been perceived as a solution. Experiences in the region, however, indicate that technical assistance perpetuated and turned into great dependency. The coming of institutions such as MEFMI, with the noble approach of empowering its member states officials and reducing use of external experts. This aspect has become a route towards sustainable and self-generating capacity for MEFMI. Ladies and Gentlemen: Allow me to acknowledge both the financial and technical support received from our partners that have rendered the MEFMI capacity building efforts effective in general. Particularly and in support of the Fellows Development Programme, the technical cooperating partners have gone an extra mile by providing expertise that groom the Fellows on gratis terms. Turning to the Fellows who have graduated today, I would like you to sincerely note that MEFMI holds you in very high esteem. As such you need to live to its ideals. MEFMI’s investment, let alone the investment of member states in human capital development, is very dear. In this regard, I urge you to display high levels of integrity and dedication by leading in assisting to impart knowledge and skills in your own institutions. It is our honest expectation that compensation from your own institution or MEFMI will not be the only guiding motive for you to impart skills on behalf of your institution or MEFMI because they have respectively assisted you to acquire the special skills in this programme. 5. Ladies and Gentlemen: I believe the graduants are anxiously waiting to celebrate later tonight and as such I do not intend to prolong my speech. I would like oncemore to thank all the distinguished guests that joined us in this memorable occasion. I would like to especially thank the financial cooperating partners that are ably represented by their Ambassadors resident in Harare and also the Africa Capacity Building Foundation (ACBF). I wish all the graduated Fellows a safe return home. Finally allow me to thank our host Government through Governor Gono and Principal Secretary, Manungo, for the excellent hospitality that MEFMI Secretariat is enjoying in spite of the economic challenges that Zimbabwe is going through. MEFMI will continue to count on you in this regard. Last but not least let me thank MEFMI staff for the Secretariat’s hard working spirit that guarantees good outcomes all the time. I thank you all! Asanteni!!
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Foreword message by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, for the Kenya National Chamber of Commerce, Mombasa Branch Chronicle, 'Business Financing Edition', June 2007 issue.
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Njuguna Ndung’u: The Kenyan money market and other key developments in the financial sector Foreword message by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, for the Kenya National Chamber of Commerce, Mombasa Branch Chronicle, “Business Financing Edition”, June 2007 issue. * * * I am honoured and privileged for the opportunity to share the Central Bank’s thoughts on the Kenyan money market specifically and other key developments in the financial sector generally. It is important to underscore at the onset, the mandate of the CBK which is principally to foster, price, monetary and financial stability, supervision of efficient and effective payment, clearing and settlement systems. Currently the ambit of the Central Bank supervision extends to commercial banks, mortgage finance companies and non bank financial institutions licensed under the Banking Act. Deposit Taking Microfinance Institutions are also expected to come under the purview of the CBK once the Microfinance Act, 2006 is operationalized by the Minister of Finance. Money markets play a key role in providing a channel for savings which can be mobilised to fund productive ventures in the economy. It is generally agreed that there are positive linkages between mobilisation of savings, channelling them to productive investments and poverty reduction. This is important especially when poverty is caused by lack of access to credit and productive investment. The Banking Sector currently offers an array of products that can be considered as channels of deposits and savings. They range from savings accounts to fixed deposit accounts. They offer a return by way of periodic interest on amounts saved or on maturity for fixed deposits. There has however been public outcry on the returns received on these products which are considered meagre in comparison to the rates charged on loans and also the charges on these products. From an analytical point of view, most of these products have negative returns in real terms. The CBK in a bid enhance the competitiveness of these products, embarked on publication of charges in the print media in 2003. This initiative was expected to reduce the charges on the products thus increasing their “net return” The publications which had been suspended in 2005 are being reviewed to sharpen their effectiveness in promoting market discipline. It is also noteworthy that the Banking Act was recently amended to restrict charges on savings accounts. In its role as fiscal agent of the government, the CBK also raises funds for the government through Treasury Bills and Bonds. These instruments offer a secure investment vehicle with the Bills being of a short term maturity of up to six months. Bonds are offered over longer tenors of up to 15 years. These instruments can be discounted at the Central Bank and bonds are tradeable on the Nairobi Stock Exchange. It is also useful to highlight other critical investment products that fall under the purview of the Capital Markets Authority (CMA). Of particular interest are equity securities and unit trusts. The Nairobi Stock Exchange (NSE) offers equity (shares) and fixed income (debt) securities. There are over 50 companies in diverse sectors that are currently listed on the NSE. The shares of these companies provide an investment opportunity based on one’s risk preferences and investment horizon. Recent Initial Public Offers (IPO) such as the Kengen one have elicited substantial interest among Kenyan investors. This trend is expected to continue with forthcoming IPO’s in line with the Government’s ongoing privatization programme. On the fixed income segment, the NSE offers bonds, commercial paper and notes that tend to target institutional investors. I regard Unit Trusts as a form of “collective investment scheme” that provide an opportunity for small investors to access the capital markets. They involve the pooling of funds from various investors by market players licensed by the CMA. The pooled funds are invested in diverse investment vehicles primarily shares based on among other factors, the investors risk appetite and liquidity preference. The returns are then proportionately shared among the investors. Unit Trusts particularly offer small investors the benefits of professional investment management, economies of scale and portfolio risk diversification. Turning to recent significant developments in the financial sector, I will focus on MicroFinance and Credit Reference Bureaus. Microfinance involves the provision of diversified financial services and products to the un-banked and underserved segments of the population by different financial service providers, mainly to the low-income households and micro enterprises. Microfinance plays a vital role in poverty alleviation in empowering the underserved and un-banked economically active and underprivileged social constituencies in contributing more effectively to wealth creation and economic development. The recently enacted Microfinance Act, 2006 provides a legal, regulatory and supervisory framework for deposit-taking microfinance business aimed at creating an enabling environment that will promote performance and sustainability of deposit-taking microfinance institutions, while at the same time protecting depositors’ interests. One of the key hindrances to access to financial services and products by the vast majority of the Kenyan populace engaged in the informal/small and medium enterprise sectors has been the lack of a “credit track history”. Further, this information asymmetry problem has also been a contributory factor to the high levels of non-performing loans in the Kenyan Banking Sector. It is in this regard that the CBK teamed up with the Kenya Bankers Association and other players to develop a credit information sharing mechanism. The mechanism will entail the licensing and oversight of Credit Reference Bureaus by the CBK. The Bureaus will act as depositories of credit information to be used by banks in their lending decisions. Regulations for the Bureaus are expected to be gazetted by the Minister of Finance in the second half of 2007. One of the challenges facing us now is the presence of Pyramid Schemes that are not only fraudulent but also not known until one falls victim. Information asymmetry makes such a business thrive. Information provided by these bureaus will be long-term and sustainable solution and promote undeterred development in the financial sector. In closing, let me extend my thanks once again to the Mombasa Branch of the Kenya National Chamber of Commerce and Industry for this opportunity. I wish the branch well in its endeavours to achieve its mandate of acting as a forum for business people to share their experiences and forge solutions that will create a conducive business environment. To the readers, may you have an enjoyable and fruitful read and direct innovative ideas to us in CBK.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the opening of the 7th East African Banking School, Nairobi, 20 August 2007.
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Njuguna Ndung’u: Implementation of Basel II, risk management framework within banks and the prevention of financial crime Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the opening of the 7th East African Banking School, Nairobi, 20 August 2007. * * * The Chairperson, Kenya Institute of Bankers; Representatives of Financial Institutions; Distinguished Participants; Distinguished Guests; Ladies and Gentlemen; It gives me great pleasure to be with you today and to address the participants at the 7th East African Banking School. Before I make some remarks, let me take this opportunity to thank the organisers of this workshop and the facilitators for inviting me to preside over the opening of this important workshop and to give a keynote address. On behalf of the Central Bank of Kenya, and on my own behalf, please allow me to warmly welcome each and every one of you to Nairobi, Kenya. Ladies and Gentlemen, The financial sector is growing in dynamism and complexity to become very competitive. These developments require highly trained expertise and substantial resources to support such capacity building. The banking sector and our respective central banks must therefore invest heavily in capacity building. I would appeal to banks from partner states to continue supporting their respective Institutes of Bankers with adequate resources to enable them offer more courses that meet the growing demand in training. In Kenya, we are pleased with the efforts the Kenya Institute of Bankers (KIB) is making to meet the growing demands of the financial sector in professional training. The Central Bank of Kenya has continued to complement KIB’s efforts in these endeavours through the Kenya School of Monetary Studies. Ladies and Gentlemen, It is worth noting that the theme, “Banking in a Globalised and Complex Environment”, is very appropriate in this era of globalisation of banking business. However, before delving into this topic allow me, ladies and gentlemen, to recognise the important role KIB has been playing in capacity building in Kenya. Currently, KIB has 40 banks out of 42 banks as corporate members. I have also been informed that KIB has approximately 7,000 individual members, with 2,300 actively pursuing courses leading to professional examinations. Successful candidates at the lower level examination are offered a Certificate in Banking & Financial Services, whereas at a higher level, a Diploma in Banking and Financial Services is offered by the Institute. Therefore, KIB provides examinations that enable successful candidates to be professionally qualified bankers. This underlines the significant contribution that KIB has been making in improving management of financial institutions in Kenya. I urge you to continue this good work. With the rapid expansion and the ever increasing sophistication and dynamism of the banking sector, the demand for well trained bank professionals will definitely be on the increase. Ladies and Gentlemen, I have reviewed the contents of the 7th School’s workshop programme and noted that it has been well designed around ten topics to reflect the central theme of the workshop, namely, Implementation of Basel II, Risk Management Framework within banks and the Prevention of Financial Crime. In my remarks, I will briefly touch on these issues and make an attempt to clarify our position on some of them. However, during the training sessions, you will be required to delve into greater details on these subjects. Ladies and Gentlemen, One of the best known schemes for financial crimes involves money laundering. This is the method of hiding, mixing and disguising the proceeds of criminal activities through legally operating institutions for the purpose of disguising the origins of the proceeds. In other words, money laundering is a tool that is used by people involved in illegal activities, such as drug trafficking, organised crime, tax-evasion, political bribery, and above all, corruption. In addition, the events of September 11th have added another dimension to the problem of money laundering and brought to light the synonymy between money laundering and terrorism. Reliable estimates by the IMF put money laundering to be in the ranges of USD 590 billion to USD 1.5 trillion, about 2% to 5% of the world’s economic output. Due to banks’ confidentiality principle and their capability to handle huge cashless transactions and transmit funds efficiently, they are normally the targets of money laundering activities. In doing so, banks also suffer serious consequences from money laundering, which include reputation and legal risks. Money launderers are now able to quickly move illicit money between national jurisdictions, therefore complicating the task of tracing and confiscating these assets. It is in this regard that there is a concerted international and regional effort to combat the vice. In the area of Anti–Money Laundering (AML), Kenya has set out seven key strategic objectives for the proceeds of crime and anti-money laundering prevention. As you may remember, Kenya has signed and ratified all the United Nations Conventions on combating Money Laundering and the Financing of Terrorism. Kenya has also criminalised money laundering under the Narcotics Drugs and Psychotropic Substances (Control) Act No. 4 of 1994. To date a draft Proceeds of Crime and Money Laundering (Prevention) Bill, 2007 is now being debated by Parliament. The proposed legislation will be the focal point of Kenya’s AML regulatory regime. The legislation will, amongst others, require financial institutions to: • Establish appropriate Know Your Customer (KYC) requirements; • Maintain records; • Establish suspicious transaction reporting mechanisms; and • Provide training to staff on anti-money laundering techniques. The Central Bank expects financial institutions to be committed to ensure that the integrity of the Kenyan financial system is not in any way compromised by these criminal activities. In this connection, I would like to urge the respective Institutes of Bankers to develop and implement relevant course materials to support institutions in their efforts to train staff on anti-money laundering techniques. Ladies and Gentlemen, On the topic of risk management framework within banks, I am pleased to report that over the last two years, the Central Bank has been involved in initiatives aimed at transforming the approach used for conducting its core mandate of supervision and regulation of banks to make it more risk-focused. During the year, significant steps were made towards implementation of Risk Based Supervision. Inspection procedures and report formats were modified, and the Central Bank received Risk Management Programs (RMPs) from all institutions as required of them. The exercise has substantially raised the level of awareness among banks on the importance of strong risk management systems. Most banks have now hired risk management personnel and introduced procedures for reporting and reviewing the critical risks facing their operations. This process will continue to improve bank operations and contribute to the soundness of Kenya’s banking system. In addition to this, risk management and strategic management are both aimed at enhancing corporate governance in the banking sector. The Central Bank has continued to lay emphasis on corporate governance in the banking sector as one of the key tenets of its legal and regulatory framework. In this regard, the Central Bank has revised provisions in the prudential guidelines to require institutions to separate ownership from management, restrict ownership of shares to reduce shareholder dominance, introduce board independence and periodic disclosure of financial statements. During our deliberation under the auspices of the Monetary Affairs Committee of the East African Community last May, we were pleased to learn that majority of our partners have equally made notable progress in these areas. I am therefore pleased that this Workshop will cover these topics adequately. However, we expect that having followed keenly the developments in the banking sector, our respective Institutes of Bankers will strive to offer more relevant courses and training opportunities to its membership to meet the growing training needs on risk management in banks. Ladies and Gentlemen, Since 1999, banking institutions in Kenya have been regulated under Basel I Capital Adequacy Accord which was issued by the Basel Committee in 1988 to guide in assessing banks’ capital adequacy requirements. Under this framework, the focus has been largely placed on the credit risk faced by banks. The 1988 Accord was later amended in 1996 to incorporate a capital charge for the market risk, which we in Kenya and other Central Banks in the region have not adopted. In 2004, the Basel Committee issued the Basel II Capital Accord which, in addition to credit and market risk, introduces a capital charge for operational risks that banks face. The Accord took effect from the beginning of 2007 in G10 countries. However, the committee recognises that emerging countries such as Kenya will not be able to implement this accord in 2007 as they are yet to fulfill the prerequisites of the new Accord. The Central Banks of Kenya, Uganda and Tanzania have indeed agreed that they will only implement the Basel II accord upon implementation of key prerequisites. These preconditions include: • The full implementation of the Basel I Accord; • Adoption of Risk Based Supervision; and • Adherence to the Basel Core Principles for Effective Banking Supervision. The move to Basel II will ensure that the solvency of the banking sector is determined in more precise terms, taking into account most of the critical risks that banks are exposed to. Through the revised approach, we will overcome the simplistic methods of measuring capital adequacy currently in use, which do not reflect the increasing sophistication of activities that many banks are beginning to engage in. As a result of the improved techniques brought about by the new Accord, we hope to achieve increased stability of the sector. The Central Bank is currently undertaking various initiatives within its’ current 2006-9 strategic plan to ensure full compliance with the aforementioned prerequisites of Basel II implementation. Of critical importance has been the shift to Risk Based Supervision (RBS) which began in 2004. RBS focuses on assessing the adequacy of banks’ risk management frameworks in identifying, measuring and mitigating inherent business risks. Ladies and Gentlemen, Risk Management does indeed lie at the heart of Basel II and it is imperative that a “risk management culture” be inculcated in banks as a precursor for implementation of the new Accord. Towards this end, the Central Bank conducted a survey in 2004 that indicated gaps in Risk Management Practices in Kenyan Banks. This led to the issuance of Risk Management Guidelines by the Central Bank to guide banks in the development of Risk Management Frameworks. The Central Bank, since May 2006, has been reviewing the Risk Management Frameworks of all institutions. These frameworks will form the basis of future “supervisory relationships” between the Central Bank and each institution. More fundamentally, the Risk Based Supervision approach will inculcate the requisite “risk management culture” in banks before Basel II implementation can be considered. The Central Bank recognises that the structure of banking institutions is increasingly evolving and becoming more complex due to business linkages with the non-bank financial associates, affiliates and subsidiaries. These linkages obviously affect the soundness of the banks in the conglomerate group. The Central Bank supervisory approach has traditionally viewed banks as “stand-alone” entities. In response to this, the Central Bank is developing a consolidated supervision framework, which will address the risks arising from the activities of the conglomerate. Ladies and Gentlemen, To achieve all these, the Central Bank has proposed comprehensive amendments to the Banking Act with a view to bringing it in line with international best practices and to meet the dynamic needs of the banking industry. In particular, some of the objectives of the review exercise include: • Enhancing the independence of the Central Bank; • Expanding the “Permissible Activities” of banking institutions; • Introducing consolidated supervision; and • Establishing provisions for Prompt Corrective Action. A robust legal and regulatory framework for the banking sector in Kenya is part of the reform package that is intended to ensure a suitable environment for safe and sound banking. Ladies and Gentlemen, Before I conclude, please allow me to pose a few challenges for the regional Institutes of Bankers. First, as you are well aware, microfinance is the provision of financial services to low income people and enterprises. The microfinance industry in our region has experienced major transformations over the past twenty years, growing from a fledgling concern dominated by a few donor and church-based NGOs to a vibrant industry increasingly driven by commercial viability and sustainability. We challenge the institutes to tailor a curriculum that meets the requirements of this sector, which plays an important part in the financial market. Second, regional central banks are currently enhancing their technical capacity to handle the challenges posed by the implementation of Basel II. Basel II implementation requires various skills like IT experts, legal expertise, actuaries and banking experts. Thus the training efforts of the institutes will be a key ingredient in the development of the three pillars of Basel II. The inclusion of the stakeholders in this consultative process and capacity building is crucial. Ladies and Gentlemen, I would like to encourage you all to participate actively during this important forum so as to get maximum benefits from this workshop. As I conclude, may I welcome the presence of delegates from Rwanda and Burundi to this workshop. I wish the participants a happy stay in Nairobi and fruitful deliberations. With these few remarks, it is now my humble duty to declare the 7th East African Banking School officially open. Thank you for your kind attention.
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Talking notes of Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, for the meeting with the Kenya Forex Bureaus Association (KFBA), Nairobi, 22 August 2007.
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Njuguna Ndung’u: Regulation and supervision of the forex bureau industry in Kenya Talking notes of Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, for the meeting with the Kenya Forex Bureaus Association (KFBA), Nairobi, 22 August 2007. * * * The chairman, KFBA; Distinguished Guests; Ladies and Gentlemen; 1. Let me take this opportunity to invite you all to the CBK during this very important occasion to meet the forex bureau industry representatives as part of our partnership and to discuss and share experiences on industry matters. 2. Before I proceed, let me thank the association for honouring our invitation and my staff for the presentation, which has clearly laid down the industry landscape and set the stage for our meeting. I hope this does form a platform through which we share experiences as well as challenges. 3. Ladies and Gentlemen, first and foremost, let me emphasize the role of regulation and supervision of the forex bureaus in Kenya, which aims to: • develop a strong, stable and viable forex bureau industry; • inculcate good corporate governance practices in forex bureaus; • ensure there is adequate internal control and management information systems in forex bureaus; and • ensure forex bureaus to comply with the Act and Guidelines. All these factors enhance healthy developments for any firm in business. But since bureaus are special, we shall continue to attach a lot of importance to compliance and enforce the Act and Guidelines including suspension and revocation of licences. 4. However, we expect forex bureaus to cooperate and partner with the Central Bank in the development of the forex bureau industry. 5. Let me now turn to specific matters that touches on certain specific issues on the industry. These include: a) Moratorium: As you are aware, the Central Bank had in the past imposed a moratorium on licensing new forex bureaus. This was done in order to: • allow newly established forex bureau industry to grow and individual bureaus to consolidate • ensure market discipline in the foreign exchange market by developing appropriate frameworks for regulation and supervision; and • enforce Government concerns on money laundering and related financial crimes. After a careful assessment, the Central Bank has lifted the moratorium on licensing of new forex bureaus including those to be located in the Nairobi and Mombasa Central Business Districts. b) Industry image: The continued existence of the moratorium can have negative implications on the industry image and the Bank, including creating opportunities for “rent seeking” and corrupt practices. This has tended to create a screen between the licensing authority and potential investors in this market. c) Licensing procedures: On licensing of new bureaus, you note that the Bank has introduced new licensing procedures that involve a two stage process, which include: i) ii) In the first stage, applicants are expected to submit application documents including: • Certified copy of Certificate of Incorporation and Memorandum and Articles of Association; • A feasibility study of the proposed forex bureau; • Particulars and “fit and proper forms” of proposed shareholders and directors; • Declaration and confirmation that no shareholder and/or director has a similar position or role in any other forex bureau in Kenya; and • Provide evidence of non-interest bearing deposit of US$ 30,000 and core capital of US$ 30,000. In the second stage, the Central Bank will issue a Letter of Intent to prospective bureaus to enable them commit funds by paying the requisite fees and deposits, and prepare premises for inspection before issuance of licence and approval to commence operations. The Central Bank has cleaned up the process and I do promise you an efficient licensing procedure. d) Compliance: let me take this opportunity to once again urge the industry to ensure that they have sound and effective internal control and management information systems to enable prompt and accurate submission of returns. 6. In conclusion, Ladies and Gentlemen, let me take this opportunity to invite the industry association chairman/ representative to make some remarks. Thereafter, we shall have a short discussion on industry concerns. I also urge you to continue to work together with my staff in development of the industry and in seeking solutions to the various challenges that will arise from time to time. Thank you.
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Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Senior Policy Seminar on Implications of Capital Flight & Macroeconomic Management & Growth in Sub-Saharan Africa, South African Res. Bank, Pretoria, 30 October 2007.
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Njuguna Ndung’u: Implications of capital flight for macroeconomic management and growth in Sub-Saharan Africa Keynote address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Senior Policy Seminar on Implications of Capital Flight and Macroeconomic Management and Growth in Sub-Saharan Africa, South African Reserve Bank, Pretoria, 30 October 2007. * * * Honorable Governors and Colleagues, Honorable Ministers, Honorable Ambassadors and Excellencies, Representatives of external partners and institutions, Ladies and Gentlemen, I would first like to thank the South African Reserve Bank, and particularly, my colleague Honorable Tito Mboweni, for hosting this important and timely event on the “Implications of Capital Flight for Macroeconomic Management and Growth in Sub-Saharan Africa”. I would also like to thank all my colleagues, and senior officials who have responded positively and are here to participate in the deliberations and contribute to the success of this important event, which has tremendous potential for investment, economic growth and more generally for the development of our continent. Africa is often labeled as the capital-scarce region of the world; one that has been marginalized in the landscape of global capital flows. The latest statistics published by the World Bank flagship report “Global Development Finance” suggest that the region received less than 4 percent of net foreign direct investment (FDI) flows to developing countries in 2006. Interestingly the totality of these FDI inflows went to 5 countries (Angola, Equatorial Guinea, Nigeria, South Africa, and Sudan), all of which are oil and mineral-rich. So these FDIs went to extraction sectors. The region is also lagging on the remittances, receiving just 4 percent of total remittances to developing countries – by far the smallest share. The average in other regions is in excess of 25 percent. As a result of chronic shortage of capital, investment prospects have been delayed, leaving the majority of countries in the region undiversified, commodity-dependent, and highly vulnerable to terms of trade and exogenous shocks. Over the years, most of these countries have been confronted with chronic balance of payments crises, and relied on external debt to bridge their ever growing financing gap. However, the accumulation of external liabilities over time took Africa’s external debt to unsustainable levels, when it reached the critical threshold of US$230 billion, about 45% of GDP in the 1990s. And as external debt continuously increased, so did debt service payments whose high costs undermined investment and growth potential even further. Paradoxically, the accumulation of external liabilities in the region is mirrored by massive outflows of resources in the form of capital flight – the voluntary exit of private residents’ own capital for safe havens away from the continent. The latest estimates published by UNCTAD suggest that capital flight from Sub-Saharan Africa is fast approaching half a trillion dollars, more than twice the size of its aggregate external liabilities. But why capital flight problem, just when the policy directions are clearer now than they were 10 years ago in most SSA countries? The costs of this financial hemorrhage have been significant for African countries. In the short run, massive capital outflows and drainage of national savings have undermined growth by stifling private capital formation. In the medium to long term, delayed investments in support of capital formation and expansion have caused the tax base to remain narrow. Naturally and to the extent that capital flight may encourage external borrowing, debt service payments also increased and further compromised public investment prospects. Furthermore, capital flight has had adverse welfare and distributional consequences on the overwhelming majority of poor in numerous countries in that it heightened income inequality and jeopardized employment prospects. In the majority of countries in the sub-region, unemployment rates have remained exceedingly high in the absence of investment and industrial expansion. By way of illustration, at the height of the Latin America debt crisis in the 1980s, Nicolas Brady, then US Treasury Secretary, who advocated policies to stem and reverse capital flight in response to that crisis, especially emphasized its costs for the US economy. In particular, he said, “As many as 400,000 new jobs could be created in the US economy if Latin America could achieve a 50 percent reduction in current debt service.” Sure enough, employment prospects would have been even higher in the source region if approximately 50 percent of flight capital was used to fund productive investments there, instead of flying to “safe havens”. For us Central Bankers, massive outflows of resources pose serious challenges for exchange rate management and monetary policy, especially for the majority of undiversified countries in Sub-Saharan Africa, which rely on hard currency for most imports. Most of my colleagues here, and especially the few who have gone through it, know how difficult monetary and exchange rate management becomes when foreign reserves go down to just a handful of months of imports. Interestingly and in spite of these costs, capital flight has continued to grow unabated in the region, including during the HIPC era, when the severely indebted countries were acceding to debt relief under the Enhanced HIPC Initiative. In particular, capital flight estimates between 1999 and 2004 are about US$80 billion, with more than US$35 billion recorded in 2003 in constant US dollars, the largest single annual outflow over the decades following independence. An annual outflow of this magnitude suggests that capital flight indeed remains a serious problem in the region and may undermine HIPC’s effectiveness and its potential impact for domestic resources mobilization in support of investment and economic growth. However, over the past few years, the costs of this hemorrhage for Africa’s development have become more apparent within the international community. This renewed interest at the global level has been partly motivated by the growing welfare and income gap between SubSaharan Africa and the rest of the developing world, with the majority of countries slated to miss the MDG targets. In December 2000, the UN General Assembly adopted a resolution 55/188 in which it called upon countries to cooperate through the United Nations system by devising ways and means of preventing and addressing the illegal transfer of assets and repatriating illegally transferred funds. And last month in New York, the United Nations Office of Drugs and Crime and the World Bank jointly launched the Stolen Assets Recovery (STAR) Initiative. This recent attempt to address the long-standing financial hemorrhage undermining Africa’s economic growth and development at the global level, and particularly within the UN platform, is indeed an important starting point, underlying the need for shared responsibilities in the face of persistent lopsided financial flows. Indeed, while massive resources have been fleeing African countries, their final destination has been outside African boundaries. Just last month, over US$30 million owned by one of the Nigerian Governors were frozen in London. In light of these developments, this Senior Policy Seminar on Capital Flight organized in Africa, is relevant and germane to the growth and development challenges facing the majority of countries in the continent. In this regard, I would like to thank the different organizing institutions which have invested immensely into the planning and organization of this event. I would also like to congratulate the organizers for putting together a very comprehensive agenda, going beyond the nitty gritty of central bankers’ immediate concerns – implications of capital flight for monetary policy and macroeconomic volatility – to address other key issues such as: • the causes and determinants of capital flight; • estimation of capital flight and methodology; • the link between external debt and capital flight; • implications of capital flight for capital market development; • implications of capital flight for banks and corporate performance; • implications of capital flight for investment; • the theoretical foundation of capital flight; • mitigation of capital flight through institutional strengthening; • expected benefits of capital flight repatriation; • implications of current international financial architecture for capital flight. I very much welcome the focus of this learning event on the role that the international financial architecture has played in the current asymmetric flows of resources from capitalscarce regions of the developing world, and especially from Sub-Saharan Africa to higherwage areas in the more advanced economies. In particular, more than just emphasizing the safe haven nature of the destinations to which the scarce resources from Sub-Saharan Africa are flowing to, I would like to urge experts and scholars attending this conference to discuss the role that the bipolar international currency landscape dominated by the dollar and more recently the Euro has played in encouraging capital flight from Africa. I also welcome the emphasis on capital repatriation and institutional policies and measures to stem capital flight. In the face of the continued marginalization of Africa in the landscape of global capital flows, the success of the region in achieving robust and long-run economic growth very much depends on its ability to generate sufficient resources for long-term investments. In this regard, the massive infusion of resources through a repatriation of a sizable or even part of the half a trillion US dollars that escaped for safe havens via the capital flight channel could play a great deal in supporting investments in critical areas, including infrastructures, telecommunications and education. Harvard University is often praised for the size of its endowment, which, in excess of US$20 billion dollars, is one of the largest in the world. How many Harvards could be established in this continent to create the critical mass of world-class engineers and scientists, and intellectual leaders needed to advance Africa’s development, expand industrial output and enhance employment creation in the era of knowledge from the half a trillion US dollars stored by a handful of Africans in save havens? Several world-class institutions could be established and thousands if not millions of jobs created from it, especially if repatriated funds were indeed used for productive investments and economic growth and not for consumption, which may further erode the current account. As concerted efforts are underway to recover stolen assets under the STAR initiative, I would like to urge the participants to this Seminar to undertake a comprehensive analysis of the expected benefits of capital flight repatriation, but also the potential risks and risk mitigation strategies associated with such an effort. Additionally, I welcome the emphasis of the seminar on the possible causes of capital flight. Over the past few years, a number of economists have singled out portfolio diversification motives, political and macroeconomic instability, particularly conflicts and macroeconomic volatility, fiscal deficits and expected devaluation of local currencies as some of the main causes of capital flight. However, recent data which suggest that capital flight has continued to grow unabated even in recent years, where fiscal deficits and macroeconomic volatility have been jugulated, suggesting that there may be other determining factors, particularly, corruption and poor governance. Let me illustrate this point further by taking you all the way to the America, to Haiti, the first Black Republic in the world. Prior to its independence in 1804, William Pitt, the UK Prime Minister, referred to Haiti as the “Eden of the Western World” for its wealth and production. Then, Haiti’s production accounted for more than one third of France’s foreign trade, and its own foreign trade equaled that of the newly born United States. The Haiti that was so much coveted a couple of centuries ago is certainly not the one we all know today. Why? It has become a country saddled with external debt burden, excess capital flight and recurrence of conflicts. “The Haitian debt was accumulated not to finance productive investments, but to finance the government’s patronage employment and large military and police forces. Corruption has been endemic, so there is a suspicion that some of the proceeds of foreign loans found their way into the pockets of the rulers and foreign bank accounts. This is a description of Haiti’s experience in the 90s.” However, the 90s to which these facts refer are not the 1990s, but the 1890s. I do not believe that there is a fatality in the path to underdevelopment or poverty trap for countries located below the tropics as a number of economists have alluded to in the literature on post-conflict and economic geography. Many countries in the developing world, including Africa, have gone through the cycle of external indebtedness, corruption and capital flight, and external debt in a continuing loop. However, in the midst of all this, countries in Asia and Latin America have succeeded in escaping the infinite loop. Remember the East Asian Tigers, and emerging market economies in Latin America, Chile and Argentina. I believe there is a way out of this loop for African countries and hope that the deliberations coming out of this seminar will identify concrete policy options and proposals to support ongoing efforts to stem capital flight and enhance repatriation in support of investment and economic growth across Sub-Saharan Africa; so that Africa in 3007 is not the mirror image of Africa in 2007; the one which has rightly or wrongly been associated with corruption, capital flight, HIPC and poverty. In wishing successful deliberations to all the delegates, I hereby declare this seminar open. Thank you all.
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Speaking notes of Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of the survey on bank charges and lending rates, Nairobi, 28 August 2007.
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Njuguna Ndung’u: Survey on bank charges and lending rates in Kenya Speaking notes of Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of the survey on bank charges and lending rates, Nairobi, 28 August 2007. * * * Mrs. Jacinta Mwatela, Deputy Governor of the Central Bank of Kenya; Mr. Richard Etemesi, Chairman of the Kenya Bankers Association; Ms. Caroline Pulver, Representative of the Financial Sector Deepening Trust; Representatives of the Kenya Bankers Association; Distinguished Guests; Colleagues; Ladies and Gentlemen: I would like to start by first thanking all of you for accepting our invitation to attend the launch of this survey on bank charges and lending rates. Allow me at this early juncture to extend a special vote of thanks to the Financial Sector Deepening (FSD) Trust, Kenya for partnering with us on this key initiative. I would also like to acknowledge the efforts of Research International, Tell-Em Ltd. and the Central Bank Team that worked on this project. We all appreciate that bank charges and lending rates continue to be of great public concern in our country. The issue at times seems to take an emotive stance with the public being “pitted” against the banks. At the Central Bank, we believe that this should not be the case and what we prefer to see is a healthy informed debate around this issue. It is with this in mind that the Central Bank has been at the forefront in measures aimed at enhancing market discipline through publication of charges and lending rates in the print media and the survey that we are launching today. I must underscore that the aim of this launch is not to “name” any bank as the cheapest or “shame” another as the most expensive. Allow me to delve into the heart of the findings of the survey that are instructive in informing the way forward. First, the level of awareness of charges and lending rates amongst bank customers is generally low. Second, related to this, the survey also established that the level of ”comparison shopping” for banking services and products is also low. This alludes to an information asymmetry problem. Information is indeed critical to the effective functioning of markets. It is not in doubt that when information on alternatives is readily available, the outcomes will be customer driven products and competitive price offerings. It therefore behoves the Central Bank and the players in the market to address this information asymmetry problem urgently if we are to enhance access to banking services and customer satisfaction. The launch of the survey is the first step in this direction and is not a one-off event. We will endeavour to engage the public in conjunction with other key players particularly the banks and the media in educating them about the various product offerings in the market and their related cost. I am in this regard, delighted at the presence of both these key players here today. The endgame is expected to be more competitive product offerings that will draw more Kenyans into the banking space. As you may be aware, the Financial Access Survey released in January this year indicates that 38% of Kenya’s bankable population is totally excluded from financial services and products. It is also instructive that only 19% of this populace is served by the formal banking sector. We must therefore collectively endeavour to push forward the “access” frontier and salvage Kenyans from the jaws of pyramid schemes and shylocks. These schemes are capitalising both on information asymmetry and the perception by the public that current formal financial services are expensive. I must commend initiatives in the recent past by banks to introduce niche products such as those targeting Small and Medium Enterprises and bundled products charging a flat fee for a basket of services. But more needs to be done in this arena. We also need to reflect on other barriers to access beyond fees and charges such as minimum and operating balances on accounts, laborious account opening processes, branch locations and timings and customer service. I believe there is scope in this regard through the Kenya Bankers Association (KBA) for the development of a basic competitive “no frills” account that can be offered by all banks. Such an account would have low or nil minimum balances as well as minimal charges if any. Indeed such an account would be a vehicle to bring more Kenyans into the banking system. India and South Africa have developed such products to enhance financial inclusion. My challenge therefore to the Kenya Bankers Association is to spearhead an initiative in this regard, to develop a uniquely Kenyan “Mzalendo” basic transactional account. The Central Bank stands ready to support this kind of innovation. Ladies and Gentlemen: Another possible area of cost cutting is through innovations that reduce the cost of delivery of banking products. In this regard, the Central Bank is seeking to facilitate the use of agents such as microfinance institutions by banks in the comprehensive review of the Banking Act that I have alluded to in my remarks in the recent past at other fora. The use of agents by banks should lower service delivery costs as they do not have to put up “brick and mortar” structures to expand their footprint across the country. It is the Central Banks’ expectation that savings from such innovations will be passed on to customers in the form of lower charges and lending rates. As I draw to a close, I wish to briefly dwell on credit products. Competition in the recent years coupled with aggressive marketing has increased personal loans by banks. As we have seen from the survey presentation this morning, the cost of credit is not just the lending rate but also includes other costs such as commitment fees, negotiation fees, legal, valuation and insurance fees. The challenge that we must then face is disclosure to consumers of the total effective cost of loans. In this regard, I would urge KBA to require in its’ code of conduct that banks disclose the total all inclusive “annual percentage rate” of credit facilities to enable customers make informed choices and avoid “debt overloads”. The recent years have produced results that we will quote for many years to come: a) Lowering barriers to entry: threshold of minimum balance, loan requirements, etc, improves access to financial services. b) Lowering transactions costs attracts potential micro-savers to banks. c) Banks can make profits in downstream activities. Let me end by reiterating that the Central Bank remains committed to continued consumer education and sensitization on banking products and services in conjunction with banks, the media and other like minded players. We are convinced that this will bring on board more Kenyans into the formal financial sector, uplifting their well being and enabling them to participate in and benefit from our national development aspirations. I thank you all once again for honouring our invitation and it is now my pleasant duty and honour to officially launch the Survey on Bank Charges and Lending Rates. Thank you.
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Opening address of Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official opening of the Kenya Microfinance Workshop, Strathmore University, Nairobi, 23-24 November 2007.
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Njuguna Ndung’u: Legal frameworks for microfinance – a rush to regulate Opening address of Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official opening of the Kenya Microfinance Workshop, Strathmore University, Nairobi, 23-24 November 2007. * * * The Honourable Minister for Finance, Mr. Amos Kimunya The Vice Chancellor, Strathmore University The Chairperson, the Association of Microfinance Institutions (AMFI) The Chief Executive Officer, AMFI Microfinance Practitioners Development Partners Distinguished Guests and Participants Ladies and Gentlemen It gives me great pleasure to be with you today during this very important Microfinance Conference and to make the opening address “Legal Frameworks for Microfinance: A Rush to Regulate”. Before I make my opening remarks, let me take this opportunity to thank the organizers and facilitators of this conference for inviting me to make the opening address on this pertinent topic. This Microfinance Conference comes at the right moment when the microfinance industry is awaiting the implementation of the Microfinance Act, 2006. The licensing, regulation and supervision of deposit-taking microfinance institutions under the Microfinance Act is expected to enhance the orderly growth and development of a sound, vibrant and stable microfinance industry in Kenya. Ladies and Gentlemen; a number of studies have shown that the provision of microfinance services in a long-term, sustainable and viable manner does have a positive impact, and in fact has changed the quality of life for millions of people in developing countries by allowing them to build income and assets, either by savings mobilization or the productive investment of loan capital. This helps them manage risk to increase production, cushion themselves in times of crisis, improve their welfare, upgrade their standard of living and improve the quality of their lives. The majority of the poor, low income households and MSEs, in Kenya, just like in many developing countries, however, largely experience lack of access to financial services, including credit, savings, insurance, money transfers among others. According to a most recent survey on the access to financial services in Kenya, FinAccess Study, whose findings were launched in January 2007, only 19% of Kenyans have access to formal financial services through commercial banks and Postbank. An additional 8% of Kenyans are served by SACCOs and MFIs, while 35% depend primarily on informal financial services such as ROSCAs and ASCAS. This brings to about 62% the population that is “financially included” meaning that they have access financial services and products either from formal, semi-formal or informal financial service providers. On the other hand, 38% of Kenyans, classified as “financially excluded”, have no access to financial services and products. This implies that more effort is required to improve access to financial services and products. Ladies and Gentlemen; previously, it had been argued that lending to the poor was not only administratively costly, but was highly risky because of their limited saving propensity and inability to come up with sufficient traditional collateral as a guarantee for loans. Formal financial institutions thus tended to concentrate their lending on investment opportunities and transactions that had high or more assured rates of returns. Conversely, the success of microfinance in many developing nations in Africa, Asia, and Latin America has slowly caused microfinance to be embraced by the rest of the world as a key tool to reduce the cyclical and persistent plague of poverty. A diverse range of alternative service providers, including SACCOs, MFIs, ROSCAs and ASCAs, have mushroomed across Africa, Asia, and Latin America to fill the gaps left by formal financial institutions. Serving over 100 million households worldwide, they have shown great commitment in serving those who have been excluded from sourcing services from the formal banking sector. Undeniably, providing financial services to the poor, low-income households and MSEs can go a long way in alleviating poverty. In Kenya, microfinance services and products are provided by a variety of institutions of different institutional forms under more than nine different Acts of Parliament. These microfinance providers can be clustered into three broad categories, notably, formal, semiformal and informal institutions, with the level of formality defined by the degree of formal regulation and supervision. The formal category includes banks and financial institutions licensed under the Banking Act, building societies and the Kenya Post Office Savings Bank. The semi-formal category includes SACCOs, Development Finance Institutions Agricultural Finance Corporation (AFC), Industrial and Commercial Development Corporation (ICDC), Kenya Industrial Estates (KIE), Industrial Development Bank (IDB), and Kenya Tourist Development Corporation (KTDC)} and microfinance institutions; while Accumulating and Rotating Savings and Credit Associations (ASCAS, and ROSCAs), shopkeepers and money-lenders dominate the informal category. I am happy to note that these alternative financial services providers have emerged with new, innovative, and pro-poor alternative modes of financing the poor, low income households and MSEs in the rural and urban areas of Kenya. They have indeed played a key role in providing increased access to financial services and products to the underserved or un-served segments of the Kenyan population. Ladies and Gentlemen; with respect to the diversity in the microfinance operations in Kenya, however, come a number of constraints that have had to be addressed to enable the providers improve their stability, outreach and financial sustainability. The major challenge has been the lack of a specific legal and regulatory framework and appropriate regulatory oversight to govern and guide the specific operations of microfinance business in Kenya. This has had a bearing on a number of other constraints faced by the industry including weak corporate governance and management capacity, weak internal controls, unhealthy competition and multi-lending, low scale & outreach, unfavorable image and public confidence, information constraints, high transactions costs, limited access to funds and the lack of industry performance standards and accountability. To reduce these constraints, while also harnessing the emerging innovations within the sector and stimulating the effective development of the sector, it was necessary to put in place appropriate laws and regulatory and supervisory framework clearly defining the roles to be played by the Government, the Central Bank of Kenya, and the microfinance practitioners in the development of the sector. Ladies and Gentlemen; the Microfinance Act was enacted in December 2006 to provide a level playing field and the appropriate legal, regulatory and supervisory framework for the microfinance industry. The Act is expected to promote the growth and development of the microfinance industry in Kenya, set prudential standards, create an enabling environment and act as a road map and catalyst towards achieving the desired objectives of increased outreach and sustainability of MFIs. We expect that this legal and regulatory framework will promote a viable and sustainable system of microfinance in Kenya by ensuring that licensed MFIs contribute to poverty alleviation and at the same time comply with the requirements of financial sector safety and soundness. Through this we expect that the fast-growing Kenyan microfinance industry will develop into an integral part of the financial system in Kenya, and will play a pivotal role in deepening financial markets by expanding access of affordable financial services and products to majority of Kenyans. Ladies and Gentlemen; we are pleased with the steady growth in the microfinance portfolio of the six mainstream institutions involved in microfinance, namely Equity Bank Ltd, Cooperative Bank, K-REP Bank, Family Bank and Kenya Commercial Bank as well as the Kenya Post Office Savings Bank (KPOSB). These models have had far reaching impact while influencing the microfinance practices and outreach modalities of similar microfinance institutions within the Eastern African region. This steady growth in Kenya’s microfinance portfolio indicates that prudentially regulated and supervised institutions are more able to mobilize savings on a viable and sustainable basis. This is to say, in other words, that appropriate and effective supervision with necessary and appropriate prudential rules provides a conducive and enabling environment for microfinance business to grow and thrive. This is also an indication that microfinance institutions that will opt to be licensed and regulated under the Microfinance Act will be in a better position with regard to improved efficiency, effectiveness (increased outreach) and long-term sustainability. This will further enable these institutions to establish sufficient and effective linkages to commercial banks and payment systems. Ladies and Gentlemen; the Central Bank acknowledges that prudential regulation and supervision of microfinance institutions is not only intrusive, but has cost implications, not only to the regulator, but also for the regulated institutions. The regulation and supervision of institutions is anchored on a legal and regulatory framework that requires, first and foremost, the assessment of the adequacy of the institutions’ capital to meet their business requirements to match their risk profiles and to protect the interests of their depositors. Although prudential regulations, which subscribe minimum corporate governance standards, capital adequacy levels, liquidity requirements and adequate provisioning for loan losses etc, create a stringent regime, it is essentially necessary for deposit-taking microfinance institutions. This is to ensure the protection of their financial soundness in order to protect depositors' funds and uphold confidence in the financial system. The Central Bank also acknowledges that although prudential regulation is considered necessary when there are depositors to protect, it is not appropriate for credit-only MFIs which fund themselves from donors’ funds or commercial loans. The Bank asserts that such MFIs require relatively non-intrusive, non-prudential regulation, involving, for example, screening out unsuitable owners/managers or requiring transparent reporting and disclosures. To this end, the Microfinance Act, Section 3 makes appropriate provisions for the deposit taking and credit-only microfinance institutions respectively to allow for the expansion of microfinance in Kenya. Ladies and Gentlemen; the regulation and supervision of the microfinance sector is important as it is expected to lead to quality growth, broaden the funding base for deposit-taking MFIs and initiate the process of integrating these institutions into the formal financial system. The regulation and supervision of the sector will enable Central Bank to define, and enforce, rules and procedures for MFIs operations, entrance, exit, and ultimately create an environment for fair competition and efficiency in the sector. These rules will further aim to contribute to the stable and efficient performance of these institutions and protect clients (in particular those making deposits) against excessive risks that may arise from failure, fraud, or opportunistic behaviour. Ladies and Gentlemen; to achieve the above, and in preparation to regulate and supervise the institutions that will be licensed under the Microfinance Act, the Central Bank is deeply involved in its capacity as well as the microfinance industry’s capacity, in collaboration with key microfinance stakeholders. The cost of regulation and supervision are not to be overlooked, for both the regulator and the soon-to be regulated microfinance institutions. Research and development, infrastructure development, human resource capacity building for both CBK and the industry, and the development of appropriate performance standards and regulations for MFIs are some of the activities that will need great financial input and technical assistance to develop. Although there are cost implications for MFIs, the outcomes, with regard to expansive outreach to majority Kenyans and financial sustainability are benefits worth considering against the costs. The Central Bank, therefore, will seek to advance market discipline as a complementary layer to reducing the costs of regulation and supervision. In conclusion, Ladies and Gentlemen; I am pleased to inform this forum that the Central Bank is not only committed to fostering the soundness, stability and integrity of the financial sector in Kenya but also is also committed to fostering the development and growth of alternative financial service providers for the benefit of our people. Microfinance is one subsector that the Central Bank is very keen to develop as a powerful tool for fighting poverty and increasing access to financial services and products to majority of Kenyans. As a way forward, let me underscore the important role of the microfinance industry and the need for all microfinance industry players and key stakeholders to continue to promote close partnership and collaboration with the Central Bank of Kenya and the Government in the development of this industry. I recommend that partnership should involve regular consultations towards seeking solutions to issues and challenges facing the industry with the objective of building a sustainable and sound microfinance industry. Together, as a team, we can change the microfinance landscape, set the pace and ensure the development of a sound and stable microfinance industry in Kenya as an integral part of the financial system. Ladies and Gentlemen; let me take this opportunity to thank the organisers, Strathmore University and the Association of Microfinance Institutions (AMFI), for organising this important conference. I look forward to seeing more collaboration amongst key microfinance industry stakeholders in fostering the growth and development of the microfinance industry. Thank you.
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Keynote address of Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers Annual Dinner, Nairobi, 23 November 2007.
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Njuguna Ndung’u: Recent economic developments and policy direction for the banking sector Keynote address of Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers Annual Dinner, Nairobi, 23 November 2007. * * * Chairman, Kenya Institute of Bankers Distinguished Members of the Council Management and Members of the Kenya Institute of Bankers Distinguished Guests Ladies and Gentlemen It is my great pleasure to be with you this evening at this auspicious occasion which celebrates an important annual event for the Kenyan Banking Fraternity. I therefore thank the officials of Kenya Institute of Bankers for inviting me to this annual dinner and for according me the privilege of addressing this distinguished audience. This Annual event gives us a unique opportunity to meet, share experiences, reflect on the achievements we have made in the banking sector during the year, the missed opportunities and the challenges we face going forward. At the outset, Ladies and Gentlemen, I would like to recognize the important role that KIB has played in capacity building within Kenya’s banking and financial sector. During my opening remarks at the 7th East African Banking School hosted by KIB earlier in the year, I did mention that capacity constraints would halt the sector’s vibrancy. I am happy to learn that a good number of staff in most commercial banks have gone through the Institute’s training and have contributed to the improvement of banking and professional standards in the industry. The country achieved several milestones in 2007. Economic performance during the year was tremendous with real GDP growing by 7.1 percent in the second quarter of the year compared with 5.8 percent in 2006. Growth begets growth – that is one of my conclusions in some of my research works. This growth was supported by improved performance in the manufacturing, tourism, transport and communications, and of course the financial services sectors. The good performance is expected to continue supported by continued stable macroeconomic environment, increased investments in infrastructure facilities in the 2007/2008 financial year, and consolidation of financial sector to mobilize development finance, regional economic integration and increased investments in both public and private sector. As we continue to solve the underlying constraints. One of the major successes in the banking sector has been the expansion of branch network of the key banking institutions in Kenya. However, we have not yet exhausted the opportunities to increase access to financial services by a majority of the population, and our target is to be a regional hub for banking and financial services and the economy to be completely monetized. During the year, the National Economic and Social Council developed a vision for Kenya. Vision 2030 seeks to transform Kenya into a globally competitive middle-income country with a high quality of life by the year 2030. To realize this vision, the Kenyan economy requires a sustained annual growth of 10% during this period. This will require maximum contribution of each and every key sector of the economy, including the banking and financial sector. The banking and financial sector, for instance, is expected to increase the savings rates to 30% of GDP which will be achieved by increasing bank deposits and increasing the pool of funds through reforms of the pension industry and the capital markets. This may require transformation of banking institutions into larger, stronger banks with attractive savings products and extension of credit referencing services. The insurance services sector will also require reforms to make the players stronger and able to support a larger economy. Ladies and Gentlemen: One of my objectives when I joined the Central Bank as Governor this year, was to oversee an effective monetary policy that is consistent with the development agenda of the country and the development of an appropriate financial sector in which you play a key role. During the year, the Central Bank pursued a monetary policy designed to support economic growth projections of the economy, contain underlying inflation at below 5%, and refine monetary policy operating procedures to enhance the efficiency of the monetary policy instruments. These developments have worked, but there are challenges on the inflation front brought about by the external shocks arising from increasing pass through effect of oil prices and sometimes domestic food prices. The monetary policy also facilitated adequate credit expansion to the private sector which grew by 15% on average over the last 3 years. Short term interest rates remained stable with a gradual upward trend in 2007, and are expected to continue to remain stable in the medium term on account of continued Government commitment to fiscal discipline, inflation expectations anchored on continued low and stable underlying inflation and an independent monetary policy guaranteed by a flexible exchange rate. Interest rate spreads also narrowed from 9.4% in January 2007 to 8.5% by September 2007. I wish to commend the banks for their effort in reducing the lending rates though we believe we can still do more to bring the spread to much lower levels. Perhaps we will have time to share our survey and analytical results on factors sustaining large spreads in Kenya. A challenge for us all – deposits have remained low and most of the time negative in real terms. This is not a good way to attract savings. Let me touch on Banking Sector Development: The banking sector recorded strong growth in the year to September 2007 against a backdrop of buoyant economic conditions. The highlights of the sector’s performance in the year to September 2007 were as follows: • The sector’s total assets expanded by 20 percent while deposit liabilities increased by 18 percent during the period. The increase in the deposit base was attributed to aggressive marketing campaigns for new deposits by some institutions and rapid expansion of branch network of banking institutions. The banking sector remained well capitalised with capital and reserves increasing by 22 per cent as a result of fresh capital injection and retention of profits. • As at September 2007 gross Non-Performing Loans declined to 12.7% of total loans compared with 22.7% in 2006. The sharp reduction in the level of non-performing loans was attributed mainly to write-offs against provisions held and recoveries by some of the banks during the period under review. Additionally, the resolution of non performing assets by the Government in one of the leading banking institutions contributed greatly to this reduction in NPLs. • Pre-tax profit for the nine months period ending September 2007 increased by 36.4 per cent to stand at Ksh 26.6 billion compared with Ksh 19.5 billion in September 2006. The improved profitability was attributed to an increase in interest income on loans and advances, government securities and non-funded income, all attributable to the vibrancy in the sector. Mr. Chairman, allow me to commend your members for the excellent performance in the banking sector. On our part, we remain committed to fostering a stable market based financial system as mandated by law. We will continue to develop and enforce a legal and regulatory framework that fosters a safe, efficient and accessible financial system. You will agree with me that a sound financial system is indeed a catalyst for the high economic growth that the country needs to move to new development frontiers. Let me also salute the commercial banks for the various innovative niche products introduced during the year. It is only through such new products that we can counter the “negative innovation” that saw the proliferation of pyramid schemes in 2007. At the CBK, we are consulting with other market players including the banking sector with a view to conducting sensitization and awareness programmes to enlighten Kenyans about these unscrupulous schemes. One conclusion we have arrived at in CBK is that once barriers to entry and transaction costs of maintaining bank accounts are solved, the downstream market will be vibrant and lucrative thereby improving financial access. The Banking landscape has become very dynamic. During the year Central Bank licensed two fully fledged Sharia compliant Banks, First Community Bank and Gulf African Bank. These banks are expected to introduce novel Sharia compliant products adding to the existing variety in the sector. We believe this is in tandem with national aspirations of developing Kenya into a premier financial services hub in the region with a variety of competitive products on offer. Ladies and Gentlemen: I will spend the next few minutes to highlight the various initiatives undertaken in the course of 2007 in order to enhance the legal and regulatory framework for the sector. The comprehensive review of the Banking Act that commenced in 2006 was completed in May this year, and the revised Draft submitted to the Minister of Finance in June. The draft is currently being reviewed by the Attorney General and will be put to another round of stakeholder consultations before publication and tabling in Parliament. The overarching objective of the review was to align the Act to best practice as stipulated by the Basel Committee on Banking Supervision and to take into account emerging issues in the sector. Ladies and Gentlemen: the lack of credit information sharing has in the past been a contributory factor to the high levels of non performing loans in the sector. Furthermore, banks have tended to rely more on physical rather than on “personal” collateral in their lending decisions. Following the enactment of the Finance Act, 2006 that made the sharing of information on non-performing loans compulsory, the Central Bank in partnership with the sector formulated regulations on Credit Reference Bureaus. The regulations which are currently under review by the Attorney General will provide the framework for the licensing and oversight of Credit Reference Bureaus by the Central Bank. Credit Information Sharing will reduce the incidence of non-performing loans and enhance access to credit by individuals in the informal sector and Small and Medium Enterprises who can rely on “personal” collateral, or other innovative forms of collateral that the market may develop. A sound legal and regulatory framework for money laundering prevention and control is critical to safeguarding the integrity of the Kenyan financial system. In this regard, the Proceeds of Crime and Money Laundering Prevention Bill was tabled in Parliament in May 2007. The Bill has since lapsed, but we anticipate it will be retabled in Parliament in the coming year. On our part, we will continue enforcing without exception, the Guideline on Proceeds of Crime and Money Laundering (Prevention) to deter the use of the Kenyan banking system for money laundering purposes. A survey released early this year indicated that 38% of Kenyans lack access to financial services. This population has been kept away from banks due to fear of costs and barriers to entry. Once the income side is solved through economic growth and an enabling legal and regulatory framework for Microfinance Institutions is created, it is our strong belief that this will go a long way in pushing forward the “Kenyan access to financial services frontier”. As you will recall, the Microfinance Act was assented to in December 2006 and the regulations to operationalise the Act are currently under review by the Attorney General. Once gazetted, the regulations will provide the Central Bank with a platform to license and oversee Microfinance Institutions. This means more players and more flexibility and competitiveness within the financial sector. Ladies and Gentlemen: It would be remiss of me not to address the current “buzz word” in supervisory circles, “Basel II”. As you are aware, the Basel Committee issued the Basel II Capital Framework in June 2004. Basel II was ready for implementation among the Committee’s 13 member countries from the end of 2006. It is, however, widely acknowledged that Basel II will only be implemented in emerging economies such as Kenya at a later date as they put the requisite supervisory infrastructure in place. This position was indeed adopted by the Central Banks of Kenya, Uganda and Tanzania in 2005. Since then, we have focused on putting in place the requisite supervisory infrastructure as I have alluded to in my remarks this evening. I am delighted that we have made substantial progress towards this end. Accordingly, we commenced in September, a consultative process with the Banking Sector that will lead to the formulation of a policy position on implementation of Basel II in Kenya in the course of 2008. The financial sector will be facilitated to play a pivotal role in achieving these objectives through reforms aimed at achieving: • STABILITY in the sector to ensure that all banks and financial institutions taking deposits safely handle the public’s savings and ensure that the chances of financial crises are minimized. • Greater EFFICIENCY in the delivery of financial services to ensure that the costs of services become increasingly affordable and that the range and quality of services better caters to the needs of both savers and investing businesses. • Improved ACCESS to financial services and products for a much larger population of Kenyans. Let me reiterate that a consultative approach will be followed to ensure that the best interests of the banking sector and national development aspirations are taken into account in formulating the policy position. The Payments System has undergone active modernization that began in 1998 to develop a world-class payment system to ensure: increased efficiency and effectiveness of the clearing and settlement; provision of a variety of instruments and mechanisms for an integrated, modern and technologically sound payment system for transfer of funds between transacting parties; reduction and containment of systemic and other payment related risks; reduction of settlement cycles; enhanced access to financial services and promotion of Kenya as a competitive regional and international financial center. Given the importance of payment and settlement systems in the economy, the Central Bank, with the support of Kenya Bankers Association, implemented a Real Time Gross Settlement system two years ago going by the acronym KEPSS (Kenya Electronic Payment Settlement System). The Central Bank is happy with the way that the Banking Sector adapted to its usage especially for inter-bank payments. I commend the banking fraternity for this cooperation. The total value of transactions processed through the system increased by 71.4% from Kshs 496.3 billion in August 2005 to the current level of Kshs 850.7 billion. A commercial bank survey conducted in July 2007 indicated that 75.1 percent of the users were corporate while 24.9 percent were individuals. Central Bank is, however, convinced that this system’s usage for third party payments can still be enhanced and accordingly, the Bank is seeking your support in achieving this objective by way of pricing the service competitively among other contributions. The Bank has also initiated action in a number of areas namely: linking the Central Government and Kenya Revenue Authority to KEPSS and capping the value of payments processed through the clearing house in order to reduce systemic risk associated with the large value payments while at the same time increasing the number of transactions processed on a RTGS basis. Turning to the retail payment sector, the Central Bank has observed increased use of plastic money or payment cards and the use of mobile phones to transfer money in Kenya. In a recent survey carried out by the Central Bank, ATMs in Kenya grew from 648 in June 2006 to 844 in June 2007. The mobile phone as a means of transferring money was introduced early in the year and is recording rapid increase in usage especially for rural to urban funds transfers. This phenomenal growth is evidence of the modernization and innovations taking place in payments in the country. In order to facilitate this growth further, banking institutions are encouraged to expand access to the rural areas without ignoring the fact that enhanced reliability of these new technologies is equally important. The above developments notwithstanding, Central Bank recognizes the fact that a sound legal framework plays a crucial role in the proper functioning of payment and settlement systems and the financial sector as a whole. To this end, a proposed National Payment Systems Bill, 2007 has been forwarded to the Attorney General’s office where it is undergoing final drafting to reinforce the existing general legal infrastructure that affects payment systems. The law will provide a legislative framework for governing the operations of national payment systems and payment instruments in Kenya when enacted. It is important that legislation takes place when the infrastructure is in place and the players are prepared. It is our hope that this will be realized by end of the first quarter of next year. In closing, let me underline the Central Bank’s commitment to partnership with the banking industry in facilitating the development of a sound banking system with highly trained professionals that would improve the standards and mobilize the substantial resources required for our country’s development. Finally, Ladies and Gentlemen, as we head towards the festive season, I take this opportunity to wish each and every one of you a Merry Christmas, a peaceful electioneering period and a prosperous New Year. Thank you.
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Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the Official Opening of Financial Reporting Workshop for the Banking Sector, Nairobi, 27 March 2008.
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Njuguna Ndung’u: IFRS, Basel II and the challenges ahead in Kenya Keynote address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the Official Opening of Financial Reporting Workshop for the Banking Sector, Nairobi, 27 March 2008. * * * Distinguished Participants, Distinguished Resource Persons, Ladies and Gentlemen Let me first thank Ernst and Young for the invitation to give today’s keynote address, on the Financial Reporting Workshop for the Banking Sector. Looking at the agenda, this meeting in the next two days will dwell on a number of important accounting and regulatory issues. Therefore, to help set the stage for the discussion to follow, I would like to take this opportunity to expound on the Central Bank of Kenya’s perspective on compliance with International Financial Reporting Standards (IFRS), and specifically at the benefits from such compliance, the progress we have made, the link between IFRS and Basel II and the challenges ahead. Acceptance and use of IFRS has become virtually universal, with many countries that hitherto operated their own national standards having phased them out for IFRS despite the associated challenges. International flows of investment capital and capital instruments across geographical boundaries have added a new impetus to the adoption of international standards globally. It is no wonder that in 1998, the Institute of Certified Public Accountants of Kenya (ICPAK), moved from Kenya Accounting Standards in favour of International Accounting Standards. The Central Bank as the principal regulator of banks and non-bank financial institutions, formulates prudential guidelines that are in harmony with IFRS in order to minimize conflict and enhance compliance with international standards. The Central Bank of Kenya recognises that financial reporting standards play a crucial role in enhancing financial stability. On one hand, Reporting Standards provide the foundation for the production of credible financial statements and other disclosures that communicate the performance of the industry and at the firm level. On the other hand, disclosure of reliable information facilitates market discipline, cultivates confidence and reduces the possibility of adverse instability. The credibility of information allows market participants to process the right information and make appropriate decisions, thus a good signalling mechanism. Disclosure of information, however, should not compromise proprietary data, but must be flexible enough to accommodate future advancement in risk management. Such outcomes therefore, have obvious implications for the supervisor’s ability to oversee the safety and soundness of financial institutions. It is necessary for banks and non-bank financial institutions to prepare quality financial statements so that shareholders and other stakeholders are well-informed and a sound judgement on their financial status can be made by the market. Quality and reliable information depends in turn, on the reporting standards being applied. In this respect, IFRS ensures that financial reporting is prepared under accepted principles that convey a true and fair view of the financial position of an institution. The foregoing notwithstanding, the Central Bank has made significant progress in strengthening the supervisory approaches and risk management guidance for banks and non-bank financial institutions. This is aimed at encouraging the banks and non-bank financial institutions to implement sound risk management practices at all levels and in all market segments. It is for this reason that the Central Bank will continue to attach great importance to risk management and reporting standards so that financial statements produced by banks and non-bank financial institutions convey adequate information about their risk management activities to key stakeholders, such as shareholders, creditors, depositors and any other interested parties. It is hoped that with adequate and timely information potential investors can make correct judgement/assessment of this market. The choice of Basel II as a topic for discussion during the workshop is indeed timely. Basel II represents a crossroad, a watershed and a turning point for the future of global supervisory practices. Basel II presents us with an opportunity to enhance risk management systems in our banks, upgrade our supervisory approaches and inculcate market discipline. This can only serve to enhance financial stability. Central Bank recently issued an information memorandum to banks and non-bank financial institutions thereby setting the stage for the implementation of Basel II. Unlike Basel I which focused on a single risk measure, Basel II puts more emphasis on the banks’ own internal methodologies, supervisory review, and market discipline. The Accord is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks face. All of the reinforcing pillars will contribute to safety and soundness in the financial system. Market discipline reinforces the incentives for the management of banking enterprises to manage them along sound lines. It operates on the basis of disclosures and other information available in the market and defines the reward system for the management. Periodic and meaningful disclosures by banks relating to their capital, risk exposures and risk management techniques enable market participants to make an assessment of a bank's risk profile. The information is also appropriate for supervision in that it generates advice and /or strengthens partnership. Enhanced, high-quality disclosures are mandated in IFRS from an accounting perspective and in Basel II from a prudential perspective. While IFRS disclosures focus on assessing the current financial position of an enterprise, Basel II disclosures are more forward-looking. Given the different focus of accounting and prudential standard setters, it is to be expected that the disclosure requirements under the two standards differ in some respects. IFRS disclosures are made in the financial statements by all enterprises that prepare and submit financial statements. On the other hand, disclosures under Pillar 3 are required to be made only by banks that are implementing Basel II. Moreover, Pillar 3 disclosures need not necessarily be made in the financial statements. IFRS and Basel II disclosures do, however, complement as well as supplement each other in several ways. Both require corporates to provide information on their capital, the risks exposed to, and how these risks are managed. Disclosures are required to be made "through the eyes of the management". This enables the user of information to view and assess a firm in the same way its management would. Disclosures under both IFRS and Basel II include a good mix of quantitative and qualitative aspects. Consistent, comprehensive and comparable disclosures contribute to effective market discipline. IFRS and Basel II disclosures try to ensure that this goal is met. There is potential for achieving synergies in disclosures under IFRS and Basel II by defining risk parameters in a common way, and developing common processes and data collection methodologies. This could lead to a consistent basis for internal reporting to the management of the enterprise and external reporting to the supervisors or regulators and other stakeholders. Challenges with IFRS and Basel II Compliance with IFRS will assist banks to comply with certain aspects of Basel II. Both IFRS and Basel II intend to leverage on market discipline by requiring the disclosure of certain information. Basel II encourages development of more refined approaches to the measurement of risks and greater transparency while IFRS strives to support broader and more sensitive recognition and disclosure of risks. Through financial reporting, the management of banks and non-bank financial institutions provide their shareholders, potential investors and other stakeholders with the past results of the business being managed and supervised. These reports give more in-depth insight into the income statement, balance sheet and cashflow and therefore, help the users of these reports better understand and assess the financial performance of the business. The market participants base their investment decisions mainly on the financial reports, thus reinforcing the importance of providing adequate and accurate information. Although financial reports are a crucial management tool, they at the same time provide the management with an opportunity to explain to stakeholders the institution’s performance, achievements and future plans. Basel Committee on Banking Supervision recognises the importance of IFRS in Basel Core Principle (BCP) 22 by requiring regulators to ensure that banks maintain adequate records which are prepared in accordance with consistent accounting policies and practices. Compliance with IFRS and Basel II will however, pose certain challenges to banks and non bank financial institutions. For accounting standards, the most recent challenge is the accounting methods for sophisticated financial products, such as bonds, in which differences in financial assets’ classifications can result in different financial impacts. For example, heldto-maturity classification conceals profit or loss until maturity, while trading classification charges profit or loss to financial statements in every accounting period. The interpretation for a suitable classification relies significantly on the intention of bank management as well as on the judgment of external auditors. Another practical challenge is the use of complex financial models to measure risks in banks’ portfolio. These models are important as they provide adequate predictive power. But there must be sufficient data, appropriate risk measurement techniques, and a rigorous validation process for the benefits of the predictive power of the models to be analysed. At present, the most important concern is the lack of consistent data points over time. For example, for credit risk measurement, a certain amount of data on default is required. Such data is typically not readily available. Banks may need to rethink their operations and strategies on account of the expected greater involvement of third parties. The point here is that new regulations allow banks to use financial models to estimate required capital and fair values of assets and liabilities. This means that banks can take advantage of the lower capital requirements by offering cheaper or more cost efficient products to their customers. But these aspects in the market place are driven by the market niche the bank is serving. The combination of market niche, requisite information and efficiency will be the core of operating strategies in the banks. Banks must increase their knowledge base regarding risk management techniques, especially on risk modelling. Going forward, a good internal rating system is key to business expansion and growth. To do so, banks can initially seek support from external consultants to transfer the know-how on risk management. But, in the longer term, it will be necessary for banks to train their own staff and build expertise to work as specialists on internal rating system and risk modelling. But we all do know that at the end of it all, these requirements and their derivative innovations are driven more not by the regulator like CBK, but the market niche the bank or any other firm in business is operating in. The more we understand our market niches, the more we perform better and above all adhere to the rules of the game. Market niches provide a drive to innovativeness. I should now end my talk. It has been a pleasure to share with you a regulator’s view on compliance with IFRS. I hope my remarks and observations have been useful. We are travelling on an important and challenging path towards achieving a robust and resilient financial system, and steady progress is being made. Indeed, this progress is usually noticeable in times of economic vibrancy. You, as a key stakeholder, are also an important part of this journey. It is a great honour and privilege for me to declare the Financial Reporting Workshop for the Banking Sector officially opened and to thank Ernst and Young for organizing such a workshop. Thank you very much.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Launch of Suntra Investment Bank Unit Trusts, Nairobi, 7 April 2008.
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Njuguna Ndung’u: Kenya’s macroeconomic developments and key financial sector reforms Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Launch of Suntra Investment Bank Unit Trusts, Nairobi, 7 April 2008. * * * Mr. Nguru Wachira, Chairman of Suntra Investment Bank, Mr. James Murigu – Managing Director, Distinguished Guests, Ladies and Gentlemen. I feel honoured by your invitation to grace this important occasion because it is not only a milestone to Suntra Investment Bank, but it is also a significant development in our capital market. Kenya’s macroeconomic environment and future prospects Ladies and Gentlemen, the Kenyan economy has grown steadily in the recent past with all sectors registering expansion, and therefore creating more employment and investment opportunities for many citizens. This growth has introduced new challenges to regulators particularly in the financial sector. For effective monetary policy, you also require an active and efficient financial sector. To ensure that Kenyans reap the benefits of economic growth, Central Bank has pursued deliberate policies that have achieved relatively stable and low underlying inflation, even with supply shocks, the current inflation bout is related more to supply constraints rather than monetary overhang, stable exchange rate even with some minor volatilities, a strong balance of payments position, low and stable interest rates, and substantial inflows of both official capital and foreign direct investment. It is noteworthy that since KenGen IPO was floated, many Kenyans have a high appetite of investing in the stock market which has boosted activity at the Nairobi Stock Exchange. KenGen IPO showed that investment opportunities constraints the boost in investment. Unfortunately this growth has not come without challenges ranging from payments, settlements, investors’ returns to safety of investors’ assets to the stock exchange, brokers, Capital Markets Authority. Despite these challenges it is gratifying to note the significant growth in the Fixed Income segment of the Nairobi Stock Exchange and the vibrancy we have seen of the capital markets in general. This has lengthened the maturity profile of the bond market. The Central Bank of Kenya, in consultation with Market Leaders Forum successfully issued another 15-year Treasury bond thus enhancing the continued deepening of the local money and capital markets. A sure way to assess long-term prospects and economic confidence in future. Ongoing key reforms to propel further growth and efficiency in financial markets Financial sector is singled out as a key industry that would play a pivotal role in successful implementation of the Vision 2030 through mobilization of long term financial resources. This will make Nairobi a financial hub of the region. The Central Bank of Kenya in collaboration with the Treasury and other stakeholders are carrying out significant reforms to spearhead further growth and efficient functioning of the financial markets. Some of these reforms relate to the introduction of an efficient trading platform. The proposed phased introduction Primary Dealership will further deepen the capital markets. The proposed reduction of the threshold for investment in Kenya Government Treasury bills will undoubtedly pave way for wider public participation in government debt markets as the Government starts implementing Vision 2030. Further, I would like to commend the teams comprising of Central Bank of Kenya and the Nairobi Stock Exchange that have been working to connect CBK’s-CDS with the NSE’s Automatic Trading System(ATS) to facilitate online trading of bonds in the secondary market. If successfully implemented, Delivery versus Payment arrangements will be greatly enhanced to the extent that Over-The Counter (OTC) trading can effectively take place. The CBK and the Treasury are also working on a Benchmark Bonds programme to be rolled out in the near future. Investment banking in Kenya We have witnessed a steady growth of investment banks in Kenya. Kenya now boasts of 12 investment banks, 19 investment advisors and 7 stockbrokers. Investment bankers and brokerage firms play a critical role in contributing to the efficient functioning of securities and equities markets in the economy. With the deluge of information available to market participants today, the value of investment analysts’ opinions – both to investors and issuers – is greater than ever before. If we aspire to be the financial hub of the Region more investment banks and other intermediary financial institutions (like discount houses) must take firm root under the close supervision of the regulatory body. Effective supervision will help prevent unprofessional activities by players by ensuring that brokers, investment banks financial advisors among others, provide the appraisal, the screening and the monitoring roles as required. Suntra Investment Bank Unit Trusts Let me now turn main reason that we have gathered here: The Suntra Investment Bank’s UNIT TRUST. Suntra Investment Bank (SIB) Ltd has been active in the Capital Market. Distinguished Guests, we are here to celebrate with SIB Ltd as they continue to create value in the country’s Capital Markets by introducing new products. Suntra Unit Trusts are packaged to benefit Kenyans on many levels by efficient risk management and guaranteed positive return on assets. Unit Trusts go hand-in-hand with other traditional products they have in stock. Unit Trusts provide a sure avenue for investor diversification. Perhaps this is good to solve the supply side constraints of investment and also in small and manageable units. As approved / licensed Investment firms, Unit Trusts can facilitate / foster efficient liquidity management during an IPO since they have the privilege of depositing funds (settling / paying for shares) after allocations have been announced. This means that investors’ money will be held in the bank accounts of Unit Trusts and not concentrated with the receiving banks. The entry of SIB in this line with the efficiency they promise is great indeed. With these few remarks, Ladies and Gentlemen, it is my humble duty to officially declare Suntra Investment Bank Unit Trusts launched. Thank you for your kind attention.
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Speech by Mrs Jacinta Mwatela, Deputy Governor of the Central Bank of Kenya, at the Stakeholders Forum on the Deposit-Taking Microfinance Regulations issued under the Microfinance Act, Kenya School of Monetary Studies, Nairobi, 12 May 2008.
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Jacinta Mwatela: Regulation of microfinance in Kenya Speech by Mrs Jacinta Mwatela, Deputy Governor of the Central Bank of Kenya, at the Stakeholders Forum on the Deposit-Taking Microfinance Regulations issued under the Microfinance Act, Kenya School of Monetary Studies, Nairobi, 12 May 2008. * * * The Chairperson, the Association of Microfinance Institutions (AMFI); The Chief Executive Officer, AMFI; Microfinance Practitioners; Development Partners; Distinguished Guests and Participants; Ladies and Gentlemen; It gives me great pleasure to be with you this morning during this important stakeholders’ forum on the Deposit-Taking Microfinance Regulations, 2008 issued under the Microfinance Act, 2006 (Act No. 19 of 2006). These Regulations set the stage for the implementation of the Microfinance Act and are expected to usher in a new dawn in the development of the microfinance industry in Kenya as an integral part of the financial system. Let me also take this opportunity to thank the Association of Microfinance Institutions (AMFI), all industry players and stakeholders for their collaboration, input and patience. I am aware that the delay in the completion of the drafting of the regulations and the appointment of the commencement date of the Microfinance Act has caused concern in the industry. The work on the regulations has been a considerable one and the challenges mammoth. However, good things, they say, come to those who wait. I therefore congratulate AMFI and the entire microfinance fraternity for keeping the faith and staying the course and urge them to continue to be patient as the appointment of the commencement date and regulations are with the Attorney General’s Chambers for gazettement. This will be out shortly. Ladies and Gentlemen; as you are aware the legal, regulatory and supervisory regime, spelt out under the Act and Regulations, will allow regulated deposit-taking microfinance institutions to offer a variety of financial services and products including savings mobilization, credit facilities and domestic money transfer, among others to Kenyans. I expect that many microfinance institutions and potential investors will take the opportunity to establish deposittaking business in order to enhance access to financial services and products by Kenyans. According to the Finaccess study conducted in 2006, about 38 per cent of adult Kenyans are un-served by our financial system indicating a huge market potential for the microfinance industry. The study shows that only 19 per cent of Kenyans are served by formal financial sector, namely commercial banks and the Kenya Post Office Savings Bank, while 8 per cent are served by semi-formal financial service providers such as microfinance institutions (MFIs) and Savings and Credit Co-operatives societies (SACCOs) and the remaining 35 per cent are served by informal financial service providers ranging from Accumulating and Rotating Savings and Credit Associations (ASCAs and ROSCAs) to shopkeepers and money lenders. This indicates a big gap in access to financial services by Kenyans that I expect deposittaking microfinance institutions (MFIs) to play a major role in filling it by expanding access. Given this scenario the microfinance deposit taking institutions will be playing a major role in narrowing the service gap. Ladies and Gentlemen, the former UN Secretary-General, Kofi Annan stated that “Sustainable access to microfinance helps alleviate poverty by generating income and wealth, creating jobs, allowing children to go to school, enabling families to obtain health care and empowering people to make the choices that best serve their needs. …The great challenge before us is to address the constraints that exclude people from full participation in the financial sector.” I couldn’t agree more and this is the challenge before us. A financial system that serves only a minority of a country’s people is biased and unacceptable. All inclusive financial system that provides access for the majority is the central goal of the development of our financial system as envisaged by Vision 2030. The government, as envisaged in Vision 2030, will strengthen alternative financial service providers including MFIs and SACCOs, among others, to play a major role in savings mobilization and wealth creation, thus contributing to poverty reduction and economic growth. Ladies and Gentlemen, we expect that when the Act and Regulations are fully implemented, it will bring, in the not too distant future, a new breed of microfinance institutions, the deposittaking MFIs, which will enable these institutions to mobilise savings from the general public. Thus, the Act and Regulations will set in a new era in the growth and development of the microfinance industry by integrating the industry to the formal financial sector, thereby promoting competition, efficiency and access. Through this, we expect the microfinance industry to play a pivotal role in deepening financial markets by expanding access of affordable, appropriate and innovative financial services and products to majority of Kenyans. These include cellular phone banking, alternative, low cost outlets e.g. agencies, and mobile banking, among others. Ladies and Gentlemen, once the Act is fully implemented, it will promote an orderly growth and development of a sound and stable microfinance industry. The regime will also embrace microfinance industry corporate governance, accountability and transparency, performance standards and benchmarking, deposit protection, efficiency and effectiveness, among others. As you are aware that the policy underpinning the regime is based on a three tiered approach to regulation and supervision of the microfinance industry, with the deposit-taking MFIs and non-deposit taking MFIs falling under the Act. Informal microfinance institutions will remain unregulated. The deposit-taking MFIs are categorized into two: the community MFIs and the nationwide MFIs with a minimum capital requirement of KSh.20 and KSh.60 million, respectively. The nationwide MFIs will operate countrywide, while the community MFIs will operate with one Government Administrative District or Division if operating in a City. Ladies and Gentlemen, let me also urge the industry to move fast and develop a selfregulatory mechanism in addition to the current regime provided under the Act and Regulations to provide for a self-regulating mechanism including a code of conduct, oversight, disciplinary and dispute resolution mechanism, and minimum reporting and performance standards. This should cover all practicing microfinance practitioners – ranging from deposit-taking MFIs, non-deposit taking MFIs and informal microfinance entities. You will note that in the recent past, the Central Bank of Kenya made press statements in the print media warning the public on the illegal operations of pyramid schemes in Kenya. The building of an all inclusive financial system including the strengthening of alternative financial service providers and public education and awareness campaign is expected to stem off the mushrooming of pyramid schemes and similar schemes. The Central Bank of Kenya will continue to educate the public and will publish licensed deposit-taking MFIs in the Kenya Gazette and once in a year print media with national circulation. Anyone taking deposit from the public without a license from the Central Bank will be committing an offence under the Banking Act and Microfinance Act except those exempted under the respective legislations. I, therefore, strongly advise the general public not to risk losing money by depositing or placing the same in unregulated institutions like the pyramid schemes. Ladies and Gentlemen, let me highlight some key silent regulatory and supervisory requirements for deposit-taking MFIs which include licensing requirements; corporate governance; performance and accounting standards; accountability and transparency; deposit protection; dissolution mechanisms and supervision by the Central Bank. The legislation further specifies limits on lending to ensure that MFIs retain their core business of extending services to the poor, low-income households and SMEs as their core market segments and minimize dealings with insiders. Ladies and Gentlemen, I expect institutions to use innovative delivery channels and methodologies and reduce entry barriers resulting in increased efficiency and competition, hence reduction in costs and increased access in the near future. The ability to create new innovations and harness their potential will directly impact our market share and prosperity. Through new ideas, best practices, innovative delivery channels and approaches, we can stimulate new thinking and, critically, new action. Unleashing home-grown capital can create a pool of resources for local entrepreneurs to set up small business and diversify their economic base. Microfinance, a new pillar of development, is yet another instrument to unleash the ideas and energies of local entrepreneurs with a potential to grow, to forge linkages with other businesses that will drive national savings and investments. Ladies and Gentlemen, the Central Bank, on its part, will continue to ensure macroeconomic stability and to provide an enabling regulatory environment for the financial sector growth and development. The supervisory and regulatory capacity of the Central Bank of Kenya is strong and is continually being enhanced to cope with market dynamics and new skills and knowledge. We continue to be grateful to the development partners who have collaborated with us in building adequate skills and capacity in the field of microfinance. We shall also continue to work closely with the Government ministries and microfinance practitioners in the development of the industry. Ladies and Gentlemen, we all would like to thank the Attorney General’s Chambers and the Treasury who have tirelessly worked hard hand in hand with the Central Bank team in the preparation of the Regulations and look forward to a speedy gazettement of the same to effect the Act into operation. Before I conclude, Ladies and Gentlemen, let me once again take this opportunity to assure the AMFI, microfinance industry players and key stakeholders of the Central Bank’s continued commitment, collaboration and partnership in the development of the industry. Finally, it is my pleasure to now declare the Forum on the Deposit-taking Microfinance Regulations 2008 officially opened and wish you fruitful deliberations. Thank you.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the cocktail to usher in the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) 16th Taskforce meeting of senior officials, Mombasa, 18 August 2008.
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Njuguna Ndung’u: Combating money laundering and the financing of terrorism Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the cocktail to usher in the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) 16th Taskforce meeting of senior officials, Mombasa, 18 August 2008. * * * Mr. Serwalo Tumelo, Permanent Secretary, Ministry of Finance and Development Planning, Botswana and Chairman of the Task Force of Senior Officials; Permanent Secretaries here present; Dr. Eliawony Kisanga, Executive Secretary, ESAAMLG; Representatives of Co-operating Nations and Organisations; Members of the ESAAMLG Taskforce of Senior Officials; Distinguished Guests; Ladies and Gentlemen: It is my joy and pleasure to be here this evening on the occasion of the official opening of the 16th ESAAMLG Taskforce of Senior Officials Meeting. I must start by extending a very warm welcome to all the delegates here present. It is indeed an honour for Kenya to be hosting this important meeting. We appreciate the hosting of the ESAAMLG Meeting in Kenya even after the period of turbulence that we underwent at the beginning of the year. However, this is now behind us and we are back in business. As the Swahili say, “kuteleza sio kuanguka” (To slip is not to fall). Anti Money Laundering and Combating the Financing of Terrorism are indeed current buzz words in the global financial circles. Forums such as this therefore serve as useful avenues of sharing various country experiences. For the case of Kenya, the timing of this meeting could not be more opportune. The Proceeds of Crime and Anti-Money Laundering Bill, 2008 is currently under consideration by our Parliament. We remain cognisant that Kenya’s vision of being a regional trade and financial services hub is founded on the enactment of an enabling legal and regulatory framework. A sound Anti-Money Laundering legal and regulatory regime is therefore a critical plank to this aspiration. Ladies and Gentlemen: The region is vulnerable to money laundering particularly given its mainly cash based economies. This is further aggravated by porous borders and weak institutions for enforcements. Though much has been done in the recent past by organizations such as ESAAMLG, more remains to be done. The challenges we face are multifaceted, but as the region has demonstrated through the support member countries have given to ESAAMLG, we remain resolutely committed to fighting the double evils of money laundering and financing of terrorism. Allow me for the next few minutes to wear my Central Bankers’ hat as a regulator of the banking sector. From where I sit, I am acutely aware, that money laundering is a threat to both the integrity and stability of the banking sector and even the forex bureaus themselves. Further, with increased globalisation, our banking systems are increasingly under close scrutiny by our international trading partners particularly with regard to anti money laundering legal and regulatory frameworks. Ladies and Gentlemen: In Kenya, as I have alluded, we are in the process of enacting a comprehensive Anti Money Laundering legislation. However, this is not to say that there are no measures in place at the moment to deter money laundering. The Central Bank, as both regulator and supervisor of banking institutions, has played a key role in ensuring that systems to combat abuse of the banking sector by criminal elements are in place. In 2000, the Central Bank of Kenya issued guidelines to all commercial banks pursuant to the Banking Act on “Know Your Customer” and “Customer Due Diligence” procedures. The guidelines vest responsibility on the Board of Directors and Management of banking institutions to: • Establish appropriate policies and procedures to ensure the effective prevention, detection and control of possible money laundering activities and terrorism financing. • Train staff in the prevention, detection and control of possible money laundering activities and terrorism financing. • Ensure adequate identification of customers, their source of funds and the use of the said funds. The guidelines were reissued in 2006 following a review that took into account international developments and experiences of financial institutions in implementing the 2000 guidelines. Key changes included: • Strengthening of customer due diligence procedures. • Providing additional guidance on identification of suspicious transactions by commercial banks. • Introduction of guidance on customer due diligence procedures for non face to face transactions that have gained increased prominence with the growth in internet and telephone banking. We know that the rapidly changing technologies and the introduction of new financial products remains a major challenge which requires financial institutions and regulatory bodies to constantly remain vigilant of possible abuse of new products by criminals. The Central Bank continues to monitor adherence to the existing guidelines through its surveillance mechanisms and adopting them to the changing environment. Kenyan banks have faced a number of challenges in implementing these guidelines. I am sure that these are challenges also shared in some of the countries represented here. In particular, some customer due diligence requirements have been difficult to implement particularly in rural and even peri-urban areas. For instance, the requirement to verify the physical address of a customer has been a challenge in some instances. As you will appreciate, documents such as utility bills required to prove physical address are nonexistent in areas where electricity, telephone, water and other services are yet to be installed. We might call it an urban bias in physical address. This is further complicated in some of our nomadic communities whose physical address is determined by availability of pasture and water. Given our experience, we would greatly welcome an opportunity for this Group to engage in a discussion of these peculiar challenges. In particular, it would benefit our financial institutions dealing with less sophisticated customers to apply simplified customer due diligence that takes into account the existing circumstances without necessarily compromising the “Know Your Customer” obligations as required under the Financial Action Task Force (FATF) recommendations. I would therefore urge this Group to look at how a Risk Based Approach reflecting the circumstances in this region can be rolled out. This would benefit financial reach in the country. The cost of staff training for financial institutions and putting in place the requisite systems for transaction monitoring is also enormous. I am, however, pleased to note that the Kenyan Banking sector has embraced the necessary policies and procedures to deter and detect money laundering. We are jointly addressing the challenges I have alluded to with the banks, as we seek customised solutions that will not dilute the overarching imperative that banks “know their customers”. We also hope that lessons from ongoing ESAAMLG research studies on trends and typologies of Money Laundering in the region will serve as useful inputs in addressing some of these challenges. From a regional perspective, as Central Banks, we continue to engage and share experiences on how we can strengthen our regulatory mechanisms on anti-money laundering and combating the financing of terrorism. Beyond ESAAMLG, this agenda is discussed at regional economic forums that our countries are members of, including the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern Africa Development and Co-ordination Committee (SADC). We would also, in this regard, welcome assistance to Central Banks as well as other regulatory bodies to enhance their regulatory capacity in anti money laundering and combating the financing of terrorism. It is my hope that ESAAMLG will expand its co-operation with the regional organizations involved in this area of work so that the work of these organizations can complement each other for the benefit of all countries in the region. I understand that this co-operation already exists and I would like to take this opportunity to encourage its expansion. It is also important to continue having dialogue between the regions’ private and public sectors as we continue driving this common agenda. This will ensure that both the public sector policy makers and private sector implementers move in tandem. Without overemphasising the point, capacity building should be a key pillar of this dialogue. I hope that ESAAMLG will be able to initiate such dialogue at an appropriate time. Those of us in the financial sector stand ready to participate in such an initiative. At this juncture, it would be important to recognise the ESAAMLG’s cooperating nations and organisations for their supportive role in capacity building in the region. I would like in particular to acknowledge Governments of the United States and United Kingdom, the United Nations Office on Drugs and Crime, the World Bank and the IMF. It is my expectation that they shall remain engaged as ESAAMLG continues to spearhead the development of an enabling AML/CFT legal and regulatory framework in the region. As I wind down my comments, I urge you to take some time to enjoy the beautiful beaches and warm hospitality that Mombasa offers. There is indeed a Swahili saying that translates as “Getting into Mombasa is easy, the hard part is getting out”. So if you find yourself wanting to extend your stay here, do not be surprised. Kenya, of course, offers much more including the acclaimed “seventh wonder” of the world, the Maasai Mara which is currently experiencing the spectacular annual migration of wildebeest from the Serengeti in Tanzania. As you embark on your meeting over the next few days, I wish you very fruitful deliberations. Do enjoy the evening and, indeed, your entire stay in Mombasa. It is now my pleasant and honourable duty to declare the 16th ESAAMLG Task Force of Senior Officials Officially Open.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Banking and Finance Conference, Nairobi, 18 August 2008.
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Njuguna Ndung’u: The role of banking and finance in regional integration Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Banking and Finance Conference, Nairobi, 18 August 2008. * * * Chief Executives of Commercial Banks here present; John Wanyela, Executive Director, Kenya Bankers Association; Representatives of the East African Business Council and East African Development Bank; Conference Facilitators; Distinguished Guests; Ladies and Gentlemen: I am delighted to be here this morning and let me hasten to thank the organisers of the conference for the invite. I am informed that the overarching theme of the conference is mainstreaming banking and finance issues in the integration process of the East African Community. This is indeed a subject that is near and dear, not just to the Central Bank of Kenya, but also to our counterparts in the region. I was therefore pleased to be advised that similar forums have already been held in Uganda, Rwanda and Tanzania. I am further informed that a regional forum that will bring together all the East African key banking and finance players is scheduled for Arusha in the course of next month. The role of banking and finance in regional integration cannot be overemphasised. At the most basic level, banks facilitate trade and flow of funds and investments across the region. However, with the global trends towards regional integration, banks will increasingly play a pivotal role in providing capital that will make this vision come true. I have in mind the move towards private-public partnerships in the financing and implementation of key regional infrastructure projects. We would like to see our banks playing an increased role in such initiatives. Commercial banks must therefore facilitate long term financing projects. It would be apt at this juncture to commend the Kenyan banking sector that is well represented here today for expanding its footprint across the East African region. Regional banking is a relatively “virgin” service that should be encouraged. Your institutions will, however, require to be well capitalised to take advantage of emerging regional opportunities. In this regard, raising capitalization in the commercial banks will facilitate flexibility and innovations in their market niche. I would also like to commend Kenyan banks and the Kenya Bankers Association for their efforts in the recent Safaricom IPO. All the banks came out of it unscathed and this self discipline and focus is commendable. Of course, the Central Bank had to walk the path with them. Allow me to now turn to the experiences of the regional central banks in the East African Community (EAC) integration agenda. As you may be aware, the EAC has mandated the Monetary Affairs Committee (MAC) with the key objective of implementing a monetary union which is a precursor to the full integration of the East African Community. MAC is comprised of the Governors of the five East African central banks. Technical sub-committees of MAC focus on the thematic areas of macroeconomic issues of convergence, bank supervision, payments systems, financial markets, information technology and capacity building. These areas are indeed the building blocks of the envisaged monetary union. Of particular interest to the banking sector is the harmonisation of regulation and supervision. This is of key importance to the increasingly regional Kenyan banking sector in view of the costs associated with compliance to varying regulatory regimes. Therefore, the harmonization of banking supervision and regulation continues to be at the top of the MAC radar screen. What has been our score card in this area? Overall, MAC has served as a useful forum to share experiences on topical bank supervision and regulation issues and forge a common way forward. Indeed harmony has been achieved in key regulatory issues such as operational independence of central banks, publication/disclosure of financial statements by commercial banks and business continuity management. We continue to share supervisory policies and procedures through joint arrangements. The East African central banks are at the moment in active discussions on a draft regional Memorandum of Understanding (MOU). The MOU, which we target to finalise by the end of the year, will enhance information sharing amongst the partner central banks. As you will appreciate, this initiative will facilitate the consolidated supervision of our regional banks. There are however challenges, some of which are legislative in nature as well as the microstructure of our financial system. Going forward, MAC will continue, relentlessly, to work towards harmonizing the East African banking supervision and regulation regimes. We are acutely aware that a harmonized regulatory regime will reduce compliance cost and spur regional expansion of banks. It is not an easy road, but one that we must tread. Our vision will be ultimately achieved when the partner central banks can issue “East African Banking Licences” valid in all the partner states. Ladies and Gentlemen: It is my expectation that over the course of this morning, you shall as market players: • Clearly identify ways in which the banking sector can facilitate regional integration. • Brainstorm on regulatory and other barriers to regional integration from a banking and finance perspective. • Make clear, time bound and practical recommendations on how the barriers identified can be overcome. We look forward to receiving the report of your proceedings this morning and remain open to further consultations on this topical agenda. It is now my pleasant duty and honour to declare the Banking and Finance Conference officially open. I wish you fruitful deliberations in this Conference.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Launch of Equity Bank Mobile Phone Banking Service, Nairobi, 3 September 2008.
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Njuguna Ndung’u: Mobile phone banking services in Kenya Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Launch of Equity Bank Mobile Phone Banking Service, Nairobi, 3 September 2008. * * * Mr. Peter Munga, Chairman of the Board of Directors of Equity Bank Ltd.; Dr. James Mwangi, Managing Director and Chief Executive Officer of Equity Bank Ltd.; Board Members here present; Distinguished Guests; Ladies and Gentlemen: I am delighted to be here this afternoon on the occasion of the launch of Equity Bank’s mobile phone banking service. Today indeed marks yet another landmark event on Equity’s chequered path. I am therefore grateful for the invitation to share in this occasion. Let me at this early juncture commend the Board, management and staff of Equity on the introduction of the mobile phone banking service that I will be launching shortly. The service provides an EAZZY 24/7 Mobile Phone Banking solution to your customers as they shall literally be carrying their accounts in their hands (“Benki Yangu Mkononi”). This is indeed a revolutionary solution that will provide the following four key benefits: 1. Convenience: The launch of mobile phone banking is a step towards making financial services accessible to all Kenyans who have access to a mobile phone. This is a revolutionary mobile solution that delivers mobility, convenience and security to the bank’s existing as well as prospective customers. It will leverage on the strong mobile penetration both locally as well as globally and essentially the affinity of mobile devices to the consumer. Customers will be able to generate value from wireless transactions anytime anywhere. 2. Banking the unbanked: With 11 million Kenyans having access to a mobile phone, and only approximately 4.5 million banked, the new solution offers an avenue to push forward the access frontier in Kenya. This effort will bring more Kenyans into banking solutions. 3. Beyond banking; financial solution: This banking solution will allow for the use of a mobile phone to perform various other services beyond funds transfer. Customers will be able to pay for services, manage their accounts, provide airtime top-ups and execute other service requests. 4. Opening new economic frontiers and supporting Vision 2030: This service will contribute to economic expansion for Kenyans, especially the small and medium enterprises. By accessing financial services easily and affordably, Kenyans will be better equipped to support their enterprises. The success of the small and medium enterprise sector undoubtedly lies at the heart of the realisation of Vision 2030. The four benefits provide us with a solution to Kenyans who view banks as expensive, have barriers to entry and have high transaction costs of maintaining accounts. What Kenyans need is access to bank accounts where they can save and transact easily. This move by Equity indeed answers to that challenge. The Central Bank welcomes such innovations by the banking sector and is committed to the creation of an enabling regulatory environment towards this end. I would therefore urge the banking sector to seek innovative ways of leveraging on existing technologies and infrastructures to provide affordable and inclusive financial services to Kenyans. Mr. Chairman, Kenya can not develop, or even realize the aspirations of vision 2030, if the majority of Kenyans at the bottom of the economic pyramid lack access to financial services such as savings, credit, payment/remittance systems, money transfers, insurance and pension. The example Equity Bank has shown here today takes us steps towards realization of this goal. These are steps to emulate for the growth and development of our financial sector. Ladies and Gentlemen: It is now my honour and pleasure to declare the Equity Bank Mobile Phone Banking Service Officially Launched. Thank you.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the FIRST Consultative Group Meeting, Nairobi, 24 November 2008.
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Njuguna Ndung’u: FIRST in development Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the FIRST Consultative Group Meeting, Nairobi, 24 November 2008. * * * Chair, Governing Council of the FIRST Initiative; Distinguished members of the Council here present; Management and staff of the FIRST Initiative Program Management Unit; Distinguished guests; Meeting participants; Ladies and Gentlemen: I am pleased to be here this morning at the opening of the FIRST Initiative Consultative Group meeting. My thanks go to the Governing Council and the Program Manager for the kind invitation. Allow me also to thank FIRST Initiative for choosing to host both the Governing and Consultative Group meetings in Nairobi famed as “the Green City in the Sun”. I would also wish to welcome you all to Nairobi and hope that you will extend your stay to enjoy the varied and scenic delights that Kenya offers. Ladies and Gentlemen: This is indeed a “watershed” meeting that comes after the completion of the first four year mandate of FIRST Initiative. I am informed that FIRST Initiative began its operations in 2002 with a five year mandate that was successfully completed in 2007. The mandate was to provide Technical Assistance to support growth and poverty reduction in low and middle income countries by promoting a financial sector that was stable, deep and diversified. This is indeed a noble objective and it is therefore gratifying to note that FIRST will now enter a second phase of operations to run to the end of 2012. Role and significance of FIRST in development FIRST mission to deliver flexible, top-quality technical assistance related to financial sector is welcomed in the region where the role of the financial sector is recognized as an engine for development. Most of you in this room can remember vividly the days of financial repression when government legal restrictions prevented financial intermediaries in the economy from functioning at their full capacity. The regulations generally included interest rate ceilings, compulsory credit allocation, and high reserve requirements. The development philosophy has shifted away from direction and control. Governments of developing countries have now realized the great potential of the financial sector in fostering development. The formation of FIRST as an institution was to help developing countries tap the potential support to the development of the financial sector. The fact that FIRST initiatives always come in after Financial Sector Assessment Program (FSAP) and other assessment have been undertaken by the IMF and the World Bank signals to governments of developing countries that our partners not only perform a “health check” of our financial system but they also offer “health solutions” after a prognosis has been identified. Many of the projects financed by FIRST initiative have helped countries tighten their adherence to international standards and codes for the financial sector. In doing so, I belief in the assertions that FIRST has helped developing countries achieve part of their development goals of building an efficient, inclusive and transparent financial system. The fact that FIRST works closely with the recipient institutions to prioritize technical assistance activities that are consistent with the recipient country plans is a great plus. It re-defines development partnership of donors and recipient countries. I note with great pleasure FIRST model of doing business. It encourages recipient governments to identify their financial sector problems, prioritizes them, and then supports viable solutions. It also pools the efforts of several development agencies, leveraging their expertise and reducing duplication. Often, FIRST takes on targeted projects and once completed, FIRST disseminates the results to boost their impact and catalyze long-term support from both development partners and recipient governments. In Kenya the Vision 2030 has identified that the problems of high interest rate spreads and limited access. The focus then is how to reduce these spreads, raise access and deepen the financial sector. The level of solutions require policy reforms that alleviate market, institutional and political barriers to competition. The Vision 2030 has identified areas in which policy reforms can have a major impact in reducing such barriers and thus increasing the effectiveness and competitiveness of financial intermediation. Here in Kenya, I would like to acknowledge an initiative such as FinAccess initiated and partly funded by FIRST which has given us the survey information which has become an integral part of financial market processes and analyses. The results have helped us understand some of the issues in the financial sector and have provided us a better understanding on how to develop the sector. There is an increasing body of evidence to support the view that financial sector development contributes to both economic growth and poverty reduction by affording people greater access to finance. Going forward Going forward, I have noted with satisfaction that FIRST will seek to strengthen the causal links between its technical assistance and the contributions of deep, orderly financial systems to economic growth, poverty reduction, and social equity. FIRST will do this by increasing its emphasis on achieving market development outcomes, and filling gaps in domestic financial markets. It will also continue to give priority to supporting governments in lower-income countries in developing action plans geared toward these outcomes. Such a move is welcomed in the region where there has been a very strong upward trend in diversification of economic activities among rural households over the decade. One robust finding of the rural panel analysis is the importance of access to credit as a correlate of escaping from poverty. In Kenya for example, most (70 percent of) Kenyans do not have access to any form of credit. For those who do access loans, there is significant disparity in average amounts – with non-poor households borrowing 42 percent above the average amount, and poor households 77 percent below; the advantage for urban households is even larger, whereas female headed are way below average (World Bank 2008). The question is whether we have adequate financial vehicles for each of these diverse house-holds. Financial stability and development are a crucial prerequisite and a facilitator of reforms in other sectors, including private sector development, infrastructure, housing, and social policies. Financial sector development is vitally linked to growth and poverty reduction. Wellfunctioning financial systems channel funds to productive uses essential for a country’s transformation. Financial services In Kenya, we have identified that a well-functioning financial system is critical to accelerating economic growth. That is, a vibrant and globally competitive financial sector will drive high levels of savings and finance Kenya’s investment need. According to the Financial Access Survey 2007, by FSD Kenya, the banking sector serves only 19 per cent of Kenya’s bankable population with 8 per cent being served by other financial services providers such as MFIs and SACCOs. 38 per cent are totally excluded and 35 per cent rely on informal financial services providers. The evidence is also that access to financial services outside the main cities still remains limited. The introduction of MFI’s, the SACCO’s and CRBs will produce the best financial infrastructure to reach all segments of the economy and information flow to help them function properly. For Kenya to achieve its aspirations of Vision 2030, the levels of investment will require a continuous increase in the level of national savings to sustain economic growth. In this regard, financial sector reform measures will be implemented and more savings products developed to support the requisite national savings. To do so I intend to suggest areas where support of FIRST initiative will be most welcomed in Kenya’s case, but also applies to most countries in SSA: • Enhance the role of the Government in the financial sector to provide a legal, regulatory, and supervisory framework that promotes soundness and competition in the sector. More support for the review, amendment and drafting of financial sector laws and regulations that govern all the regulators with the objective of strengthening their effectiveness. • Reduce the existing deficiencies in the clearing and settlement mechanisms in national payment systems. The modernization of the national payment system has included, among other things, the introduction of Real Time Gross Settlement (RTGS) and the Kenya Electronic Payments and Settlement System (KEPSS) to all participants. But now require enhancement to ensure overall adoption. • Increasing access to credit. The major impediments to growth in developing countries especially in SSA is the insufficient access to credit for large segments of the population and enterprises, especially micro, small and medium sized ones. Areas which FIRST can support include: improvements in the operation of the government registries including: assistance to the Companies Register to enable the Registry clear the backlog in filing and allow for speedy and accurate information sharing of corporate information and data; improvements in the land registration system through digitizing land records; establishment of a legal and regulatory framework for the operation of a credit reference bureau that would facilitate the much needed information flow among the credit granting institutions. • Improve the financial legal environment. The legal system in the region currently faces major challenges in supporting effective financial intermediation. Furthermore, the drafting, implementation and application of the legislative and regulatory reforms, require strong capacity in the judiciary and in the legislative and executive offices charged with legislative drafting and law revision. • Clear and effective laws backed by a strong and credible judiciary are an essential element in creating an environment that is conducive to business and financial activity. Enforcement of contracts in the financial sector is a major signaling mechanism that helps the financial sector development and innovation intermediation. • Develop a financial sector that reflect the economic structures of the country and avoid temptations of one size fits all. Most SSA are characterized by formal and informal finance. The process of formalization requires understanding of the economic structures. Conclusion In conclusion, I realize that the issues for discussion during this meeting are vital to the financial sector at this crucial time when the world is seeking solutions to the global financial crisis; the Central Bank of Kenya and the Ministry of Finance are interested and also party to the issues being discussed here. The financial sector reform agenda is now even more urgent in the wake of the ongoing global financial crisis. I am informed that you spent a good part of yesterday discussing the crisis and I am sure that you came up with useful proposals that you will be sharing. It is inevitable that there will be fundamental changes to the global financial architecture and institutions that govern it. This will pose a greater challenge to developing countries that are already resource constrained and yet need to quickly embrace these changes. Again, partners such as FIRST Initiative will be called upon to quickly deploy technical assistance to client countries. Targeted technical assistance in the financial sector will support governments’ effort to deepen a market based economy which contributes to a sustainable fiscal position and improved allocation of resources. Broad-based financial and legal sector reforms will directly contribute to improving equity and reducing poverty through expanding access to financial services. Poverty is sustained by exclusion in the market. The poor benefit from financial services by providing a safe haven for their savings. The route to savings together with investment opportunities that promise returns is the road to enhance poverty reduction. These objectives will be achieved through provision of technical expertise and building capacity to implement our countries’ financial sector and legal sector reforms whenever required. I therefore look forward to the output of today’s discussions that should enable FIRST to meet and exceed the monumental expectations from client countries in its second phase of operations. On that note, it is my honour and pleasure to declare the FIRST Consultative Group Meeting officially open and to wish you fruitful deliberations. Thank you.
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Keynote address by Dr Hezron O Nyangito, CBS, Deputy Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers, Eldoret, 16 January 2009.
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Hezron O Nyangito: Impact of the global financial crisis on the Kenyan banking system Keynote address by Dr Hezron O Nyangito, CBS, Deputy Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers, Eldoret, 16 January 2009. * * * Mr Stephen Anjichi, Executive Director, Kenya Institute of Bankers; Mr Ben Kamau, Honorary Chairman, Kenya Institute of Bankers, Eldoret Chapter; Committee Members of the KIB Eldoret Chapter present; Distinguished Guests; Ladies and Gentlemen: I am honoured to be here this evening to join you on the occasion of the Kenya Institute of Bankers (KIB) Eldoret Chapter Annual Dinner. I take this early opportunity to sincerely thank the Chairman and Committee of the Chapter for the invitation. At the Central Bank we welcome opportunities such as this one that enable us to exchange views on topical issues with industry practioners. Given also that the year is still young, it is appropriate for me to wish you all a fruitful and prosperous 2009. Mr. Chairman: The topic that I was requested to speak on, “The impact of The Global Financial Crisis on the Kenyan Banking System” is indeed topical and has engaged policymakers across the world since 2007. I will therefore first explore the genesis of the global financial crisis, then review its potential impact on Kenya from a macro perspective and conclude by analysing its impact on the Kenyan banking system. Ladies and Gentlemen: 2008 was indeed a historic year. Aside from the domestic/political problems experienced during the first quarter of the year, the financial disruptions triggered by the US subprime mortgage market precipitated a global financial crisis, which has simultaneously affected all the major world economies including the United States of America, the European Union, Japan and China. By end of 2008 all these economies were in a recession. As you are already aware, the current financial crisis can be traced to a decade of low interest rates in the United States of America during the 1990s, which in turn spurred liberal lending practices by commercial banks to clients that had no ability to repay loans (the so called sub-prime clients), thereby compromising the quality of loans held by financial institutions. The widespread nature of lending to the sub-prime market, in turn, promoted a boom in the property market. However, as the US experienced an economic slowdown and rising interest rates during the past two years, sub-prime mortgage defaults began soaring, and the securities built around these debts, including property prices began loosing value with contagion effect. The resultant strain from the financial crisis has had two critical consequences internationally: a Credit Crunch in the USA, and in countries that were exposed to the high risk mortgagebacked securities in Europe and Asia, and a liquidity crisis arising from the uncertainty over which institutions held problem debt and its actual value, so that banks have been prompted to restrict lending to one another, creating a major liquidity crisis in the global financial market. The combination of a deteriorating credit market and liquidity strains precipitated the current financial crisis, and the collapse of America’s largest mortgage institutions (Fannie Mae and Freddie Mac), and globally important investment banks such as Bear Stearns, Lehman Brothers and Merrill Lynch. The resultant crisis has also led to panic selling in financial markets and a remarkable response by central banks. Ladies and Gentlemen: The current concern for most Kenyans and investors is the extent to which the contagion of this global crisis will affect the domestic economy. Among the questions being asked are: how will the domestic economy be affected? Through what channels will the global crisis permeate the domestic economy? What is the Central Bank or the larger Government of Kenya doing to mitigate any of these effects? What policy actions is the Central Bank and the Government supposed to undertake when such crisis occur? How does the global financial crisis affect economic outlook domestically? First, I would like to underline that African markets have so far been remarkably resilient to the current Global Financial Crisis, primarily due to the fact that our financial systems do not hold any of the “toxic” securities and debts that have precipitated and spread the crisis in the international financial system. The exception is Nigeria, whose financial markets are currently experiencing enormous strains due to both global and local market liquidity issues and high dependence on oil. However, it is expected Kenya’s exposure to the crisis will be driven by the following key factors: • Demand for Kenyan exports may decline. The recession in North America and Europe triggered by the credit crunch may reduce demand for Kenyan exports goods. • Kenyan banks have deposits and placements in foreign institutions. Kenyan institutions also do have credit lines with foreign banking institutions. Collapse of any of these institutions or a credit crunch could hurt the economy. However, so far these effects have not been witnessed. • Kenyans living abroad remit money home to support consumption, and for investment purposes. Early indications show that Remittances may decline as disposable incomes decline in the countries experiencing the global recession. • Tourism could be affected as tourists postpone or cancel visits abroad on account of difficult economic conditions and uncertain duration of the economic recession. However, recent data indicates that tourism has fully recovered in Nairobi but Mombasa and the lodges are still lagging. • Kenyan exporters and importers use letters of credit issued by financial institutions abroad to facilitate trade between Kenya and the rest of the world. Since confidence is returning and global interbank lending has now resumed, this effect may be very minimal. • The shilling depreciated to the US dollar between September 1 and November 30, 2008 following pressure from the global financial crisis as foreign investors “fled to safety” while consolidating their finances to meet their obligations abroad. • The stock markets, and respective investors, recorded a sharp fall in the value of their investments and general financial net worth following the current global financial meltdown. Stock markets fell by 21 percent in Uganda, 24 percent in the South Africa and 27 percent in Kenya between September 1 and November 30. • Kenya receives foreign assistance from overseas for official use to finance development projects (e.g. roads, energy etc), and through NGOs to finance poverty reduction activities. This assistance could decline due to the crisis. Mr. Chairman: Let me now turn to the heart of my address this evening on the impact of the financial crisis on the Kenyan banking system. Overall, I am pleased to note that the outlook for Kenya’s financial sector remains stable in view of the prevailing levels of capitalization, sound risk management systems, strong asset quality and profitability that the banking sector is currently enjoying. Specifically, the banking sector has enjoyed relatively strong performance during the last five years, supported by improved macroeconomic stability and legislative reforms which resulted in the implementation of revised prudential guidelines and risk management frameworks. These reforms have enabled the Central Bank to identify, monitor and control risks in a timely manner, while also strengthening corporate governance in banking institutions. The key highlights of the banking sector by end of November 2008 are: • Deposits increased by 25% from Shs. 730 billion at November 2007 to Shs. 911bn in 2008 as the sector continues to expand its outreach and aggressively market for new deposits. The asset base of the sector also increased by 33% to stand at Kshs. 1.2 trillion. The asset growth was largely fuelled by an increase in loans and advances. • The total capital to total risk weighted assets ratio of the sector increased from 16.7% in November 2007 to 18.1% in November 2008. This ratio is an indicator of the capital adequacy of the sector. The minimum statutory ratio is 12% and at slightly over 18%, the sector has some cushioning to absorb losses. • The average liquidity of the sector which is the ratio of liquid assets to deposits and other short term liabilities stood at 37.3%. This was above the statutory minimum of 20%. • The stock of non performing loans to gross loans decreased from 11.4% as at the end of November 2007 to 8.4% at the end of November 2008. The reduction is largely attributable to enhanced risk management practices by banks and NPL recoveries. • The sectors profit before tax stood at Kshs. 40.2 billion for the eleven months ending November 2008. This is a 21% increase from the Kshs. 33.2 bn registered over a similar period in 2007. The enhanced profitability was driven by interest income on loans and advances and foreign exchange dealing income. Ladies and Gentlemen: This performance notwithstanding, it is important to observe that the financial sector could be vulnerable to effects of the global financial crisis and economic recession, as individuals and firms are likely to struggle to repay debts, thereby resulting in a deterioration of the quality of loan portfolio, and profitability in the financial system. In particular, the Central Bank is cognisant that there may be a lag and perhaps second round effects of the crisis on the Kenyan economy. We are therefore actively engaging banks to ensure that they have adequate capital buffers to withstand the current turbulences. We are also focusing on liquidity management strategies by banks to ensure that they can meet their obligations as and when they fall due. Broadly speaking, there are three main areas of focus for Kenyan monetary authorities to respond in dealing with the current global financial crisis, notably: (a) the need to continuously strengthen the regulation of the financial sector; (b) a reappraisal of the role and activities in the capital markets and (c) the importance of strengthening coordination of regulatory authorities in Kenya. In this regard, the following policy measures and actions are recommended to safeguard the confidence of credit markets and stability of the financial system in Kenya. In the Kenyan context, a highly enhanced regulatory and supervisory oversight of the banking system remains the key plank to addressing the on-going and unfolding global financial crisis. This entails: First, enhanced capital requirements for banks, thereby reducing their vulnerability to sudden asset-price movements and ensure they have the resources to support any off-balance sheet exposures. We have also enhanced and are constantly monitoring commercial banks’ liquidity positions, thereby reducing the chances of institutions being threatened by a reduction in financial market liquidity. This is made possible through improving the bank’s risk management capabilities, through better stress-testing of their market positions against possible adverse price movements. Also to review the role of credit-rating agencies in the financial system. It is therefore gratifying to note in this regard that the recent passage of the Finance Act, 2008 has increased the minimum core capital for banks to Kshs. one billion by the end of 2012. This measure we believe will strengthen the banking sector further and enable it withstand periodic local and global turbulences. We are currently engaging banks whose core capital is currently below Kshs. 1 billion on their capital build up plans. Secondly there is need to undertake reforms in the Capital Markets to restore investor trust and confidence. The reforms should also cover a reappraisal of the role and activities of investment banks which remain the weakest link in the financial sector and their regulatory structure in order to stem any downside risk to the banking system. The reforms will entail: - Developing a comprehensive and enforceable regulatory framework and streamline the corporate governance in line with the international best practices and a thorough fit and proper vetting of directors and owners of these institutions. - Re-assessing the use of the word “bank” by investment banks in Kenya – there is potential to confuse the public with traditional banking. - Increase capitalization requirements – capital adequacy, and Institute risk management practices as well as improve disclosure requirements so financial market participants have better information. Thirdly, the Kenyan financial sector is regulated by various institutions, namely, the Central Bank of Kenya, the Capital Markets Authority, the Insurance Regulatory Authority, and the Retirement Benefits Authority. Given the inter-dependence of financial markets, and contagion effects of risks emanating from any sector, there is need to begin thinking towards a Financial Services Authority (FSA), which will coordinate financial sector-wide stability surveillance at the technical level. In addition, regional cooperation is critical in addressing financial risks arising from events outside our borders, and within the Eastern Africa region. Mr. Chairman: I would like to conclude by underlining the role of professionals in managing global financial crisis. Professionals including bankers are on the spot like never before. There is of course considerable debate on the capacity of bankers, analysts, fund managers, credit rating agencies, regulators and accountants in the crisis. Professionals have a sacrosanct responsibility to provide advice and guidance in their areas of speciality. Institutions such as KIB therefore play a key role in building the capacity of bankers to respond to emerging issues. The global financial system is evolving rapidly and professionals have to “up their game” if their institutions are to survive in these turbulent times. Bodies such as KIB must therefore provide relevant and appropriate capacity building programmes for their members. I must therefore commend the KIB Eldoret Chapter for organising today’s forum that will enable your members to gather insights on topical issues. KIB indeed provides a useful knowledge base on the banking sector. I would therefore challenge you to add your voice in times such as this by providing advice as to how Kenya can continue on a growth trajectory, the global financial crisis not withstanding. At the Central Bank, we are open to knowledge sharing and welcome ideas from organizations such as KIB. I therefore urge you to continue addressing topical issues and share your recommendations with policymakers. I do not wish to extend my remarks much further as I am acutely aware that social “ice breaking” and renewal of existing acquaintances is a critical component of gatherings such as this. I therefore wish the KIB Eldoret Chapter well in all its endeavours. Let me close my remarks by wishing you all a very pleasant and memorable evening. Thank you.
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Speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Luncheon with members of the Eastern Africa Association, Nairobi, 21 January 2009.
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Njuguna Ndung’u: Economic and financial developments in Kenya Speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Luncheon with members of the Eastern Africa Association, Nairobi, 21 January 2009. * * * The Chairman Eastern Africa Association, Members, Distinguished Guests, Ladies and Gentlemen; Let me first thank the Chairman of the Association for this opportunity to share my experiences with economic performance, the conduct of monetary policy in 2008, and the perspective for 2009. The experiences of the Central Bank have been vast but I will deal with economic performance and policy directions in three topical areas: • The Conduct of Monetary Policy and Monetary policy decisions • Economic growth outlook • The Global Financial crisis and Kenya’s economic performance A. The conduct of monetary policy in 2008 The past year has been a difficult one both from a local and global perspective. For monetary policy at the Central Bank of Kenya (CBK), three challenges emerged; • liquidity management in the economy; • inflation upsurge; and • exchange rate volatility These challenges tended to take monetary policy management to unfamiliar territory. In order to ensure price stability or fight inflation, the CBK relies on indirect instruments that affect liquidity in the economy and so the stock of money, which in turn affects interest rates and prices in the desired direction. The debate on what are the targets and what instruments to achieve the targets is relevant. Money supply growth was maintained within the target range for most of the months in 2008. (i) Liquidity management in the economy The role of a modern central bank is in general price stability, that is to fight inflation. However, for the Central Bank of Kenya, stability of the financial system is equally important, so is the national payments and settlement system. The Bank implemented the first two objectives with varying degrees of success. While inflation was high we also faced downside risks to financial stability from the Safaricom IPO. The size and nature of the IPO led to large shifts in liquidity, and the unwinding process would no doubt have had longer term impacts on economic and financial variables if not properly managed. The offer attracted Ksh231 billion. Liquidity was skewed in favour of a consortium of banks despite the mitigation mechanisms put in place by the banking system. The Bank’s approach to this therefore was to mop up excess liquidity from the banking sector using the Term Auction Deposit and repos and inject liquidity to accommodate the liquidity shortfalls for banks outside the consortium, through reverse repos. This intermediation function helped to moderate effects on interest rates, and thereby ensured financial sector stability. The Term Auction Deposit is a new instrument we introduced in May 2008 to support liquidity management. Foreign exchange spot sales or purchases were also another indirect instrument used. (ii) Inflation upsurge The post-election disturbances early in 2008 put enormous pressure on supply networks for food in most parts of the country. Delayed land preparation and transportation constraints, coupled with high cost of fertilizer pushed overall inflation rapidly from 12.0 percent in December 2007 to 31.5 percent in May 2008. Similarly, underlying inflation rose from 5.1 percent in January 2008 to 7.2 percent in May 2008. From the outset, it did seem that inflation was going out of hand. The January 2008 effect has taken longer than we had expected to dissipate with inflation in December 2008 at 27.7 percent. International crude oil prices which had peaked in July 2008 also sustained high inflation but their transmission downward takes a longer period. A number of factors are also now coming to the fore; weaknesses in the distribution mechanisms of food in many parts of the country, high world food and oil prices were passing through to domestic food prices. The process to address these issues has started. But from the monetary policy side, we derived some measure of comfort in choosing to manage liquidity in the short term from the fact that inflation was coming from supply constraints in the economy, specifically supply and distribution factors associated with the post-election violence effects which caused food prices to increase. Monetary policy decisions are geared towards controlling the component of inflation that is linked to money supply and preventing rapid money supply growth – which would ratify high prices from the supply constraints. In addition, there are changes to inflation computation relating to the basket of goods and weights used in major categories of the consumption basket that makes inflation computation closer to international standards. (iii) Exchange rate volatility The foreign exchange market was turbulent particularly from the second half of 2008 onwards. The question we asked ourselves is what a small open economy can do in the face of portfolio capital flows. My works in the past have produced conclusions which are important even in the practical work at Central Bank. Stock adjustment, changing risk profile in the country and arbitrage process all work to warn us to do nothing when portfolio flows drive either securities markets or the economy. The shilling appreciated following increased capital inflows for the Safaricom IPO and depreciated as investors took profits and exited the stock market – a management failure in the IPO process. We have detailed this in the press release of the Monetary Policy Committee (MPC) of November 2008. We provide Monetary Policy Committee press releases to share information and even show how to process the information. B. Monetary policy decisions Inflation continues to be a challenge but expectations are that it will come down to its target level in 2009 of 5 percent. It seems likely that there will be some disinflation in the upcoming months. The CPI computation has been revised, so is the basket of goods using the 2005/06 household budget survey. The Government is taking adequate steps to address the supply constraints. There were indications of a liquidity crunch towards the end of 2008 with short term interest rates moving upwards. Money demand rises in the festive season and so we used our liquidity management tools to increase liquidity in order to stabilize the interest rates in the short term and also hope to sustain a low interest rate regime that would support investment and growth revival to the pre-crises period. You are aware the MPC reduced the statutory cash ratio from 6 percent to 5 percent at the beginning of December. To support this, it also lowered the Central Bank Rate from 9 percent to 8.5 percent to enhance liquidity in the banking system and to nurture the economic recovery process. So far Repo and interbank interest rates have declined to 4.8 percent and 5.8 percent respectively. CBK desires to have a low, stable interest rate environment that encourages private investment. This will support faster economic recovery from the 2008 shocks. The Kenya Shilling was volatile and followed global developments; appreciating against the US dollar and the Sterling Pound but depreciating against the Euro and the Japanese Yen. Against the US dollar, the shilling has lately been oscillating around Ksh78 to the dollar. But most spectacular were the effects the dollar had on the Pound and Euro. Between September 2, 2008 and January 12, 2009, the US dollar has appreciated by 7.7 percent and 16.5 percent against the Euro and Pound respectively. There were also “flight-to-safety” concerns in the wake of the global financial crisis as banks dumped asset backed securities and preferred US Bills and Bonds. The global liquidity is increasingly being measured in US dollars and so scarcity of the dollar when global banks were not lending to each other led to this depreciation and continues to sustain it even today. The road CBK took was a bit bumpy in that it accepted to live with some exchange rate volatility in the hope that they would soon soften once global banks started trading with each other. The current trend in imports and exports is expected to be sustained in 2009 with the current account deficit expected to widen. This deficit will be financed by capital and financial inflows as has been the case in the last few years. We are taking a cautious view on private capital flows. We will monitor the current account and the deficit to ensure its sustainability. But so far, most imports have been inputs and machinery equipment – so signalling firm growth and expansion in the future. C. Economic growth The economy was buffeted by internal and external shocks in 2008, thus performing below potential throughout the year. During the third quarter of 2008, the Kenya National Bureau of Statistics estimates the economy to have expanded by 2.1 percent compared to 6.3 percent in the corresponding quarter in 2007. The recovery from the post-election violence has been fast although agricultural performance lags behind. The shortfall in tourism receipts from January 2008 has also narrowed down and a catch up is expected during the next prime season. Fiscal side The shocks that have taken place in 2008 and continuing food supply constraints have put a strain on the budget and a risk of overshooting the fiscal targets. The Government intended to borrow Ksh54 billion from the domestic market in the current fiscal year. This, so far has not changed. The Government delayed issuance of the sovereign bond of about Ksh34 billion, to await stability in international financial markets. But the Government in the coming weeks will float an infrastructural bond for Ksh18.5 billion to finance major infrastructure projects. I am encouraging corporates like yours to commit funds for this important bond. D. The global financial crisis Starting as a global financial crisis it is now an economic crisis. For those countries that are less integrated in global financial markets, there is need to look at some of the risk factors. • Capital flows: Short term capital inflows which had increased substantially in 2007 flattened out in 2008 above US dollars1.1 billion. Short term capital outflows which have been far less substantial have increased, and we know the dangers and destabilizing effects of these flows. • Fiscal risks: Expenditures have been below target due to delays in implementing some projects. There may also be some diversion of expenditure to cater for famine relief and other recurrent expenditures. However, with respect to revenue, the Government is on target despite the fact that the benchmark was on the basis of a more optimistic growth path. Current figures from the Kenya Revenue Authority (KRA) on the last quarter show tax revenues overshooting their target. • Export risks: Global growth is expected to decline from 2.5 percent in 2008 to 1 percent in 2009. Although demand for some of Kenya’s exports is expected to remain robust, recent trade statistics indicate a slowdown in export volume growth. International commodity prices are also expected to decline. However, the impact of the global crisis on Kenya’s exports may come from reduced aid flows to regional trading partners. • Remittances: Remittance receipts through formal channels increased from US dollars574 million in 2007 to US dollars630 million in 2008 despite reductions beginning May 2008. The decline could persist with reduction in incomes in source countries. Remittances are predominantly used for smoothing consumption and for investment in real estate. But they are also pro-cyclical and tend to follow events in the economy. So their trend may not reveal much. • Liquidity risks: While global banks are not lending to each other, local banks are. However, Government access to global financial markets may be constrained by weakening of these markets. The postponement of the sovereign bond is a pointer to this. The latest upgrade by Fitch rating agency for Kenya is improving the country ratings and once global financial markets are stable, Kenya’s entry will be significant. But more significant will be the target enabling projects targeted to be financed by this bond issue. • On the domestic banking sector, the expectation was that due to the global crisis and the political crisis in 2008, the banking system’s net non-performing loans (NPLs) would rise. However, net NPLs as a share of total loans have come down from 2.9 in March 2008 to 2.2 in November 2009. This is due to improved provisioning and a decline in net NPLs portfolio. The CBK is tracking these risks to assess their likely impact on macroeconomic stability. Nevertheless, the economy is expected to weather first round effects of the global crisis. This will be supported by productivity growth from improved business climate and improved policy frameworks. In 2009, we expect a modest recovery and a rebound to the growth trajectory in the medium term in line with the country’s long term development strategy. Our efforts to sustain macroeconomic stability will bear fruit. Ladies and Gentlemen, let me thank you for your attention, and invitation to this auspicious occasion. Thank you.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the Launch of the Ksh 18.5 billion Infrastructure Bond Issue, Nairobi, 28 January 2009.
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Njuguna Ndung’u: Kenya’s Ksh.18.5 billion infrastructure bond Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the Launch of the Ksh 18.5 billion Infrastructure Bond Issue, Nairobi, 28 January 2009. * 1.0. * * Background Since 2001, the Government pursued a deliberate policy action to restructure domestic debt, with a view to developing a vibrant bond market for generating long term finance. The success in lengthening the maturity profile of debt instrument has been phenomenon. Several measures were instituted to facilitate development of a robust bond market (a) In 2003, the government lowered the cash ratio for commercial banks to release liquidity held with a view to reducing interest rates. (b) The Government also streamlined its domestic Borrowing Cash Plan in favour of bonds. As a result, the volume of Treasury bonds rose from Ksh.80 billion in June 2001 to Ksh.318 billion by end December 2008. The Proportion of long term debt to total domestic debt was reversed from 70:30 and now stands on average at 70:30. But what is needed now are bonds specific to projects of a developmental nature. Infrastructure financing is one such target. The government organized the first ever Infrastructure Bond Conference on October 27-28, 2008 at the Kenya School of Monetary Studies. The ambition was to launch a series of infrastructural bonds to finance targeted projects and emulate other countries like: South Africa, Ghana, Botswana, Nigeria, Malaysia, and Singapore, among others have used capital markets to finance infrastructure projects. It is against this background that the government is launching this first infrastructure bond as a starting point. 2.0. Projects/sectors to be funded Kenya aspires to be firmly interconnected through sophisticated network of roads, railways, ports, airports, and also provide water and sanitation facilities, and telecommunications as a key pillar of economic development in the Vision 2030 blueprint. But the challenge is the huge capital outlay required, leading to the initiative we are starting today. This recognition of infrastructure provision has been recognized as an inhibition in competitive production due to heavy transaction costs. The targeted projects are well documented in the prospectus. We may in future allow a monitoring process for these projects to completion. 3.0. The features of this infrastructure bond Given the long term nature of the projects, the infrastructure bond will be of 12 years to maturity with face value of Ksh.18.5bn. This issue is meant to create impact to the market. However, the infrastructure bond will be redeemed partially in 2015, 2017 and 2021 as an attractive feature for medium term investors who may wish to recoup investment back before expiry of the life of the bond. It will also help Treasury at redemption given the huge amount involved. A number of incentives have been given to make the issue attractive and successful. They include; exemption from withholding tax on interest income, we have revised agency commission upwards, the bond will qualify for statutory liquidity requirements; the bond will be listed for trading at the Nairobi Stock Exchange, the holders can use it as collateral to acquire loans from banks and banks can pledge it as collateral for repos. The infrastructure bond also gives attractive coupon rate of 12.5% p.a. The minimum placement amount will be Kshs.100,000.00 while any additional amounts will be in multiples of Kshs.50,000.00. The bond will be issued under the provisions of the Internal Loans Act Cap 420 and the Capital Markets Authority Act Cap 485A. This pioneer infrastructure bond is expected to lay ground for government agencies to issue their own specific infrastructure bonds. Moreover, future infrastructure bonds will be structured alongside the balance sheets of the issuer where stream of earnings from funded projects will be used to service the bonds. Such bonds will be issued strictly under the Capital Markets Authority’s Asset Backed Securities regulations. Honorable Minister, Distinguished guests, ladies and gentlemen, it is my hope and prayer that this Infrastructure Bond will be attractive and be fully subscribed to finance our infrastructure – a necessary condition for our economic development.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, on the occasion of the Silver Jubiliee Celebrations for Family Bank Limited, Nairobi, 22 June 2009.
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Njuguna Ndung’u: Financial sector performance in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, on the occasion of the Silver Jubiliee Celebrations for Family Bank Limited, Nairobi, 22 June 2009. * * * Your Excellency Honourable Mwai Kibaki, President and Commander-In-Chief of the Armed Forces of the Republic of Kenya; Honourable Uhuru Kenyatta, Deputy Prime Minister and Minister for Finance; Mr. Titus Muya, Chairman, Family Bank Ltd.; Mr. Peter Kinyanjui, Chief Executive, Family Bank Ltd.; Distinguished Guests; Ladies and Gentlemen: I am delighted to be here this morning to join with Family Bank in celebrating twenty five years of providing financial services to Kenyans. Allow me at the onset to appreciate the presence of His Excellency the President. I also wish to salute the Board, Management and Staff of Family Bank for successfully serving Kenyans for the last twenty five years. For most of the twenty five years of its’ existence, Family Bank operated as a building society with a microfinance focus. In the last two years, the institution has operated as a commercial bank and has registered a commendable performance. In 2008, the institution recorded a profit before tax of Kshs. 530.7 million and opened 9 branches countrywide increasing its’ branch network to 43. This is a sterling performance, but there still remains room for further expansion and improvement. Your Excellency The banking sector continues to exhibit resilience in the face of various local and global turbulences. The sector has also continued to grow and now consists of 43 commercial banks, 2 mortgage finance houses and 123 foreign exchange bureaus. The first Deposit Taking Microfinance Institution was also launched last week. Allow me to mention some indicators of the financial sector performance that painted a rosy picture in the last 12 months to April 2009: • The Sector’s assets increased by 12% from Kshs. 1.09 trillion in April 2008 to Kshs. 1.23 trillion at the end of April 2009 as banks continued to expand their lending portfolio. • Deposits increased from Kshs. 880bn in April 2008 to Kshs. 940 bn on the back of deposit mobilization and expansion of branch networks by banks. • The Capital Adequacy Ratio stood at 19.8% above the statutory minimum of 12%. This is an indicator that the sector has a cushion against periodic shocks. • The sector’s average liquidity at end of April 2009 was 41.6% well above the statutory minimum of 20%. • The number of people employed by the sector increased from 24,911 at the end of April 2008 to 25,498 at the end of April 2009. • The number of branches at the end of April 2009 stood at 904 an increase of over 100 branches from the corresponding period in 2008. Your Excellency, the strength of the Kenyan banks is now being felt in the region. There is a growing trend by Kenyan banks to expand their operations regionally particularly within the East African Community. This is in response to the regional expansion by businesses resulting from the drive towards integration. The five East African Central Banks therefore signed a Memorandum of Understanding (MOU) early this year. The MOU will facilitate information sharing and supervisory cooperation amongst the Central Banks particularly for regional banking groups. This arrangement will serve to mitigate cross border risks that regional banking groups may pose to the financial sectors of the East African countries. On the domestic front, banks are also venturing into capital markets, insurance and the retirement benefits sectors. Supervisory co-operation and co-ordination is therefore also paramount for effective regulation and supervision of domestic financial conglomerates. The Central Bank is working with the other domestic financial sector regulators i.e. Capital Markets Authority, Insurance Regulatory Authority and the Retirement Benefits Authority to finalize an MOU that will facilitate information sharing and supervisory co-operation particularly for the emerging financial conglomerates. This domestic supervisory co-operation and coordination will mitigate the systemic risk posed by players operating in the different sub-sectors of the financial system. Your Excellency A stable and efficient banking system provides a safe haven for the savings for Kenyans. The banking sector is therefore well poised to tap into the vast reservoir of savings that remain outside the formal banking space. But this can only be done through cost effective and innovative products, as well as improving access to financial services. Savings mobilization will undoubtedly support investments in the economy. Such investments will increase employment and uplift living standards of Kenyans. This will be important in achieving not just Kenya’s Vision 2030 aspirations but also the Millennium Development Goals. The Central Bank will therefore continue to partner with banks and other market players to ensure that the sector plays its’ rightful role in Kenya’s development agenda. It is now my honour and singular pleasure to invite the Honorable Deputy Prime Minister and Minister for Finance to make his remarks. Honorable Deputy Prime Minister and Minister for Finance, you have the floor.
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Speaking notes by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, Thomson Reuters Risk Management Forum "Next generation risk management", Nairobi, 23 July 2009.
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Njuguna Ndung’u: Next generation risk management Speaking notes by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, Thomson Reuters Risk Management Forum “Next generation risk management”, Nairobi, 23 July 2009. * * * Distinguished Guests; Ladies and Gentlemen: It is my distinct pleasure to be joining you this evening at this important Forum. I would therefore wish to express my gratitude to Thomson Reuters, the convenors of this event for the invitation. The timing of the Forum is apt in view of the prominence that risk management has gained in financial circles over the last few years. The global financial crisis has only served to underscore the importance of scaling up risk management practices and appropriate pricing of risk to counter dynamics in the global financial markets. I am therefore pleased to see a diverse gathering of financial sector players this evening. Thomson Reuters also brings a vast repertoire of international experience on risk management that we are keen to draw upon. Whereas risk management has been prominent on the radar of financial institutions and markets, the global financial crisis has unearthed serious shortcomings in risk management practices. And furthermore, coming from the centre, this has been disastrous. One of the cardinal causes of the crisis is now widely agreed to be deficiencies in risk assessment and pricing of complex products. These complex products were indeed at the heart of the crisis. Markets failed to price these products appropriately and deficiencies in the regulatory architecture precipitated excessive risk taking. It is imperative that market players and regulators reflect on reviewing risk management practices. I am therefore confident that the local experiences to be shared tonight and the international experiences to be gleaned will only serve to enrich this discourse. The Central Bank, can share the perspectives on Risk Management from a regulator’s viewpoint. The Central Bank of Kenya has over the last five years promoted the inculcation of a risk management culture in the Kenyan banking sector. The Central Bank has also adopted a risk-based supervisory approach. This approach is premised on the overarching objective of proactively addressing threats to financial sector stability. Maintaining the stability of the banking sector is indeed one of the core mandates of the Central Bank. I am pleased to note that the banking sector has, to a reasonable extent, embraced risk management. This is perhaps one of the key reasons behind the relative stability of the Kenyan banking sector in the recent past inspite of local and global turbulences. However challenges remain as the Kenyan banking sector embraces risk management. The first challenge relates to the implementation cost, particularly amongst medium and small banks. Human resource competences are also a constraint. The other key challenge we note from our regulatory seat is the view by some institutions of risk management from just a compliance perspective. These are not insurmountable challenges and market players should pool resources and efforts to address them. In this regard, the Central Bank will work with the banking sector to entrench risk management. The Bank will also leverage on the Kenya School of Monetary Studies (KSMS) to provide capacity building programs on risk management for the sector. I would also urge banks not to view risk management just from a compliance perspective but also as a business imperative. Entrenchment of risk management enables institutions to effectively price their products in line with their risk profile. This will not only enhance their competitiveness but also maximize shareholder value. But information must be available to provide assessment on the risk profile. The Central Bank of Kenya will therefore continue with its efforts to enhance risk management in banks. This drive will be supplemented by initiatives to scale-up surveillance at the system-wide level. In this regard, the Bank’s existing early warning system will be scaled up to incorporate both macro and micro prudential indicators of financial stability. Other measures that the Central Bank will take to strengthen it’s supervisory tools include: • Stepping up supervisory co-operation and co-ordination with domestic and foreign financial sector regulators. This is particularly pertinent as Kenyan banks extend their reach locally and regionally and also as products developed encourage other regulators to come into the picture. • Encouraging the adoption of forward looking techniques by banks in their risk management framework. This is particularly in regard to the use of stress testing. This measure will however be accompanied by “market education” to ensure that the results are not misinterpreted. My role this evening was just to set the stage for the lively interactions on risk management that will follow shortly. The Central Bank is certainly open to considering ideas that can push forward the risk management frontier. It now remains for me to wish you fruitful deliberations and a pleasant evening. Thank you.
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Opening remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya and Chairman of the Monetary Policy Committee, during the Monetary Policy Committee Seminar, The Kenya School of Monetary Studies, Nairobi, 14 August 2009.
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Njuguna Ndung’u: Taming of inflation and food security Opening remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya and Chairman of the Monetary Policy Committee, during the Monetary Policy Committee Seminar on “Taming inflation and food security”, The Kenya School of Monetary Studies, Nairobi, 14 August 2009. * * * Permanent Secretaries: Ministry of Finance; Ministry of Planning, National Development and Vision 2030; Ministry of Agriculture; Ministry of Trade; Ministry of Special Programmes; Representatives of our Development Partners; Chairmen and Heads of Government Parastatals; Representatives of the Private Sector; Distinguished Guests; Ladies and Gentlemen; It gives me great pleasure to be with you today during this important seminar on “Taming Inflation and Food Security”. Let me take this opportunity from the onset to warmly welcome you all to the Kenya School of Monetary Studies (KSMS). As you may all be aware, the Bank’s principal objective is to formulate and implement monetary policy directed at achieving and maintaining stability in the general level of prices, as well as supporting the economic policy of the Government including its objectives of growth and employment. Price stability is an important signal to the economy and provides a stable planning horizon to predict future prices and perhaps returns. Most coordination failures occur due to the inability to forecast future prices or calculate, for example, return on investment. This seminar comes at a time when the country is just recovering from the effects of high inflation arising from supply side factors caused by several shocks. These shocks have an international as well as domestic dimension. They include volatile oil prices, commodity prices and drought conditions which continue to pose a challenge to the achievement of the Bank’s core mandate of price stability. Given these outcomes – that shocks tend to affect domestic prices upwards and domestic output downwards, simultaneously – we have to rethink the appropriate measure of inflation and how to target or contain it. But also, appropriately computing and reporting inflation becomes very critical – the information processed from the reported numbers on inflation leads directly to cost of living adjustment (COLA) requests even at CBK! Usually, the CBK must have some inflation target. But also this has to be consistent with inflation experience or profile for the general public as well as create the required consistency of the monetary framework and economic growth profile. This workshop should help in defining the appropriate inflation indicator. The emphasis that seems to converge is to come up with a single measure of inflation that can be easily explained, analyzed and related to economic outcomes. But of course different economic constituencies will understand this in terms of how it affects them. Alternatively we may want to focus on measures that will say exactly what they mean. These include: a) Food inflation. b) “Core” inflation – (define what is core). c) Inflation (takes care of all the above) – National inflation indicator. d) For CBK, we would prefer a non-tradable goods price index to compute our inflation index that responds or is affected by monetary policy directly and also links to the exchange rate and the issues of competitiveness. For your information, Ladies and Gentleman, many countries are currently publishing statistics on tradable and nontradable inflation as part of their dissemination of inflation data. This allows central banks to easily compute the profile of real exchange rate. e) Finally, we want an inflation index that comes close to measuring or reflecting the cost of living. The question is, how can this be done and at least cost by KNBS and how other players in this process can partner. But why do we want several indicators of inflation to be developed? At the outset, money or the demand side is just one factor or driving force on inflation. The other one is on the supply side. Monetary policy becomes passive when supply side factors drive the domestic prices and so inflation. This means that several indicators can also bring in a wealth of information to be processed. The experience; the achievement of the inflation target has been constrained by increased volatility in food prices and other exogenous shocks. In particular, the overall month-onmonth inflation increased from 9.67 percent in January 2007 to 11.1 percent in June 2007, and to 31.5 percent in May 2008 before declining gradually to 17.79 percent in July 2009. On the other hand, CBK underlying inflation declined from 5.15 percent in January 2007 to 4.90 percent in June 2007 before rising to 7.90 percent in July 2009. The issues and questions raised by such volatility in one measure of inflation thus attract policy debate and action. It is important to note that the rising overall inflation rate during the period was attributed mainly to food prices which account for 50.5 percent of the overall consumer price index basket. The rising food prices have been attributed mainly to drought, supply constraints and lack of cultivation by farmers in Kenya’s grain basket in the Rift Valley who were displaced following the post poll crisis in January 2008. Food inflation has been quite volatile and erratic since January 2007, increasing from 11.8 percent to 15.9 percent in December 2007, 44.2 percent in May 2008 and declining to 24.4 percent in July 2009. The volatility of food inflation was the highest during the period and using a measure of volatility stood at 10.72 percent compared with 8.98 percent and 6.19 percent for fuel and transport & communication inflation rates, respectively. The Monetary Policy Committee of the Bank is concerned that the prevailing famine and drought in the country will result in a spike in inflation and so an appropriate policy response is required. The solution; most studies have advocated for improved agricultural productivity as the most effective way of addressing food crises associated with higher international prices and food security concerns. But this has to be supported by an appropriate infrastructure for processing, storage and transportation of food. In this regard, it is our hope that this seminar will seek to achieve the following objectives: a) Agree on how best to report inflation. b) Review the sources, magnitude and structure of inflation in Kenya, to gain a better understanding of its dynamics. c) Come up with feasible solutions to the food supply problem. d) Deliberate on possible action plans among key stakeholders to keep inflation low and stable. This seminar is therefore expected to come up with resolutions that would form a basis for a long term policy on domestic prices and food security in Kenya. We still have to contend ourselves with a three-dimensional solution: food production; food processing; food storage and transportation. Let me underscore the important role of partnership between the stakeholder-institutions represented here today in addressing the challenges of inflation. It is my hope that such partnerships will involve regular consultations, sharing information and strategies geared towards seeking solutions to supply constraints or challenges to food production and distribution with the overall objective of achieving price stability. This workshop should redefine and strengthen future partnership and the responsibility for each institution. On behalf of the Central Bank of Kenya and the Monetary Policy Committee, let me express my sincere gratitude to the presenters, discussants and all participants who responded to our invitation and have graced us with their presence at this seminar. I am sure they will provide a good platform to share information and discuss feasible solutions. Ladies and Gentlemen, I now take this opportunity to declare this seminar officially open. I wish you all fruitful deliberations. Thank you.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Launch of Southern Credit Banking Corporation Ltd International Mastercard Debit Card, Nairobi, 10 August 2009.
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Njuguna Ndung’u: Growth and performance of the Kenyan banking sector Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Launch of Southern Credit Banking Corporation Ltd International Mastercard Debit Card, Nairobi, 10 August 2009. * * * Chairman; Managing Director of Southern Credit Banking Corporation; Board Members; Management and Staff; Distinguished Guests; Ladies and Gentlemen: I am delighted to be here this morning to join hands with the family of Southern Credit Banking Corporation Ltd in celebrating the launch of its MasterCard Debit Card. Allow me at the onset to appreciate the presence of the MasterCard Representative Assistant Vice President: Commerce Development, Mr. Charlton Goredema. I also wish to salute the Board, Management and Staff of Southern Credit Banking Corporation for successfully serving Kenyans in the last twenty seven years. I am pleased to note that your bank has expanded its network from the two branches at incorporation in 1982 to nine branches countrywide and has been in the forefront of innovations in electronic payments solutions in Kenya, a position that it first achieved with their Senator Card brand. Today, the bank is becoming a market leader with the launch of the first MasterCard Debit Card in Kenya and also in the region. It is also one of the only three banks in Kenya with the Acquirer status on the MasterCard franchise. The service will enable the bank’s existing customers transact business at more outlets, at their convenience, anywhere in the world. I commend the Board for this. Ladies and Gentlemen; This new service will provide an expansion of Kenya’s card market segment which is currently thin and requires patronizing by many of the bank customers. Similarly, the new product will go a long way in deepening the financial sector by facilitating payments. Mr. Chairman, Let me turn to growth of the banking sector and its performance, one of the main pillars of Kenya’s economic growth. Ladies and Gentlemen; Despite the local and global turbulences experienced over the past one year, the banking sector remained stable and exhibited resilience. The sector has continued to grow and expand both locally and regionally to new markets within the East African region and beyond. In addition, banks are posting good results for their second quarter ending June 2009. We commend the banking sector for the efforts in weathering storms of the global financial crisis and our own share of internal shocks. Mr. Chairman; Let me at this point mention some indicators of financial sector performance for the quarter ended June 2009 to show not only its resilience but its source of strength: • The Sector’s assets increased by 15% from Kshs.1.09 trillion in June 2008 to Kshs.1.26 trillion at the end of June 2009 as banks continued to expand their lending portfolio. • Deposits increased from Kshs.871bn in June 2008 to Kshs.954bn mainly due to deposit mobilization and expansion of branch networks by banks. • The Capital Adequacy Ratio stood at 19.8% above the statutory minimum of 12%. This is an indicator that the sector has a cushion against periodic shocks. • The sector’s average liquidity at end of June 2009 was 40.9% well above the statutory minimum of 20%. • The number of people employed by the sector increased from 24,435 at the end of June 2008 to 25,766 at the end of June 2009. • The number of branches at the end of June 2009 stood at 930 an increase of 158 branches from the corresponding period in 2008. • The number of accounts has similarly increased to 6.7m accounts from around 4 million accounts in the same period – shows we need to do more on this count. Ladies and Gentlemen, Our appeal to the banking sector is to put up strategies that will support and stimulate the private sector. Banks stand to benefit from a strong and vibrant private sector. The CBK has shown the industry the way by the recent successive reduction of the Central Bank Rate and Cash Reserve Ratio. It is good and encouraging for banks to post healthy profits, but also good in tandem with that to reduce the lending rates to encourage the private sector lending and financing both investments, working capital and reducing the risks of default. I would like to reiterate once more that the Central Bank welcomes initiatives and innovations by the banking sector in coming up with new products and is committed to the creation of an enabling regulatory environment towards this end. I would therefore urge the banking sector to seek diversification of their products in light of the dynamic banking environment to leverage on their growth and earnings. Such diversification of financial services like the Debit Card we are launching today do help to reduce transactions costs. But the banks should let us know how we can help to reduce risks and costs if they are the ones sustaining higher lending rates – but also keeping deposit rates low! Ladies and Gentlemen; It is now my honour and pleasure to declare Southern Credit Banking Corporation’s MasterCard Debit Card officially launched into the Kenyan market. Thank you.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of the Banking Credit Information Sharing Implementation Project, Nairobi, 27 August 2009.
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Njuguna Ndung’u: Credit information sharing to enhance financial sector development Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of the Banking Credit Information Sharing Implementation Project, Nairobi, 27 August 2009. * * * Mr. Martin Oduor-Otieno, Chairman, Kenya Bankers Association; Mr. John Wanyela, Executive Director, Kenya Bankers Association; Chief Executives of Commercial Banks here present; Distinguished Guests; Ladies and Gentlemen: I am pleased to join you this morning on this important occasion to launch the Banking Credit Information Sharing Project. Allow me therefore to extend my gratitude to the Kenya Bankers Association for facilitating this project and the invitation. The importance of this function cannot be overemphasised and I am delighted at the excellent turnout of the banking fraternity. The Banking (Credit Reference Bureau) Regulations 2008 were published in July 2008 and launched at this very venue in September 2008. The Regulations paved the way for the licensing and surveillance of Credit Reference Bureaus (CRB) by the Central Bank of Kenya. These Bureaus will collate credit information from institutions licensed under the Banking Act. I am pleased to report that since the Regulations became operational in February 2009, there has been considerable interest by potential investors. I do believe that interest is for those who cherish the importance of the development of information capital. The Central Bank has so far received three applications for CRB licenses, two from local investors (Credit Reference Bureau Africa and Metropol) and one from a South African based regional player – Compuscan. Accordingly the Central Bank has this week issued a letter of intent to the first applicant, Credit Reference Bureau Africa. This is an approval in principle to conduct credit reference bureau business. The Bureau will commence operations on completion of an independent third party system and security audit and an onsite inspection by CBK. The letter of intent was granted after a detailed due diligence of the application to ensure all statutory and prudential requirements were met. The Central Bank wishes to reassure Kenyans that it shall rigorously assess all applications to ensure the integrity of the envisaged credit information sharing mechanism. Ladies and Gentlemen: The launch of this project today by the banking sector is therefore very timely. The overarching objective of the project is to co-ordinate the efforts of all players so as to build a sustainable and holistic information sharing mechanism. The Central Bank renders its full support to this project and we expect that all banks will also commit to implementing all the agreed milestones. Credit information sharing offers Kenya an opportunity to promote access to affordable credit to more Kenyans because information lowers the risk premium and search costs. There is indeed a clear and direct linkage between access to credit and economic development. Allow me to highlight four key benefits that the Central Bank sees accruing from this initiative. First, credit information sharing will facilitate the development of information capital. The risk premium associated with information asymmetry and search costs will decline. Second, information capital will change the current collateral technology. Credit by the banking sector in Kenya has to a large extent been underwritten by physical collateral such as land. Borrowers without access to such collateral have been constrained in accessing credit. Credit information sharing will enable borrowers build a track record that can be used in accessing credit. This will be especially pertinent to those borrowers in the informal and Small and Medium Enterprises (SMEs) who have a track record and good performance to use it to access credit. The SME sector is very important to the industrial development of this country and the Vision 2030. Ladies and Gentlemen: The third benefit is to enhance information symmetry and support financial development. The existing state of information asymmetry between borrowers and banks is a constraint to innovation. Two important outcomes in information asymmetry: moral hazard problems from the borrowers and adverse selection from the banks. These two problems could punish the economy with low provision of credit. We have also seen that there is adverse selection among banks as well. Fourth, in a segmented market like ours, some segments remain untapped because banks do not have adequate information to price suitable products. In part this has also contributed to the high cost of credit. Borrowers have had to bear a “risk premium” because of this lack of information. It is therefore the Central Bank’s expectation that savings arising from the increased credit information shall translate to lower cost of credit. In turn, more Kenyans will be able to access credit from banks. The current level of interest rates is a combination of costs (like information search costs), risk premium and of course banks’ profit margin. High interest rates also give rise to default risks. The risk premium and search costs can be minimized by information symmetry and reduce Non-Performing Loans. As you will recall the Kenyan banking sector was saddled with a huge non performing loan portfolio in the 1980s and 1990s. Part of the burden was occasioned by “serial defaulters” and inadequate incentives to have a good credit history. The days of “serial defaulters” are definitely numbered with the advent of credit information sharing. More importantly, we expect that there will be incentives for good credit behaviour that will attract competitive pricing of credit facilities. The message to Kenyans is that now more than ever before, there will certainly be benefits accruing from adhering to the contractual terms of loans. I am sure the other institutions in Kenya will deal with appropriate definition of property rights and contract enforcements to further reduce the risk premium. Ladies and Gentlemen: In a nutshell, credit information sharing will increase vibrancy in the market for the borrowers and lenders. Borrowers will be able to access enhanced facilities as they grow their credit histories and track record. Conversely credit providers will be able to develop new and competitive products that will tap into previously unserved and underserved market niches with the power of available information. This can only impact positively on the banking sector and the Kenyan economy as a whole. As I draw to a close, let me recognize that the banking sector credit information sharing initiative will serve as a model for other credit providers. We must move with speed to have the mechanism up and running and begin to rope in other financial and non financial credit providers. This will allow the full benefits of credit information sharing to the whole economy. I therefore urge all banks to support this initiative which the Central Bank is unreservedly committed to. It is now my distinguished duty to officially launch the Banking Credit Information Sharing Implementation Project. Thank you.
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Opening remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the breakfast meeting for domestic financial sector regulators, Nairobi, 31 August 2009.
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Njuguna Ndung’u: Financial sector collaboration Opening remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the breakfast meeting for domestic financial sector regulators, Nairobi, 31 August 2009. * * * Hon. Deputy Prime Minister and minister for Finance Board Members and Chief Executive Officers of RBA, CMA and IRA, Distinguished Guests, Ladies and Gentlemen: It is my pleasure to be with you this morning and I am indeed honored to be accorded this opportunity to give brief remarks at this important breakfast meeting where the Domestic Financial Sector Regulators will be signing the Memorandum of Understanding (MOU) on financial sector Collaboration. At the onset, allow me to extend my gratitude to the Hon. Deputy Prime Minister and Minister of Finance for agreeing to grace the ceremony and deliver a key note address. In the same token, let me take this opportunity to recognise the work of The Technical Committee on Collaboration which has been instrumental in organising the event. Ladies and Gentlemen, the Monetary Affairs Committee is a caucus of Central Bank Governors under the East African Community Monetary Union which is mandated, among others, to harmonize regulatory regimes and supervisory frameworks in the region in the banking sectors. During the 12th Monetary Affairs Committee (MAC) Governors’ Meeting held in Kigali, Rwanda in May 2009, my fellow Governors and I celebrated the execution of the MOU amongst the five Central Banks, which was put into effect in early 2009. It was indeed pleasing for Governors to note that the Bank of Uganda had already signed an MOU with other domestic financial sector regulators in Uganda. Other MAC Governors were therefore urged to implement a similar arrangement with their respective domestic regulators by June 2010. This is to demonstrate that collaboration amongst domestic regulators is in line with regional aspirations. Consequently the celebrations that we mark today will enable CBK achieve a milestone set by MAC Governors ahead of the set time of June 2010. I cannot thank my fellow domestic regulators enough. But for the Kenyan side, let me commend RBA and Edward Odundo for the time and effort he has put on this initiative. As you are aware, there has been increased integration of economic and financial markets globally. Globalization is creating new business opportunities and opening new markets. However, the forces of globalization and the ensuing competition are prompting financial companies to engage in business operations that make group management and risk aggregation more challenging. Similarly, a new concept of cross-ownership and trading is emerging in our market, thus blurring sector boundaries and product lines. For example, we have banks that want to offer bancassurance while insurance companies are underwriting financial risks that were once a domain of investment banks. As a result, it is becoming increasingly difficult for one regulator to set up a regulatory regime without taking into consideration the impact it bears on the other financial sub-sectors. In the same vein, we are increasingly seeing banks acquiring brokerage firms in the capital market. Harmonisation of regulatory regimes in the entire financial sector is therefore critical in order to offer consistency and maintain financial stability. The ongoing global financial crisis has only served to underscore the inter-linkages of financial systems. The crisis has demonstrated that risks and shocks that originate from one area can be transmitted internally within a group or externally through converging products, markets or cross borders. In this regard, financial sector regulators should base their supervision on a consolidated basis by reviewing risks across the entire financial spectrum rather than purely on an industry solo basis. Ladies and Gentlemen, before I conclude my remarks, allow me, on behalf of my fellow regulators, and on my own behalf, to express our sincere gratitude to all the guests who responded to our invitation and set aside time to grace this ceremony. I am sure also, the totality of the financial market will appreciate this move by the regulators. Finally, Ladies and Gentlemen, being aware of the task ahead of us, let me take this opportunity to invite our chief guest to address this gathering. Welcome Deputy Prime Minister, Hon. Uhuru Kenyatta.
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Speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official launch of the Central Bank of Kenya's new website, Nairobi, 1 September 2009.
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Njuguna Ndung’u: Central Bank of Kenya’s new website – improving communication Speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official launch of the Central Bank of Kenya’s new website, Nairobi, 1 September 2009. * * * Mr. Mutua Kilaka, Financial Secretary, Ministry of Finance; Dr. Geoffrey Mwau, Economic Secretary, Ministry of Finance; Dr. Bitange Ndemo, Permanent Secretary, Ministry of Information & Communication; Board Members here present; Distinguished Guests; Ladies and Gentlemen: You are all welcome to the launch of the new CBK website today. Let me at this early juncture thank our Chief Guest, Mr. Mutua Kilaka for accepting to launch our new website and to all our distinguished guests for joining the Central Bank fraternity in marking this occasion. Ladies and Gentlemen, it is important to note from the very onset that central banking has undergone dramatic changes in recent decades and many central banks now post and communicate their policies and forecasts in their websites. Conventional wisdom in central banking previously held that monetary policymakers should say as little as possible and say it cryptically. In recent years, the understanding of central bank transparency and communication has changed dramatically. On its part, the Central Bank of Kenya has employed a wide range of communication channels to ensure it efficiently and effectively communicates with the market as well as target audience. The launch of our new website today marks a major milestone towards the achievement of the Bank’s vision of becoming a world class, modern Central Bank. Our new website is also part of the Bank’s communication strategy aimed at improving Central Bank communication platform and policy. Ladies & Gentlemen, Central Bank communication is important for financial market participants as it forms the basis for their extrapolations regarding current and future policy actions that might impact the value of their financial assets. So far, communication between the Central Bank and financial markets has worked fairly well. Market participants have learnt over time to distinguish between information and “noise”. The Central Bank, on its part, has remained committed to provide markets with information while avoiding the “noise”. It has become increasingly clear to us that managing public expectations through effective communication is a central part of monetary policy and indeed, of central banking. This is an important aspect of formulating and communicating policy. Public expectations are more likely to help foster economic stability when the public has a clear understanding of what the Central Bank’s goals are, how the Central Bank thinks the economy works and how it is likely to respond to various economic circumstances. Our new website has been designed to enhance communication with the financial and other markets by providing accurate and timely information. The feedback mechanism demonstrated today will serve to ensure that the Bank stays in touch with public expectations and is responsive to the needs of the market and the general public. The new site also has a chart tool that will assist researchers and students analyze time series and other information available on the website to track policy and economic performance. We believe that our website should not only be a communication tool but also a resource that adds value to those who visit it. We encourage our website visitors to utilize these tools. Ladies & Gentlemen, our communication with the public has to be simple, clear and credible. The sole use of English in our communication has, unfortunately, disenfranchised a good number of Kenyans who only speak and understand Kiswahili. The critical challenge we face is in developing a communication infrastructure and strategy that will effectively communicate to a wide audience. The development of a Kiswahili version on our new website is a first step towards ensuring that the Bank is responsive to the demands of a target audience that dominantly speaks the national language. On the strength of this initiative, the Bank will consider publishing sections of the weekly bulletin and monthly economic review in Kiswahili. We will also continue to publish exhaustive analyses and commentaries on our website and offer assessments regarding future economic developments. The Bank also recognizes the critical role that the media plays in educating the public on financial and economic issues. Our new website has dedicated a link for media houses to access information that will facilitate their role. It is encouraging to note that some media houses have published staff commentaries and analyses carried on our website. This collaboration will ensure that the public receives information that is complete and correct. In conclusion, let me observe that in uncertain economic times, communication is not only an instrument, it is also an asset valued by the public. The Central Bank, the media and other institutions have an obligation to communicate effectively while being aware of the adverse effects that misinformation can have on financial market participants, households and businesses. We have positioned our website as the primary tool for Central Bank communication and encourage members of the public to visit it and give us their feedback. On our part, we shall strive to constantly enhance our communication infrastructure to meet the demands of our target audience. With these few remarks, it is my singular honour to call upon the Mr. Mutua Kilaka, Financial Secretary, Ministry of Finance to give his remarks and officially launch our website. Bwana Kilaka. Karibu Sana.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the 2009 Alliance for Financial Inclusion (AFI) Global Policy Forum, Nairobi, 14 September 2009.
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Njuguna Ndung’u: Kenya’s vision for a strong and accessible financial sector Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the 2009 Alliance for Financial Inclusion (AFI) Global Policy Forum, Nairobi, 14 September 2009. * * * The Right Honourable Prime Minister of the Republic of Kenya, Mr. Raila Odinga; The Deputy Prime Minister and Minister for Finance of the Republic of Kenya, Mr. Uhuru Kenyatta; Permanent Secretaries here present; Dr. Alfred Hannig, Executive Director, Alliance for Financial Inclusion; Distinguished Guests; Ladies and Gentlemen: Right Honourable Prime Minister, let me thank you most sincerely for gracing this important Forum. Your personal presence demonstrates the seriousness with which the Government of Kenya takes the role of the financial sector in the process of our nation’s economic development. May I also heartily thank the Alliance for Financial Inclusion (AFI) for choosing to host its inaugural Global Policy Forum in Nairobi. This is indeed a very great honour to our country. I also warmly welcome all the Forum participants and hope that in the course of the next three days, we shall have fruitful discussions and emerge with smart policies to expand global financial inclusion. In this respect, I am delighted to be part of the Forum and to champion its course. Mr. Prime Minister, this Forum is jointly hosted by the Alliance for Financial Inclusion (AFI) and the Central Bank of Kenya (CBK). The CBK is a member of the AFI Steering Committee. The AFI has over 60 member countries that account for the majority, nearly 70 percent, of the world’s “unbanked” population. AFI’s vision is to expand financial services to at least fifty million people across the globe living on less than two dollars a day by 2012. The AFI currently concentrates on six policy areas, namely, Agent Banking, Mobile Phone Banking, Diversification of Financial Service Channels and Providers, State Bank Reforms, Financial Identity and Consumer Protection. AFI’s mandate, however, will be widened as need arises. All these thematic areas, which AFI champions are relevant to our country and are key to our financial sector if it has to become “a vibrant and globally competitive financial sector” as stipulated in Vision 2030. A strong and accessible financial sector is a key ingredient in Kenya’s vision of becoming a middle income country by the year 2030. As a country we are matching on towards all these fronts that AFI espouses. The government in the current fiscal year 2009/10 proposed to introduce branchless banking. This will enable banks to provide their services through Agents with wide distribution networks and therefore legalizing Agent Banking and reducing costs of financial services. There has been a significant reduction of the proportion of our population that remains unbanked from 38% in 2006 to 33% in 2009 according to the national financial access surveys conducted by the CBK and Financial Sector Deepening (FSD) Kenya. This reduction in the unbanked is greatly attributed to the contribution of mobile phones as a channel for money transfer. The recent Financial Access Survey also indicates that the proportion of our population accessing banking services increased from 19% to 23% between 2006 and 2009. However, 33% of the population still has no access to any form of financial service and 27% access financial services from the informal financial sector. Despite the progress we have made towards expanding financial access, the majority of Kenyans still lack access to formal financial services. We are therefore keen to draw on the wealth of experiences that are brought to the table by participants in this Forum. We will, over the next three days, share experiences on smart financial inclusion policies that have worked elsewhere. We will thereafter adopt these policies to suit our respective countries as we work together to push forward the global financial access frontiers. Mr. Prime Minister, this Forum also comes at a time when the global economy is suffering a slow down, with economic activities weakened considerably. Although there are signs of improvement, we are yet to see full recovery. Globally, policy actions taken to mitigate the crisis have been geared towards maintaining effective and well functioning financial systems and to reinforce their resilience in order to guard their integrity. We have acted accordingly to ensure that our financial system remains sound, secure, stable, accessible and trusted. We are in constant vigilance that this remains the case and any action necessary to achieve this will be undertaken. With these few remarks, it is now my pleasant duty and honour to welcome the Deputy Prime Minister and Minister for Finance to make a few remarks and to welcome you to address this Forum. Honourable Deputy Prime Minister and Minster for Finance, you have the floor.
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official launch of M-PESA International Money Transfer Service, Nairobi, 13 October 2009.
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Njuguna Ndung’u: Money transfer services Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official launch of M-PESA International Money Transfer Service, Nairobi, 13 October 2009. * * * Members of the Board of Safaricom Limited, Chief Executive Officer of Safaricom Limited – Mr. Michael Joseph, Distinguished Guests, Ladies and Gentlemen: It is indeed my pleasure to be with you this afternoon on this auspicious occasion of the launch of Safaricom’s mobile based international money transfer service. This service builds up on the very successful and world renowned domestic money transfer service – M-PESA – an extremely important tool for financial inclusion. This service has earned our nation much praise and continues to attract the attention of payments system experts the world over. I congratulate the Board, Management and Staff of Safaricom limited for the evident commitment they have shown to the needs of the Kenyan market. M-PESA and other similar services offered by other service providers are a revolutionary concept not only in the market place of ideas, but also in the practicalities of technological platforms provided by advancement of technology. It started four years ago, at a time when the market was yearning for practical ideas to facilitate access to financial services to a large section of the un-banked population. Four years down the line, virtually everyone on the Safaricom platform has an M-PESA Account. The service is used to transfer Ksh 1.35 billion per day, a tremendous success by any measure. The launch of the international leg of the M-PESA money transfer service is therefore a natural progression in the value chain. Ladies and Gentlemen, mobile phone based financial services offer a convenience that is not available in any other consumer channel. In developing countries like Kenya, the mobile handset provides the unbanked segment of the population the potential to access all types of financial services; transactional and informational. In addition, it is the preferred channel because it has so far ensured security, convenience and is cost effective, while the business is conducted in a non threatening environment. The growing number of the un-banked population needs a convenient, safe and affordable means in which to access financial services. At the same time, the growth of micro banking, insurance services, and mutual funds require low cost delivery channels to effectively serve their markets. The “mobile phone opportunity” is the answer. The mobile experience also offers remarkable opportunities for frontier research on the interaction between society and technology, and how these interactions shape culture and the economy. Millions of people have been brought out of obscurity, because their cell phone gadgets have the ability to facilitate instant access not only to financial services, but also to the rest of the marketplace. It has also redefined space and time; information and funds can move from London to Lodwar in a fraction of time. Ladies and Gentlemen, regarding the service being launched today, I would like to report that the Central Bank has been evaluating and reviewing this service since 2007 when Safaricom first requested to pilot an International mobile based money transfer service in partnership with its U.K. partners, specifically the Western Union, Provident, and other partners. The Central Bank evaluated it against the backdrop of its payments systems and forex market oversight objectives. In particular, the Central Bank’s concerns lay in safety, soundness, and efficiency aspects of the pilot to ensure it met not only our own criteria but also internationally accepted standards for international remittances. The Central Bank studied the system’s reliability and governance, system audit trail, consumer protection, settlement risk, KYC requirements, service level agreements, dispute resolution procedures, remitting model, and business continuity plans among other evaluation criteria. I am glad to report that the above criteria, were fully met, and the Central Bank would like to assure the public that the product being launched today is not only technologically sound and secure, but has a legal framework under the Central Bank of Kenya Act. This being a cross border remittances service involving the movement of foreign currency, the PERMIT has been issued under Section 33 A of the Central Bank of Kenya Act which empowers the Central Bank to grant specific permission to any person to transact foreign exchange business subject to conditions the Central Bank may impose. Under the permission, Forex remittance inflows will be sold to authorized dealers (banks), while the domestic currency equivalent will be passed on to the final beneficiaries. Once the remitted funds are reflected on the recipients’ local M-PESA accounts, they may utilize the funds in the normal manner. This service will enable inbound international person to person transfers by the Kenyan Diaspora in the United Kingdom to regularly remit money to Kenya faster, reliably and possibly cheaper in the long run. It is hoped that this service will encourage members of the Kenyan Diaspora who would normally prefer informal remittances channels to migrate to the use of this reliable, albeit convenient platform to send money home. Ladies and Gentlemen, in view of the important role of the remittances in our economy, an overriding policy objective for the Central Bank is to lower costs through competition facilitated by the entry of international money transfer services providers. This will enhance service delivery and enable users of such services obtain competitive remittances rates at substantially reduced unit costs. In this regard, Central Bank has issued and continues to issue PERMITS to all applicants seeking to enter the International Money transfer services market under the legal framework spelt out in the CBK Act Section 33 A, subject to meeting the set conditions. The Safaricom Mobile Based International Money Transfer service has been granted with a permit pursuant to this policy objective. At this juncture, I would like to reiterate that while the Central Bank welcomes innovative products, it evaluates all such products to ensure safety and efficiency concerns are adequately addressed. The Central Bank has the necessary capacity to properly evaluate and appraise technology driven financial services to ensure they meet international standards. Services that involve partnerships with commercial banks have to adhere to the existing prudential and statutory banking sector requirements. We will work closely with commercial banks and other service providers to increase awareness and enlarge the frontier of services. The Central Bank is also cognizant of the fact that international remittances platforms could be used as money laundering channels. Part of our evaluation therefore involves subjecting applicants to a through scrutiny of their AML Compliances programmes not only in Kenya, but also in the sending jurisdictions. In this regard Record keeping and “KYC” requirements must be adhered to as part of the approval conditionality. Ladies and Gentlemen, the subject of migrant worker remittances and their socio economic significance both for the sending and receiving countries has become a popular topic for governments, payment systems experts and other public policy makers. International remittances bring with them substantial welfare gains to the receiving countries and have huge developmental potential. The World Bank estimates that recorded remittances by some 200 million migrants from developing countries reached US$ 283 billion in 2008, up from US$ 265 billion in 2007, while unrecorded flows through informal channels could even be higher. As a share of GDP, remittances constitute about 2% of GDP. These numbers are almost equivalent to the foreign direct investment (FDI) flows, and may in fact outstrip official development aid (ODA) to the entire developing world. For Kenya, Diaspora remits an average of US$ 50 billion each month through the formal channels such us commercial banks and authorized international money transfer entities. Against this backdrop, the Government has initiated a process to develop a policy framework for mainstreaming the Kenya Diaspora community in the development agenda. The role of the Central Bank of Kenya under this initiative is to: • Collect data on remittance flows through formal channels • Analyze the cost of remitting funds • Monitor the use of modern technology in money transfer and its effects in remittances and data collection • Disseminate information on remittances to stakeholders for policy formulation • Develop legal and regulatory frameworks for regulating money remittances services. In addition and together with stakeholders, Central Bank will continue to develop remittance platforms and recipient projects like Diaspora bonds. In this regard, Central Bank continues to collect, collate and publish data on inward remittances on the CBK website. The data is an important source of information for users and we continue to engage with banks and other remittance service providers on ways to improve our data capturing methodology. Regarding costs, our view is that the entry of many service providers will enhance efficiency for the benefit of the remitters. Informal remittances however remain a challenge and part of the reasons we support mobile based platforms is that it will encourage a migration to formal channels, if costs and safety are major considerations. Finally, the Central Bank will strive to provide an enabling legal and regulatory framework to encourage innovations by all payment service providers to enhance access to payment services and to modernize the national payment systems. We continue to work with other players to put in place an enabling legal and regulatory environment to catalyze mobile banking. Specific initiatives in this regard include: • The National Payments System Bill that will strengthen the oversight mandate of the Central Bank over the payments, clearing and settlement system. We anticipate that this will be tabled and thereafter speedily enacted by Parliament. • The Proceeds of Crime and Anti Money Laundering Bill, 2009 that will strengthen the anti-money laundering legal and regulatory framework. The bill underwent the first and second reading and we hope that when parliament resumes, it will be passed and enacted. • Amendment of the Banking Act to enable banks use non bank agents to extend their outreach. Such agents could leverage on mobile technologies to cost effectively provide services on behalf of the banks. With these remarks, Ladies and Gentlemen, it is now my pleasant duty to officially launch the M-PESA INTERNATIONAL MONEY TRANSFER SERVICE, one more product that will improve the landscape of money transfer and financial services beyond our borders. Thank you.
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Remarks by Prof. Njuguna Ndung'u, Governor of the Central Bank of Kenya, on the occasion of the 50th anniversary celebrations for NIC Bank Limited, Nairobi, 18 November 2009.
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Njuguna Ndung’u: Recent financial sector performance in Kenya Remarks by Prof. Njuguna Ndung’u, Governor of the Central Bank of Kenya, on the occasion of the 50th anniversary celebrations for NIC Bank Limited, Nairobi, 18 November 2009. * * * Mr. James Ndegwa, Chairman of the Board of Directors of NIC Bank; Mr. James Macharia, Group Managing Director and Chief Executive Officer of NIC Bank; Board Members here present; Staff of NIC Bank; Distinguished Guests; Ladies and Gentlemen: I am delighted to be here this evening to join NIC Bank in celebrating fifty years of providing financial services to Kenyans. Today indeed marks yet another landmark event on NIC’s successful path. I am therefore grateful for the invitation to join this joyous occasion. Let me at this early juncture commend the Board, Management and Staff of NIC Bank for successfully serving Kenyans for the last 50 years. • I am informed that NIC Bank (formerly National Industrial Credit Bank Limited) was incorporated in Kenya on September 29, 1959 and started off as a non-bank financial institution providing hire purchase and instalment facilities. The institution became a public company in 1971 and was listed at the Nairobi Stock Exchange. In its quest to meet the growing customer needs in terms of diverse banking requirements, NIC Bank converted to a commercial bank and obtained its banking licence in 1995. In November 1997, the bank merged with African Mercantile Bank Limited (AmBank) which allowed the bank to enhance its position in the sector. Since then, the bank has grown significantly. • Currently the bank has 15 branches countrywide having opened two branches in Kisumu and Thika in the last one year while the Meru branch is scheduled to be opened before the end of this year. The bank has also expanded regionally to Tanzania after acquiring a subsidiary (Savings & Finance Commercial Bank) where it now owns a majority stake. • The bank has been an innovative market leader in electronic payments solutions in Kenya and has continued to enhance its service delivery to its customers through technological innovations and available technological platforms. To this end, the bank has introduced NIC on-line internet banking and NIC mobile phone transfer services through the M-pesa services. I find this particular service very innovative and integrated. • It is also noteworthy that good Corporate Governance practices earned the bank three prestigious awards in 2007/2008 and 2009. These include the Financial Report Awards (FIRE) in 2007/2008 sponsored by CMA, NSE and ICPAK; the KRA Commissioner General’s Special Commendation Award and the KRA Most Distinguished Taxpayer Award won in October 2009. • Under corporate social responsibility, the bank has initiated programs that support Environmental Conservation and Advancement of Education. These are no mean achievements for NIC Bank. Ladies and Gentlemen, allow me to mention some key indicators of the financial sector performance in the last 12 months to September 2009. • Despite the various local and global turbulences experienced over the past one year, the banking sector continues to exhibit resilience and has remained stable. The impressive performance has been made possible by prudent risk management, adherence to banking regulations supported by sound legal and regulatory reforms that continue to be put in place in line with best practice. • The global financial crisis has pushed regulators like the Central Bank to think of more regulation to prevent such a crisis in future. But the emerging wisdom is to argue for better regulation. What is it?: It is a regulatory regime that can more readily identify emerging vulnerabilities; Avoids regulatory arbitrage; A regime that can properly price risks; and a regime that strengthens incentives for prudent behaviour. • The sector’s assets increased by 11% to Ksh.1.31 trillion at the end of September 2009 as banks continued to expand their lending portfolio. • Deposits increased to Ksh.1 trillion in October 2009 due mainly to deposit mobilization and expansion of branch networks by banks. • The sector recorded higher than required capital adequacy ratios. As at September 30, 2009, the Capital Adequacy Ratio stood at 20% and was above the statutory minimum of 12%. This is an indicator that the sector has a substantial cushion against periodic shocks. • The number of branches at the end of September 2009 stood at 918 an increase of over 154 branches from the corresponding period in 2008. Ladies and Gentlemen: • Let me take this opportunity to reiterate that the Central Bank appreciates the initiatives and innovations by the banking sector in coming up with new products and is committed to the creation of an enabling regulatory environment. I would therefore urge the banking sector to seek diversification of their products in light of the dynamic banking environment to leverage on their growth and earnings. • From the regulators point of view, we have signed an MoU with the Capital Markets Authority, the Insurance Regulatory Authority and the Retirement Benefits Authority so that we can encourage information flow and limit regulatory arbitrage, but above all build a strong financial sector and financial hub of the East African Community. • The strength of Kenyan banks is now being felt in the region, specifically within the East African Community. To facilitate information sharing and supervisory cooperation amongst the Central Banks, particularly for regional banking groups, the five East African Central Banks signed a Memorandum of Understanding early this year. This arrangement will serve to mitigate cross border risks that regional banking groups may pose to the financial sectors of the East African countries. • Further, the Central Bank together with other stakeholders is working on a legal framework that will enable banks to carry out branchless banking through the use of third party agents such as SACCOs, microfinance institutions and retail outlets in order to enable Kenyans to access financial services with ease. It is expected that once the process is complete, the level of access of financial services by Kenyans will widen in depth and breadth. We continue to join hands with other actors locally and internationally to promote financial inclusion and access. • In other developments, following the recommendation of a COMESA Team of Experts, the Central Bank has been picked to host the COMESA Monetary Institute (CMI) that will be based at the Kenya School of Monetary Studies. The institute will generate the required knowledge for monetary policy in the COMESA region. It will also work to harmonise regulation of financial markets in the region among other issues like a common COMESA currency. Let me take this opportunity to commend the banking industry on their achievements in opening new economic frontiers and supporting Vision 2030. I challenge all banks not only to invest more resources in technology, but to also expand their outreach into the rural areas in the provision of loans. I do agree that the level of economic activity determines the level of loans and credit advanced – but we are slowly evolving from the crisis so economic activity is picking up. I am also aware that in such areas loans and advances are also plagued with inappropriate definition of property rights and problems of enforcement of contracts. These issues are being addressed through information capital and legal reforms. The Central Bank will continue to partner with banks and other market players to ensure that the sector plays its rightful role in Kenya’s development agenda. The NIC from its 51st year is thus poised to do better in a more incentivized environment. With these very few remarks ladies and gentlemen, it is now my honour and pleasure to wish you all a very pleasant evening and best wishes in your future endeavours as you celebrate the Golden Jubilee of NIC Bank. Thank you and God bless you all.
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Keynote address by Professor Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers' Annual Dinner, Nairobi, 20 November 2009.
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Njuguna Ndung’u: Achievements, challenges and reform initiatives for the banking sector in Kenya Keynote address by Professor Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers’ Annual Dinner, Nairobi, 20 November 2009. * * * Chairman, Kenya Institute of Bankers; Distinguished members of the Council here present; Distinguished guests; Ladies and Gentlemen: 1. I am pleased to join members of the banking fraternity for the Kenya Institute of Bankers (KIB) Annual Dinner. This event has over the years become the premier event for Kenyan bankers to toast to their successes, ponder on the challenges in the year and more importantly reflect on opportunities in the coming year. I must therefore salute the Chairman and Council of the Kenya Institute of Bankers for consistently organizing this forum over the years. I am honoured to be the one to deliver the Keynote Address at this important dinner. I will keep my remarks brief, as I do not want to stand between you and the festivities that follow tonight. 2. The year has been a challenging one not just for the banking sector but also for the economy at large. The global financial crisis that escalated in 2008 drove down our efforts through second and third round effects. However efforts by all players to stimulate the economy dampened the effects of the crisis in Kenya. Globally, efforts by governments have stemmed the crisis and the green shoots of recovery are beginning to sprout. 3. Ladies and Gentlemen: On the monetary policy front, the Central Bank conducted a procyclical monetary policy in the year with a view to stimulating private sector credit and economic growth. The Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) from 8.5 percent to 7.75 percent and the Cash Reserve Ratio (CRR) from 6.0 percent to 4.5 percent between December 2008 and September 2009. These efforts managed to lower and stabilize short-term interest rates. The reduction of the Cash Reserve Ratio induced banks to expand credit to the private sector and thus stimulate economic growth. Analysis of the banking sector indicators shows that gross loans to most sectors increased in absolute terms. 4. But the cost of credit and interest rates spread remain high. The spread is a major challenge in the banking sector because it acts as an impediment to expansion of credit and development of financial intermediation and signals inefficiency in the sector. We need to come together, the market and the regulators, to deal with structural binding constraints that prevent the cost of credit to re-align itself with available incentives, market conditions as well as returns on investment. 5. Ladies and Gentlemen: Allow me now to briefly focus on the performance of the banking sector. In 2009, the Kenyan banking sector has continued to exhibit resilience in the midst of the global financial turbulences. The performance posted by banks and mortgage finance companies in the first three quarters of 2009 surpassed expectations as exhibited by the following indicators as at the end of September 2009: • The sector’s assets increased by 11 percent from Ksh. 1.18 trillion in September 2008 to Ksh. 1.31 trillion at the end of September 2009 as banks continued to expand their lending portfolio. • Deposits increased from Ksh. 895 billion in September 2008 to Ksh. 1 trillion on the back of deposit mobilization and expansion of branch networks by banks. • The Total Capital to Total Risk Weighted Assets Ratio stood at 20 percent which was above the statutory minimum of 12 percent. This is an indicator that the sector has a reasonable cushion against periodic shocks. • The sector’s average liquidity at end of September 2009 was 40.8 percent well above the statutory minimum of 20 percent. • The profit before tax for the banking sector increased by 7 percent from Ksh. 34.68 billion for the period ended 30 September 2008 to Ksh. 36.95 billion for a similar period in 2009. This reflects the increased business from expansion and diversification drives by banks. • The number of branches stood at 918, an increase of 130 branches from the corresponding period in 2008. 6. Ladies and Gentlemen: It is worth noting that in the year, significant steps were made in operationalising a credit information sharing mechanism for the banking sector. The Banking (Credit Reference Bureau), 2008 Regulations became operational in February 2009. The Regulations empower the Central Bank to license and supervise Credit Reference Bureaus (CRBs). The bureaus will collate credit information from banks that will facilitate credit risk decisions. This is the most significant step towards building information capital. It will allow us to influence the collateral technology in use currently. The licensed Credit Reference Bureaus will join the family of financial sector actors. 7. Ladies and Gentlemen: The National Payments System sits at the centre of the financial system. It is imperative that payments systems are secure and efficient. The Central Bank continues with its initiatives to modernize the national payments system. Accordingly, from 1 October 2009, value capping was effected with all payments above Kshs. 1 million being made through the Real Time Gross Settlement System (RTGS). This initiative will enhance the security and efficiency of high value payments. Let me at this juncture thank banks, government ministries and other market players for their support in implementing value capping. The Central Bank will continue working with all concerned players to educate the public on value capping and to address implementation bottlenecks that may arise. 8. Whilst initiatives to modernize the payment system continue, we remain cognizant of the cash based nature of our economy. The Central Bank is therefore reviewing currency management to ensure availability of “clean money” at a reasonable cost to Kenyans. The Bank is, in conjunction with the Kenya Bankers Association (KBA), exploring the establishment of currency centres. These centres are expected to reduce the operational costs incurred by banks in moving cash to existing Central Bank branches. This move is also expected to support the provision of “clean” notes and coins to Kenyans across the country. Pilot currency centres identified jointly with KBA in Nyeri, Meru and Nakuru are expected to be operational very soon once modalities are finalized. 9. Ladies and Gentlemen: As I draw to a close, let me briefly highlight developments in the bond market with regard to infrastructure bonds. The Central Bank successfully raised Ksh. 18.5 billion for the Government through an infrastructure bond in February 2009. This bond has not only facilitated financing of the Government’s infrastructure program but also set the pace for the issuance of similar bonds by corporate entities. 10. The recent successful bond issuances by KENGEN and Safaricom are illustrative of this trend. The success of these bonds undoubtedly would not have been possible without the support of the banking sector. We look forward to this continued support including the recently launched Second Government Infrastructure Bond. This, coupled with automated trading in the Nairobi Stock Exchange will be important for a vibrant bond market. 11. Ladies and Gentlemen: These developments are in line with core mandates of the Central Bank and also the policy drive provided by the Vision 2030 blueprint. Finally, as we draw towards the festive season, let me wish you happy holidays and a rewarding 2010. Thank you and God bless you.
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Notes by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at an address to the Emerging Market Traders' Association, Nairobi, 20 November 2009.
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Njuguna Ndung’u: The African economic picture and the Kenyan economy after the crisis Notes by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at an address to the Emerging Market Traders’ Association, Nairobi, 20 November 2009. * * * General Africa’s macroeconomic overview After a decade of strong performance in Africa’s economies, the global economic crisis has dented its growth path • Economic growth in SSA has fallen from an average of 6.5% in the 2005–2007 period to 1.1% in 2009 (from a projected growth of 6.2%) • Exports have fallen from an average of 37.7% of GDP in 2005–2007 period to 31% in 2009 with reduced demand • The economic crisis has dampened the expectations on commodity futures markets thereby inducing falling prices and demand for most commodities • Falling export demand/declining commodity prices spread the impact of the crisis to far more SSA countries; suppressing economic activity and causing fiscal and external balances to deteriorate significantly • Africa’s oil exporters and middle income countries have been hard hit when compared to their low-income counterparts while the fall in copper and diamond prices has resulted in a significant drop of export receipts for Zambia and Botswana, respectively • Most of these countries had extensively built some fiscal space before the crisis – this has suffered severely • Current account balance has worsened with a significant drop in exports as compared to imports Economic effects of the crisis on Sub-Saharan Africa (SSA) • What emerged about 16 months ago as a global financial crisis turned into the sharpest global economic contraction in modern times. Its negative effects on SubSaharan Africa are still unfolding • The crisis initially hit African countries with stronger financial linkages to international capital markets; significant trade relations with the Western world and rich natural resource countries • The initial phase of the crisis manifested itself through weakening of local currencies, declining foreign reserves and bubble busts in capital markets • Declining foreign reserves – Decline in demand leading to significant drop in commodity prices and worsening terms of trade in general – Non-resident outflows from equity and bond markets (“flight to safety”) – The market-determined or flexible exchange rate acted as an automatic stabilizer during this crisis in most African economies and accumulated reserves were drawn down to cushion the economies • Weakening of stock markets as a result of – Outflow of non-residents’ funds – dumped stocks – Unfavorable investor sentiments: concerns about global recession and negative impact on domestic economies Impact of the crisis differs across countries and regions – growth 2009* 2010* Growth Kenya 7.1 1.7 3.0 4.0 Tanzania 7.1 7.4 5.0 5.6 Uganda 8.4 9.0 7.0 6.0 Sub Sahara Africa 6.9 5.5 1.1 4.1 EAC 7.4 5.8 4.5 5.1 COMESA 11.1 8.6 3.1 6.0 SADC 7.2 5.1 –0.9 3.4 Fiscal Space Has suffered-(Overall Fiscal Balance % of GDP) Kenya –3.0 –4.40 –5.7 –5.5 Tanzania 0.0 –5.4 –5.7 –5.1 Uganda –1.1 –2.0 –2.6 –2.9 Sub Sahara Africa 1.2 1.3 –4.8 –2.4 EAC –1.6 –3.9 –3.5 –4.7 COMESA 2.7 1.7 –3.4 –2.6 (Source: IMF Africa Regional Outlook – 2009) SSA not spared by the crisis: see selected indicators 2009* 2010* Real GDP (growth rate) Oil Exporting Oil Importers 6.9 9.2 5.7 5.5 7.0 4.7 1.1 1.9 0.8 4.1 5.5 3.3 Consumer prices Oil Exporting Oil Importers 7.1 5.6 7.8 11.6 10.5 12.1 10.5 10.6 10.4 7.2 8.9 6.4 Exports as % of GDP 38.9 41.0 31.2 33.5 Imports as % of GDP 36.2 38.2 34.2 34.6 Fiscal balance (incl. grants) Oil Exporting Oil Importers 1.2 3.6 –0.2 1.3 6.3 –2.0 –4.8 –5.9 –4.2 –2.4 1.5 –4.7 Current account (incl. grants) Oil Exporting Oil Importers 1.1 14.4 –6.2 1.0 14.0 –7.6 –3.1 1.6 –5.6 –2.1 7.9 –7.9 Terms of trade (% change) 5.1 3.1 –2.2 1.7 Reserves (months of imports) 6.0 5.3 5.8 5.5 How has Africa responded to the crisis? • Foreign exchange rates allowed to depreciate freely to absorb the dollar pressure • Foreign exchange reserves holdings allowed to decline absorbing dollar depreciation pressure • Most central banks have reduced policy rates to signal easing monetary policy. Increased liquidity is expected to ensure availability of funds to finance economic activities • Fiscal stimuli: most countries have used countercyclical budget policies to jump-start economic activities What is happening on the ground in Africa? • Slow economic recovery • Unemployment still rising (youth unemployment – social strife in some African cities) as companies in real sector still shedding jobs • Entering international capital markets via sovereign bonds has been postponed to a later date when economic performance at the global level improves – postponed infrastructure projects • Inflationary pressures have eased in most SSA economies but the challenge is being compounded by weather conditions that have seen a rise in food prices • Excess capacity exists in export industries across sectors • Drop in immigrant remittances which has become a key source of finance • Penetration of China and India to African region at a period when the western countries are at their weak economic position – changing trade and FDI flows (China has pledged US$10 billion in economic cooperation with Africa) • Key banks in the business of lending, which fuels investment and job creation, are not yet lending at pre-crisis levels, as such hurting the economy as a whole • Banks remain reluctant to lend, and tight credit especially for small businesses, stands in the way of the strong recovery we need – but more driven by slowdown of economic activity • Government borrowing has increased and it will be important that this crowds-in the private sector with the amounts borrowed going to production activities – the best as we have seen are the infrastructure bonds • Ongoing efforts to re-build foreign reserves to pre-crisis level or regional convergence criteria – ESF Prospects for Africa in the post crisis period • Africa’s prospects in the post-crisis period is contingent on the behavior of policymakers both in Treasury and central banks • The first issue at the moment in most countries is to do as much as possible to support economic recovery through job creation and protect the wage good • Fiscal policy in post-crisis Africa – Sustaining domestic demand in the post-crisis period critical – Countercyclical fiscal policy to sustain demand through supporting jobs is important at the initial recovery period – In the medium term, fiscal policy should be directed firmly towards growth and long term development objectives – Adequate capital spending should be a top priority to address large deficits in infrastructure and human capital • Central banking in post-crisis Africa – Inflation in most countries has reverted to single digits, and the likelihood of a significant liquidity overhang is minimal – In many countries exchange rates have also been strengthening towards the precrisis level. Re-correction after the crisis – All these factors point towards retaining the current supportive monetary policy stance in most countries and for central banks to avoid conventional wisdom to raise interest rates soon – Central banks should be in no hurry to tighten their policy rates when underlying inflation is below target. They need to continue with the same monetary stance until the expected inflationary pressure threatens instability in the economic environment What the Central Bank of Kenya has done during the crisis • The Central Bank of Kenya – has pursued an accommodative monetary policy stance to help cushion the economy from the negative effects of the global financial crisis • Measures taken so far – Reduction of cash reserve ratio from 6% to 4.5% (100 basis points in December 2008 and 50 basis points in July 2009) – thus releasing an equivalent of Ksh.12.5 billion for lending to the economy – Consecutive reduction of the Central Bank Rate from 8.75% to 7.75% to signal to banks to lower lending rates – Allowing a reduction in foreign exchange reserves to less than 3 months to take pressure off the depreciation pressure of the Kenya shilling vis-à-vis the hard currencies (Had the CBK not allowed this, the inflationary effect of the shilling’s depreciation would have been worse – in terms of intermediate imports, oil prices etc) Kenya’s fiscal policy attempts to spur economic activity during economic downturn The 2009/10 Finance Bill took recovery head on – six solutions: • Commitment from Treasury to maintain a stable macroeconomic environment • Creating fiscal space through expenditure rationalization from non-productive sectors/activities to productive sectors • Reducing the cost of doing business • Developing key infrastructure facilities and public works to stimulate growth, employment and poverty reduction • Fiscal stimulus through measures that expand economic opportunities in rural areas for employment creation Global outlook • The fear of the “Second Great Depression” has subsided – Impact of the crisis on output has been ameliorated by coordinated Government Policies • However, significant downside risks remain to the positive outlook – Global recovery could yet prove more anaemic than currently projected – Evidence still unclear as to whether the slowdown has hit bottom in SSA Going forward • Diversification of trade relations – China and India are gaining entry to African region – perhaps change trade & FDI flows – Regional integration to promote trade relations. The crisis has awakened the need for regional integration • Financial sector development – Put more effort to developing capital markets including bonds and stock markets to widen options for saving and investment financing – World Economic Outlook Financial Development Index covers only three SSA countries. Development of such index to capture more SSA countries is crucial in monitoring progress in the development of the sector – Develop financial sector strategies to accommodate innovative policy designs and financial innovations • Partnership – AfDB, IMF and WB have done well so far – They have both short-term rescue packages and enhanced development assistance • Mobilization of adequate resources to finance growth – Put in place innovative avenues for investment and saving with adequate financial sector development – Boost development budgets to sustain infrastructure development • Stay the path of reforms – do not sacrifice long-run growth – But remain within attainable targets – credibility of reforms • Regulation of the financial sector – An emergence of regulatory arbitrage – Domestic regulators should talk to each other – But we should be careful not to call for “more” regulation rather than “better” regulation – “Better” regulation: A regime that can readily identify emerging vulnerabilities; that can properly price risks; and that strengthens incentives for prudent behaviour (Andrew Crockett, FD Supplement September 2009) • Foreign reserves have served countries in Africa well: – In theory, in a floating exchange rate regime, there is no need to hold foreign exchange reserves or to use them – But developing and emerging economies accumulated foreign exchange reserves to very high levels – it served them well in the crisis – The future of dollar denominated reserves requires close observation
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the Launch of the Automated Trading System (ATS) for Treasury bonds, Nairobi Stock Exchange, Nairobi, 7 December 2009.
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Njuguna Ndung’u: Developments in the Kenyan domestic bond market Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the Launch of the Automated Trading System (ATS) for Treasury bonds, Nairobi Stock Exchange, Nairobi, 7 December 2009. * * * The Chairman of the Nairobi Stock Exchange, Mr. Eddy Njoroge, The Chief Executive Officer, Capital Markets Authority, Mrs. Stella Kilonzo, The Chief Executive Officer, Nairobi Stock Exchange, Mr. Peter Mwangi, The Chief Executive Officer, Central Depository and Settlement Corporation, Mrs. Rose Mambo, Distinguished Guests, Ladies and Gentlemen. Good Morning. It gives me great pleasure to be with you this morning at the official launch of he Automated Trading System (ATS) for Treasury bonds. This indeed is a major milestone in the development of domestic bond market. 1. Market reforms The Central Bank of Kenya and other stakeholders have so far undertaken significant reforms in the domestic bond market. These initiatives, which include the introduction of the ATS, are aimed at enhancing the safety and efficiency in the processing of secondary trading of Government securities as ell as other securities among other market activities. 2. The ATS project The ATS project was initiated by the Central Bank of Kenya, the Nairobi Stock Exchange and the Capital Markets Authority. The two institutions constituted Technical Committee to oversee the automation of trading of Treasury bonds through the NSE. The main objective of this initiative was to make bonds trading secure, efficient and a vibrant market. The expected improvement in market activity will also improve market liquidity and encourage more investors to participate in the bond market. The Technical Committee, in consultation with key stakeholders, has developed operating rules and guidelines for the proposed automated trading of bonds through the NSE; an integrated operating system; an interface that links the Central Bank’s CDS Registry and KEPSS (RTGS) payments system with the NSE’s ATS trading platform to facilitate automated trading, settlement and delivery of bonds on a Delivery versus Payment (DvP) basis. 3. Main highlights of the ATS The following are the main highlights of the system: i. CBK remains the Registry for Government of Kenya securities. ii. Trading of Treasury bonds continues to take place at the NSE, and hence does not cater for Over the Counter (OTC) trading. iii. Stock brokers will continue to exercise their role as agents of the investors in placing sale and buy trade orders. iv. Cash settlement of all trades through this system will take place through the Kenya Electronic Payment and Settlement System (KEPSS) also known as Real Time Gross Settlement (RTGS) domiciled at the Central Bank of Kenya. v. The trading process will be premised on a Delivery versus Payment (DvP) arrangement. vi. Transactions Settlement Cycle will be at T+3, but parties can opt to shorten this period. It is our sincere hope and expectation that the roll out of automated trading for Treasury bonds, together with the recent automation of corporate bond trading, will mark the turning point for trading of Fixed Income Securities at the Bourse. This also comes at a time when re-opening of benchmark bonds has been very successful, creating adequate liquidity around each bond. This fits in very well with the roadmap for capital markets development as envisaged in Vision 2030. 4. Recent trading developments I am pleased to note that since the roll out of this new system on 27th November, 2009, the market has witnessed renewed interest and enthusiasm from bond traders. As of today, we have recorded 11 completed trades totaling Kes.1.72 billion and 16 trades totaling to Kes.2.235 billion are at various stages of processing. As we successfully move away from the manual/open outcry method of trading in Treasury bonds to the new system, we expect to see more activity in this segment of the market. We trust that market players will carry out their functions professionally, observing the highest standards of integrity and transparency so that the investing public can reap full benefits arising from the same. We at the Central Bank will continue to review the operations of the system and related processes to ensure that it meets the expectations of investors and conforms to best practice in the market. 5. Appreciation Finally, may I take this opportunity to thank all stakeholders and members of the ATS Technical Committee for working tirelessly to ensure that the project succeeds. Thank you all for your attention.
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Remarks by Prof Njuguna Ndungu, Governor of the Central Bank of Kenya, at the official opening of the workshop on Agent Banking, Nairobi, 14 January 2010.
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Njuguna Ndung’u: Agent banking Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official opening of the workshop on Agent Banking, Nairobi, 14 January 2010. * * * Chief Executives of Commercial Banks here present; Distinguished Guests; Colleagues; Ladies and Gentlemen: Allow me at the outset to thank you for accepting our invitation to attend this workshop. It is indeed important that this morning we are addressing the issue of Agent Banking, a concept we are keen to see take root innovatively in Kenya. The Central Bank has convened this workshop for three critical objectives: • The first objective is to demystify this new banking model and show how it works; • Secondly, to showcase how it has worked successfully in other countries as a platform for financial reach, inclusion and financial deepening; • Finally, to build consensus amongst market players on how Agent Banking can work in Kenya supported by regulatory framework. As you are aware, the Finance Act, 2009 that became operational at the beginning of this month has amended the Banking Act to enable use of third party agents by banks. Banks will therefore be able to leverage on additional cost effective distribution channels to offer financial services. This initiative is informed by the need to leapfrog access to financial services in Kenya. The National Financial Access Survey of 2009 shows that 32% of Kenya’s bankable population remains totally outside the orbit of financial services and many more being served by the informal financial system. Ladies and Gentlemen: Vision 2030 is premised on a safe, efficient and inclusive financial system where savings and investment rates will more than double. The financial sector is expected to play a pivotal role in mobilizing the substantial resources required to finance the envisaged flagship projects. We must therefore explore and implement innovative models that will deepen Kenya’s financial sector to support savings and investment growth. The Central Bank of Kenya continues to support innovations that will broaden financial inclusion for the majority of Kenyans. In doing so, we will need to focus on safeguards to ensure that the integrity and safety of the financial sector is not threatened. But above all, the cost of financial services should decline to encourage financial inclusion and reach at all corners of the country. It is appropriate at this stage to highlight the key steps that the Central Bank has undertaken up to now with regard to Agent Banking: • Initially, extensive reviews of the knowledge base in this area were undertaken to enhance our understanding of this model. • Secondly, a study was commissioned to review practices in other countries in Latin America, Asia and Africa. Bankable Frontier Associates, an international consultancy firm that undertook the study will be presenting their findings shortly. • Third, to uncover some practical insights on the model, a team from the Central Bank, the Ministry of Finance and the Kenya Bankers Association undertook a knowledge exchange tour of Brazil and Colombia. These two countries have to a large extent successfully implemented Agent Banking. My colleagues will be sharing their insights from this knowledge exchange later today. Let me thank the Alliance for Financial Inclusion and the Bill and Melinda Gates Foundation for supporting this exchange that we believe will transform the platform of financial services in Kenya, and to a large extent the lives of Kenyans. Ladies and Gentlemen: We have therefore so far gained invaluable insights on the Agent Banking model. These insights will contribute to the development of a robust regulatory framework for Agent Banking services in Kenya. Today’s forum offers an invaluable platform to also get feedback from industry practitioners as we develop implementation plans for Agent Banking. It is only through forums such as this that epitomize private public partnerships that we are able to achieve the aspirations of Vision 2030. Ladies and Gentlemen: I also want to address fears that the Agent Banking model in Kenya is inappropriate – that it will kill Microfinance Institutions and SACCOs. On the contrary, it will speed up their activities. Vision 2030 envisages an inclusive financial system with space for different players to serve the majority of Kenyans. They will develop their market niches in line with their relative comparative advantages and strengths. In this scenario, the Agent Banking framework will play a complementary role for all players in the market. So these fears are misplaced. But this forum will also serve to expound this line further. Ladies and Gentlemen: As I draw to a close, it is important to underscore that the Central Bank will continue to be guided in its financial sector policy initiatives by the following tenets: • First, in conjunction with the Government, the creation of an enabling environment for financial sector players. • Second, public private partnerships will continue to be at the core of our initiatives. In the case of Agent Banking, today is just but the beginning of our dialogue. As we implement the model, we will continue to engage market players to ensure it works for the benefit of Kenyans. • Third, for many years, the banking sector could not reach all the corners of the country – it was expensive to erect branches – now, with this new innovation, they do not have to – they only need to look out for the appropriate agent. • Finally, we will continue to promote innovations while ensuring that there are adequate safeguards to foster financial sector safety and soundness. I am sure this workshop will expound on these important dimensions and provide the Central Bank with the richness of policy interpretation. It is now my distinct pleasure to declare this workshop officially open. Thank you.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, on the occasion of the launch of Equity Group/Master Card Foundation Scholarship, Nairobi, 8 February 2010.
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Njuguna Ndung’u: Corporate social responsibility in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, on the occasion of the launch of Equity Group/Master Card Foundation Scholarship, Nairobi, 8 February 2010. * * * The Rt. Hon. Raila Odinga, Prime Minister of the Republic of Kenya; Hon. Prof. Sam Ongeri, Minister for Education; Mr. Peter Munga, Chairman of Equity Bank; Dr. James Mwangi, Chief Executive Officer, Equity Bank; Distinguished Guests; Ladies and Gentlemen: 1. I am honoured to join you this morning on this important occasion. Let me at the outset acknowledge the presence of the Right Honourable Prime Minister and the Honourable Minister of Education. Your presence here is testimony to the emphasis that the Government of Kenya places on education. 2. Allow me also to salute the Equity Group Foundation and the Master Card Foundation on the launch of scholarships for top primary school performers. This is a worthy extension of the corporate social responsibility activities of Equity and Master Card. I urge other entities to take up similar initiatives. 3. Developing the requisite human capital base is the cornerstone for Vision 2030. Endogenous growth models emphasize the role of human capital. Inadequate human capital will choke growth and condemn the country to a low equilibrium trap. 4. The focus of this Foundation on high performing students from vulnerable backgrounds who may easily drop out of the education system should serve as the best signalling mechanism for hard work and excellence. 5. I look forward to the success of this Foundation and the rolling out of similar schemes by the corporate sector. I am sure that these scholarships will nurture Kenya’s next generation of transformational leaders. 6. It is now my pleasant duty to invite the Honourable Minister for Education to address this distinguished gathering. Honourable Minister, You have the floor. Ajith Nivard Cabraal: Expanding financial services in Sri Lanka Address by Mr Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, at the Opening of a New Branch Office in Jaffna by The Hongkong & Shanghai Banking Corporation Ltd, Jaffna, 11 February 2010. * * * My dear friends, I am delighted to be here in Jaffna today for the opening of a new branch of HSBC, one of the market leaders in global banking. The history of the HSBC in Sri Lanka could be traced back to 1884, when it first commenced operations in Colombo. Today, the largest foreign bank operating in Sri Lanka has moved to Jaffna bringing banking to the doorsteps of people in the Northern Province. This is indeed a historic milestone. This development did not happen by chance. It did not take place automatically. With the liberation of our entire nation in May last year, the Government and the Central Bank have taken determined efforts to expand financial services, facilitate and stimulate economic activities, and develop infrastructure in the North and the East. In fact, I have personally participated at several bank branch openings during the last few months, and our officers have been following up the progress, and these outcomes are a result of such combined efforts. Today, I can proudly say that an ever-growing number of financial institutions operate in the North and that these provide diverse financial services, whilst of course we would be the first to admit that a lot more needs to be done. My dear friends, the development and maintenance of essential public infrastructure is an important ingredient for sustained economic growth and poverty reduction. In particular, health, education, electricity, housing and efficient water and sanitation services help lay the groundwork for a productive and healthy population, capable of contributing to sustained economic growth. We all know that as a result of the long and bloody conflict, the infrastructure facilities in the North could not be developed as done in the other Provinces. It is due to that fact that, with a view to fast tracking the development in the North, the Government has now launched a well-planned, integrated, accelerated development program titled “Vadakkin Vasantham.” Under this program, the Government expects to invest approximately Rs. 295 billion (US$ 2.7 billion) during the next 3 years, towards rehabilitation and development activities. This program is expected to cover the rehabilitation of roads and other transportation infrastructure, the upgrading of electricity for domestic housing and industry, water supply, agriculture and irrigation infrastructure and the improvement of the manufacturing framework. The Government also intends to implement a special poverty reduction program and establish the required social safety net, quickly. My dear friends, as we all know, the speedy resettlement of the internally displaced people has also been a top priority for the Government. Towards this goal, many extraordinary efforts have been taken. Out of the over 300,000 internally displaced persons who were rescued and had to be temporarily housed in welfare camps, over 217,000 or 72% have already been resettled. All those from Vavuniya, Mannar, Jaffna, a part of Mulativu and Killinochchi have now returned to their homes. The others mainly from Mulativu and Killinochchi are also to be resettled systematically without any undue delay, depending on the speed at which the de-mining processes take place. This is an outstanding achievement against all odds, and I believe the successful resettlement is a tribute to the deep commitment of the Government, the tremendous efforts of our public service and the dedicated contribution of several international organizations. I am also tempted to mention that this surprising outcome may have been a pleasant surprise to many who at certain times expressed the belief that the government may not have had the inclination nor the urgency to carry out this challenging task so expeditiously. My dear friends, the Central Bank has also contributed its mite to these normalization processes. We have, so far, over the past 8 months, granted approvals for the establishment of more than 90 banking outlets in the Northern Province. We have introduced a Special Loan Scheme, also titled “Vadakkin Vasantham” to boost the livelihood development of the people in the North. Under this scheme, an initial sum of Rs. 3,000 million has been appropriated to be disbursed at a concessionary interest rate of 9% per annum to the eligible micro, small and medium scale enterprises, through several Participating Financial Institutions. The repayment period could extend up to 5 years with a grace period of 6 months. I am happy to note that over 9,000 loans amounting to Rs. 1.8 billion have already been registered with the PFIs and disbursements of over Rs 1 billion has taken place. My dear friends, the rich resources of the North, including its forests, agricultural land, wet lands, lagoons and bays provide a solid base for many enterprises. Even during the conflict period, the Northern Province accounted for 10 percent of the paddy production, 40% of Red Onions, 10% of Chillies, 14% of Green Gram and 25% of Ground Nuts. These statistics indicate that there would be many viable income generating activities which could be promoted to upgrade the livelihood of the people, with the assistance of the banking sector. It has been estimated that 129,000 fishermen, representing 20 percent of the total number of fishermen in our country, live in 219 fishing villages in the Northern Province. In the year 2006, the total fish production from the North stood at 25,900 MT, representing 12 percent of the country’s total production. These facts also indicate that the income generating activities in the fisheries sector too could be developed substantially in the coastal areas with the provision of appropriate banking facilities, particularly for multi-day boats, fishing gear and other ancillary needs such as ice plants, and storage facilities. Over the past several years, the Central Bank has also initiated several credit schemes applicable throughout the country, aimed at promoting regional development and poverty alleviation. In particular, work has commenced on a new Poverty Alleviation Micro Finance Project to cover conflict-affected districts. Approximately 3,000 beneficiary groups with more than 12,000 low-income families have already been organized within the Jaffna peninsula under this project. We have also fast-tracked the Agro-Livestock Development Loan scheme, which is another scheme that could provide increased benefits to this Province. My dear friends, during the several recent visits that I made to Jaffna, I always made it a point to meet with the Chambers of Commerce officials, bankers, Teachers, students, villagers, fishermen and many others. We received many valuable suggestions from them. In particular, we received too very useful ideas to open a Central Bank’s Provincial Office and to arrange for a Special Northern Regional Development Fund for the Northern Province. I am glad to announce today that we will implement both such initiatives in the coming months. My dear friends, I thought it may also be appropriate to use this opportunity to make a special appeal to the Sri Lankan Tamil Diaspora, living in all parts of the world. The decades long conflict which sapped our combined energies in various ways, is finally behind us. Therefore, it is now time for all of us to get together and rebuild our nation, in particular, the areas that have suffered. We, on our part, are keen to assist the people of the North to resume normal lives as soon as possible. Towards that outcome, we believe the Diaspora too could play an active role and become partners in the development process of the North. They can be an important influence to accelerate investments to these areas and thereby support the expansion of industrial activity and tourism. Needless to say economic opportunities in the North are expanding day by day, and I would like to urge overseas Sri Lankans to take an early look at emerging investment opportunities in these areas, particularly in the fields of IT, education and real estate development where they can surely and effectively contribute. I would also urge the Chambers of Commerce and Industries, and other similar Associations to consider establishing international institutional frameworks and links, which would pave the way for two-way interaction between the overseas Sri Lankan community and our local institutions and businesses. Such relationships could then act as focal points to promote remittances and investments into the domestic economy, as well. My dear friends, today, we meet in the midst of a significant change in our country’s economic and political landscape. The end of the decades long conflict has resulted in the creation of a significant positive impact, not just in the Northern Province, but also in the entire country. To benefit by this positive outlook, it is crucial that we start new businesses and expand on-going ventures. In this regard, I am happy to note that the HSBC, which brands itself as the “World’s Local Bank”, could now offer both corporate and small customers a full range of financial products and services. In doing so, they, as well as all other banks who are doing business in these emerging areas, will face the challenges of borrowers not possessing long credit histories or not possessing adequate collateral. This situation will certainly pose challenges, but we would like to urge all bankers that they should practice innovative cash flow based lending methods at least for 2 to 3 years, and not to be too constrained by security based lending only. I also urge financial institutions to lend the money mobilized from the region for the development of this region. Finally, let me place on record my appreciation of the presence of the High Commissioner of the UK, Dr. Peter Hayes at this opening ceremony. Your support to this effort would certainly encourage the business community both here in Jaffna and elsewhere in Sri Lanka, and I thank you for your gesture. Let me also congratulate HSBC on this auspicious occasion of opening the first foreign bank branch in Jaffna. The HSBC Bank with its global connections could now facilitate financial transactions in the North with all parts of the world, while HSBC’s presence in the Jaffna Peninsula from today onwards, would convey an important signal to the world that tangible progress is being made in post conflict Sri Lanka. I wish Mr Nick A Nicolaou, his team in Sri Lanka the HSBC and all their customers, especially the ones in this area, all success. Thank you.
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Opening remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the East African Legislative Assembly Workshop on the East African Monetary Union, Nairobi, 4 March 2010.
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Njuguna Ndung’u: East African Monetary Union Opening remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the East African Legislative Assembly Workshop on the East African Monetary Union, Nairobi, 4 March 2010. * * * Honorable Chairperson of Communication, Trade and Investment Committee of East African Legislative Assembly, Hon. Dahilo; Representative of the Clerk of EALA, Mr. Enock Musiime; Honorable Members of Parliament from EALA; Honorable Members of Parliament from Kenya, Uganda, Tanzania, Burundi, Rwanda; Director of Planning and Infrastructure, EAC Secretariat, Mr. Phillip Wambugu and other officials from the EAC Secretariat; Senior Government Officials from the EAC; Distinguished Delegates; Ladies and Gentlemen: I am privileged by this invitation to participate in this important Workshop on the East African Monetary Union being held here in Nairobi. On behalf of the Central Bank of Kenya and on my own behalf, I welcome you all to Nairobi, Kenya. Honorable members of EALA and EAC National Assemblies, this workshop comes at a time when East Africans are anxious to appreciate the benefits from the East African Community Common Market. The protocol on its establishment was signed in November 2009. The EAC Common Market will ensure free movement of factors of people, services and capital across the five Partner States. Under the common market, goods will be freely traded when the region attains the status of a fully fledged Customs Union. As the honorable members are aware, the EAC Common Market Protocol has provisions that will guide elimination of capital restrictions that continue to impede free flow of capital among the EAC Countries. The cardinal principal of free movement of capital ties with the next level of integration that is the East African Monetary Union. In line with the regional integration as stipulated in the Treaty provision, the 6th Extraordinary Summit of EAC Heads of State held in Arusha, Tanzania on 20th August 2007 underscored the need to move expeditiously towards establishing a Monetary Union by 2012. Following that Summit Directive, Governors of EAC Central Banks met in Kampala, Uganda in January 2008 to map out a strategic framework for fast tracking the establishment of an East African Monetary Union by 2012. The meeting of Governors of Central Banks in Kampala decided on a comprehensive study of the East African Monetary Union whose major objectives were: i) To take stock of the current state of preparedness of the EAC Partner States for a Monetary Union. Among these was the economic convergence of member states; ii) To make proposals on the institutional framework and structure of the proposed East African Monetary Union; iii) To design a model protocol for the East African Monetary Union that would form the basis for the Monetary Union negotiations among the EAC Partner States; iv) To propose an institutional framework for the East African Monetary Institute which would precede and spearhead the creation of an East African Central Bank; and v) To propose a mechanism for the monitoring and enforcement of the macroeconomic convergence criteria among the EAC Partner States. Honourable members, the Monetary Affairs Committee (MAC), that comprises Governors of EAC Central Banks considered the terms of reference for the Study that were approved by the Council of Ministers. The Monetary Affairs Committee through the EAC Secretariat engaged the services of the European Central Bank in 2009 to carry out the study through an internationally competitive bidding process. As you may be aware honorable members, the Draft Final Report of the study on the establishment of the Monetary Union among the EAC Partner States was validated in a workshop held in Kampala, Uganda in January 2010. Subsequently, and after incorporating the comments of the validation workshop the Final Report was submitted and considered by the Joint Session of the Monetary Affairs Committee, Fiscal Affairs Committee, Capital Markets Insurance and Pensions Committee held in Arusha on March 1, 2010. In our meeting held on March 1, 2010, the EAC Central Bank Governors and Permanent Secretaries from the Ministries of Finance, Trade and EAC recommended to the Ministers of Finance that the Study report on the establishment of the EAC Monetary Union, together with all its annexes be adopted as one of the working documents for the East African Monetary Union negotiation process. Honorable members, the Committee of Permanent Secretaries from the Ministries of Finance and Governors of the EAC Central Banks considered a draft road map for the establishment of the East African Monetary Union. The Committee noted the following issues under the draft road map that required detailed consideration; Legal, Institutional and Regulatory Framework; Operational Issues and Policy Direction on available options for establishing the East African Central Bank. It was recommended that a High Level Task Force (HLTF) be formed to negotiate the East African Monetary Union Protocol and review the draft road map. The meeting recommended to kick start the process towards an East African Monetary Union by Commencing negotiations on the comprehensive protocol on the establishment of the East African Monetary Union. This protocol also features the Statute of the East African Monetary Institute and the East African Central Bank. The proposed Institute will carry out the preparatory work that will guide the region towards formation of an East African Monetary Union and its supporting institutions. In order to give this process the necessary institutional momentum, our meeting recommended that a sectoral Council of Ministers responsible for Finance be formed to spearhead the East African Monetary Union process and proposed their terms of reference. This Sectoral Council of Ministers of Finance will provide policy guidance on the negotiations of the East African Monetary Union process. I note from the programme of this workshop that members will be taken through the presentations on the prerequisites for the establishment of the East African Monetary Union; Legal and Institutional Framework for East African Monetary Union; Preparatory work for the establishment of a single currency and at the end of each presentation, there are plenary discussions. The recommendations that will come from the discussions in this workshop will inform the negotiation process. I wish to remind honorable members that one of the benefits of a monetary union is to reduce the costs and risks of doing business across the national boundaries. Most of these costs are transactions related. With a single currency, the costs of having to transact in different currencies and the risk of adverse exchange rate movements that could impede intraregional trade within the EAC Community will be removed. Secondly, as banks continue covering the region, they will spread the financial services for traders but also bring all regulators on a common platform. A Monetary Union will make this more efficient. Honorable members of Parliament, the gradual convergence of all the East African economies is critical while moving to a Monetary Union. Fiscal policy and fiscal rules are the most critical and crucial for economic convergence, and perhaps even more importantly, for the credibility and sustainability of the Monetary Union. Monetary Policy will be driven by other decisions like exchange rate policy and reserves as well. One recent development, for example in Kenya is inflation measurement. Inflation will determine the direction of monetary policy in any country. But for EAC members, we have to compare ourselves when we use a common methodology. There are many such challenges and the central banks in the region are ready to tackle them in totality to develop more convergence. Honorable members, as I conclude, I see enormous opportunities for East Africans as we move ahead. As East Africans, we need to tap and consolidate these opportunities. Certainly the way ahead will bring about legal and legislative reforms that need to be embraced in the road to a single currency. I thank you honorable Chair for your kind attention and wish you fruitful deliberations over the next two days of your meeting.
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Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official launch of the first licensed Credit Reference Bureau - CRB Africa Limited, Nairobi, 4 March 2010.
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Njuguna Ndung’u: Increasing access to credit Keynote address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official launch of the first licensed Credit Reference Bureau – CRB Africa Limited, Nairobi, 4 March 2010. * * * Chairman, CRB Africa – Mr. Michael Karanja; Chief Executive Officer, CRB Africa – Mr. Wachira Ndege; Board Members, CRB Africa, here present; Chair, KBA – Mr. Martin Oduor-Otieno; Executive Director, KBA – Mr. John Wanyela; Chair, Vision 2030 Delivery Board – Dr. James Mwangi; Distinguished Guests; Ladies and Gentlemen: I am pleased to join CRB Africa and the banking fraternity in the launch of the first ever licensed Credit Reference Bureau in Kenya. The launch marks a new dawn in the Kenyan banking sector. It is the first and most important step towards building information capital. The second step will be for the banks and the public to share this information; and the third step will be to use the information to develop the market and to make appropriate decisions. I would like to commend the Board and Management of CRB Africa for their enterprising efforts culminating in their being licensed as the pioneering Credit Reference Bureau in Kenya. This is a landmark achievement worthy of congratulations from each one of us. Ladies and Gentlemen: The main objective is to increase access to credit. We know the benefits of credit access and cost effectiveness of that credit to development at the firm level and at the household level. Allow me to focus briefly on the benefits which CBK sees as accruing from the adoption of credit information sharing in Kenya. First, credit information sharing will facilitate the development of information capital. The risk premium associated with information asymmetry will henceforth be eroded. This will allow cost of credit to decline substantially. Second, information capital will change the current collateral technology. Credit by the banking sector in Kenya has to a large extent been underwritten by physical collateral such as land and buildings and costs of evaluating that collateral – with inappropriate definition of property rights. Borrowers without access to such collateral have been constrained from accessing credit. Credit information sharing will thus enable borrowers to build a track record (reputational capital) that they can use to access credit. This will especially be pertinent to those borrowers in the informal and Small and Medium Enterprises (SMEs) who have a track record and good performance to use their reputational capital to access credit. The SME sector is very important to the development of this country as envisaged in Vision 2030. Ladies and Gentlemen: The third benefit is to enhance information symmetry and support financial development. The existing state of information asymmetry between borrowers and banks is a constraint to innovation and financial sector development. Two important outcomes in information asymmetry are the moral hazard problems from the borrowers and adverse selection from the banks. These two problems punish the economy with low provision of credit. Information asymmetry has also led to severe adverse selection among banks themselves. Fourth, in a segmented market like ours, some segments remain untapped because banks do not have adequate information to price suitable products. In part this has also contributed to the high cost of credit. Borrowers have had to bear a “risk premium” because of this lack of information. It is therefore the Central Bank’s expectation that savings arising from the increased credit information shall translate to lower cost of credit. In turn, more Kenyans will be able to access credit from banks. As you all know, the Monetary Policy Committee’s (MPC’s) efforts since September 2009 to signal to the market the need to expand credit to the private sector at affordable interest rates has not yielded the desired results. Banks have continuously cited structural rigidities as impeding their wish to lower interest rates. With the launch of credit information sharing, we believe it signals the seriousness with which their concerns are being addressed. Banks should henceforth pass the accruing benefits to the Kenyan public through appropriate reductions in the cost of credit. Ladies and Gentlemen: The current level of interest rates is a combination of costs (like information search costs); risk premium most of it unrealized goes to profits; our legal system with delays and lack of clear enforcement of contracts; and of course banks’ profit margin. High interest rates increase the level of default risks. With good credit track records, the risk premiums and search costs imposed on customers will ideally shrink. In this regard, we expect that credit information sharing will be an incentive for good credit behaviour that will attract competitive pricing of credit facilities. The message to Kenyans is that now more than ever before, there will certainly be benefits accruing from adhering to the contractual terms of loans. Ladies and Gentlemen: In summary, credit information sharing will increase vibrancy in the market for borrowers and lenders. Borrowers will be able to access enhanced facilities at competitive prices, as they grow their credit histories and track records. Conversely credit providers will be able to develop new and competitive products that will tap into previously unserved and underserved market niches with the power of available information. This can only impact positively on the banking sector and the Kenyan economy as a whole. The vibrancy of the credit market implies availability of resources for the productive sectors of the economy to exploit the otherwise moribund opportunities. But we should also not forget it is the end of the road for serial defaulters who took advantage of information search costs and information asymmetry to defraud banks and individuals – including bouncing cheques for lack of funds. Having said all that – Ladies and Gentlemen: Let me now take this opportunity to thank our development partners and donors, in particular, the Financial and Legal Sector Technical Assistance Project (FLSTAP), Financial Sector Deepening (FSD) Kenya and the International Finance Corporation (IFC), for their unwavering support over the more than 4 years we have committed our efforts to developing an appropriate credit reporting mechanism for Kenya. I would also wish to recognise the efforts put forward by the market players led by KBA who unreservedly partnered with CBK in developing the regulatory framework and in hosting the Kenya Credit Information Sharing Initiative (KCISI) which has put in place the modalities of operationalising the initiative. I urge all banks to support the ongoing pilot run by KCISI aimed at ensuring that all banks are fully prepared to as seamlessly as possible participate in the sharing of their credit information. The ability of all banks to participate in the initiative is the only way they will reap maximum benefits. The project manager and his team at the KCISI have assured me that they are ready and available to assist all banks to ensure compliance. Ladies and Gentlemen: The role of easily accessible and affordable credit in economic development need not be overemphasized. However, most banks finance their credit with short term deposits which constrains their credit structures to mainly short term. This is even more punishing because the overdraft facilities for working capital are also short-term and very costly. We thought with a vibrant bond market, this traditional mismatch would go away! In an effort to address the mismatch, a Technical Committee has been formed by the CBK to look at proposals for Development Banking Products or development loans with longer tenors than the current term loans in commercial banks. Supply of long term funds will support this line of development. The key target markets for the Development Banking Products are the SMEs with huge growth potential. To further address the structural rigidities in pricing of credit, CBK will later in March 2010 launch a study report on collateral system and associated costs in Kenya. The study, jointly commissioned by KBA, CBK and FSD Kenya, is aimed at establishing the current status on creation, perfection and enforcement of collateral in Kenya. Recommendations to overcoming any existing obstacles are expected to be detailed in the study report. Ladies and Gentlemen: As I draw to a close, I would like to assure you that the CBK in collaboration with the Government and the market players will enhance its efforts in addressing other structural rigidities that contribute to market inefficiencies – for this reason, we would also like to hear from the market as well – to take stock of developments as well as other emerging constraints. Ladies and Gentlemen: CBK believes that the banking sector credit information sharing initiative should serve as a model for other credit and utilities providers. CBK will engage other players to ensure that we move with speed to rope in other financial and non financial credit providers. To this end the Microfinance Act was amended vide the Finance Act, 2009 to permit credit information sharing. Inclusion of all credit providers and utility service providers will allow the full benefits of credit information sharing to permeate through the whole economy. Ladies and Gentlemen: It now remains for me to wish CRB Africa all the best as they commence their operations. We do believe that the licensing of CRB Africa and other CRBs in future will go a long way in positively altering the Kenyan banking sector landscape. We want to build strong institutions in the financial sector and information capital is one of the pillars of a strong institution. As I have emphasized, strong institutions define the appropriate incentives (punishments) that encourage prudent behavior. With these few remarks, ladies and gentlemen, it is now my honour and pleasure to declare CRB Africa officially launched. Thank you.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, on the occasion of a public lecture, Kenyatta University, Nairobi, 16 March 2010.
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Njuguna Ndung’u: East African integration as a solution to economic growth and employment generation Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, on the occasion of a public lecture, Kenyatta University, Nairobi, 16 March 2010. * * * The Chairman of Council; The Vice-Chancellor; Deputy Vice-Chancellors; Members of the entire University Community; Distinguished Guests; Ladies and Gentlemen: It is a pleasure and honour for me to address this distinguished audience on a very topical and timely issue of EAC integration as a solution to economic growth and employment generation for Kenya and the EAC region. I wish to focus my talk on domestic and regional policy initiatives and how they impact on growth, and more specifically on the employment situation in Kenya. May I start by pointing out that unemployment reflects the inability of economic activity to absorb labour or human resource at different levels. When we talk of economic activity, we mean growth. It allows economic opportunities to emerge. The most important one; investment opportunities that increase the demand for human capital. So employment is a derived demand, from the demands on economic activity and increased investment. But how does regional integration improve economic activity (growth) for member countries and so increase labour absorption – employment? This is the question we need to focus our attention on. Let me try some quick avenues: 1. EAC will provide a wider market – this will induce firms’ production expansion in size and product lines – to satisfy a wider market. 2. A larger market requires a larger investment outlay. 3. A larger market diversifies the sources of income flows. 4. Financial services to cover the region will have to adjust to a higher platform: for instance, Kenyan banks are currently expanding to the region in a significant way. The same applies to a number of other sectors such as retail services as evident with the expansion of Nakumatt and Uchumi retail shops to the region. 5. Larger demands for regional infrastructure to facilitate trade and production. The list can be long and depends on where one starts, but at the end, labour demand is derived demand from all of these economic activities. To develop this topic on Kenya, I wish to develop three arguments on Kenya’s case: First, the policy solutions, their evolution and shocks; It is often good to start from a perspective that policies, once implemented, will work and even when shocks hit the economy, the economy will return to its potential. How long it takes to return to its potential is determined by how pervasive and persistent shocks were. Having said that, the blue print of growth and employment creation was laid out by the NARC Government – “Economic Recovery Strategy for Wealth and Employment Creation” which covered the period 2003–2007. This bore fruit and the economy picked up from a low of 0.5 percent annual growth in 2002 to 6.3 percent in 2006 to 7.1 percent in 2007. This saw the number of new jobs created reaching 506.5 thousand, 488.4 thousand, 485.5 thousand, 467.3 thousand in 2004, 2005, 2006 and 2007 respectively. The results of this blue print of policy paradigm show that success will always generate success. Once policies are followed to the paper, they will generate the desired results. But then external and internal shocks hit the economy in 2008 stepped in. However, the economy is on the recovery path and it was expected to grow by about 2.1 percent in 2009 and at between 3 and 4.5 percent in 2010 and by over 5 percent in subsequent years. It is important perhaps to explain why in times of shocks, growth, investment and even economic decisions are affected and even affect other outcomes like consumption and employment. Three examples include: 1. At the individual level optimizing welfare under uncertainty. 2. Irreversibility of fixed investment decisions. 3. Informal sector expansion as a disequilibrium queuing model of employment. These are short-run and should not condemn us to a low equilibrium trap. Second, the EAC Common Market and its potential for employment. In general, most countries in Africa are forming regional economic integration arrangements in order to; secure access to larger markets and enhance trade flows and in the process attract the much needed foreign direct investments; lower trade costs among neighbours; leverage or lock in domestic reforms; create a framework for regional cooperation and resource pooling; increase their bargaining power and political cohesion. Economic integration has the potential for economic growth; to create wealth; improve labour and social conditions and result in a better division of labour between countries based on comparative advantage. Exploiting relative comparative advantage of each integrating member country enhances the region’s efficiency in production, increasing output and boosting economic growth of each member country. Regional integration, uniformity of policy and common goals will act as an agency of restraint and cushion the external shocks in some cases. The EAC brings together nationals of five countries namely, Kenya, Tanzania, Uganda, Rwanda and Burundi. In 2008, the five countries had a combined population of 126.6 million people and a nominal GDP of USD73 billion (based on EAC Facts and Figures Report, 2009). In the same year, Kenya’s GDP stood at USD26.9 billion, that is 37 percent of the EAC total. It is the dominant economy in the bloc. This enlarged market means potential for increased free trade among members. Free trade is expected to lead to rapid expansion of trade and output, which in turn is expected to lead to demand for further investment, employment and GDP growth. These gains result from the dynamic effects of a Common Market, which have been shown to overshadow the static effects, that is, trade creation, trade diversion and terms of trade effects. The dynamic effects, which are cumulative in nature lead to growth. Indeed, the dynamic effects of a Common Market are often described as the long-run consequences for the economic growth of member countries as a consequence of increased market size and exploitation of economies of scale, increased competition, learning by doing and increased investment. Also, the stronger the potential economies of scale are, and the more rapid the autonomous productivity advantages, the more likely the economic integration will lead to growth. Thus, the contribution of the EAC Common Market to economic growth and employment will be greater if the economies of scale are possible by increased market size, takes place pari passu with learning by doing. However, higher levels of economic integration that would ensure such benefits are realized require heavy infrastructural investments in the region. With this realization, the EAC Development Strategy sets out the priority programmes for the region focusing on among others, cooperation in infrastructure development. An efficient infrastructure development mainly for EAC in terms of roads and railway interconnectivity has the potential to increase from 3.7 million tonnes in 2007 to over 16 million tonnes by 2030, at an annual rate of growth of 6.7 percent, according to a study on the EAC Railways Master Plan. Current EAC efforts to develop regional infrastructures are complemented at the continental level by such initiatives as the Infrastructure Consortium for Africa (ICA), established in 2005 and mandated to support and promote increased investment in infrastructure in Africa from both public and private sources. In addition, with the implementation of the EAC Common Market Protocol, regional infrastructural projects will be well defined. Ladies and Gentlemen, it is worth noting that the overriding rationale for regional integration is development, with all the benefits that come with it. Theoretically, integration fosters growth through different channels such as increasing innovation through economies of scale and through technological spillovers and elimination of replication in research and development. Empirically, integration gives access to a larger market, more stock of technology and knowledge and therefore, more innovations and growth. Furthermore, expanded markets and increased productivity following integration, triggers increasing returns in the research and development sectors due to the implied scale effects. All these channels have important implications on employment generation and economic growth for the integrating economies. The overriding objective of the EAC Common Market is to widen and deepen cooperation among partner states in both economic and social fields for the benefit of the citizens of the member states. This is beyond what literature terms as “beg thy neighbour” effects. The Common Market Protocol provides for the free movement of goods, persons, labour, services and capital within the region as well as the right of establishment and the right of residence. The Common Market will unlock many other benefits among East African citizens. Currently, efforts are underway to move to the next level of economic integration, after the completion of a Study by the European Central Bank consultants on the East African Monetary Union (EAMU). The study has explored among other things the current preparedness for a Monetary Union, institutional frameworks and structure for an EAMU, design of a protocol on the EAMU to be negotiated by partner states, and proposals for monitoring and enforcing macroeconomic convergence in the region. Ladies and Gentlemen, all these integration endeavours will create employment opportunities. I will emphasize on employment opportunities because it is a dynamic concept that focuses on gainful employment and space to utilize your own relative comparative advantage. It is upon you to position yourselves to take advantage of these new opportunities. Our higher institutions of learning have the responsibility of training an internationally competitive labour force to enable Kenya take full advantage of these regional initiatives. The investment opportunities that come with it will allow the appropriate signals of skill requirement. Finally, the Vision 2030 and unemployment in Kenya: The Vision 2030 aims at transforming Kenya into a newly-industrialised, middle income country: what does it mean to solve the unemployment problem of Kenya? To solve unemployment, we need a long-run vision for growth and investment supported by short-run policies like macroeconomic policies, specifically: fiscal and monetary policy and also trade policies. a) Fiscal policy and fiscal stimulus The economy is just emerging from the devastating consequence of drought and the global financial crisis. The pervasiveness and persistence of these shocks required that the government develops a fiscal stimulus. It is important to understand how fiscal stimulus works in an economy like ours: 1. Recognizes support and protection for the wage good through targeted public investment and public works – Kazi Kwa Vijana. 2. A shilling spent in rural Kenya has a higher multiplier effect in the economy. 3. Support local industries – via government expenditure and higher domestic consumption – preserve jobs – prevent layoffs. 4. Increase public investments that are complementary to private investments – in that they enhance profitability of private investments. 5. Finally, in this way the government crowds-in private sector but not crowd-out. b) Monetary policy But perhaps one may ask how has the monetary policy reacted to the crisis and how does it work to support economic activity? Monetary policy works to control the level of money supply consistent with economic activity. Several instruments: Central Bank Rate (CBR) – as a signalling rate of the stance of monetary policy. It has been progressively reduced from a high of 9 percent in August 2008 to the current level of 7 percent. Lowering of the CBR signalled the intention of the Central Bank for a low interest rate regime to encourage credit extension to the private sector and so investment to support growth. Cash Ratio Requirement (CRR) – in order to avail liquidity to commercial banks and release more resources for financial intermediation, the Bank has lowered the CRR from 6 percent to 5 percent in December 2008 and further to 4.5 percent in June 2009. Liquidity management tools: To further enhance liquidity management in the banking system, the Bank has instituted several reforms to introduce new instruments like horizontal repo, vertical repo with fixed tenors. Financial development: In general an efficient and developed financial system is important to collect and collate savings from micro-savers to investors. Second, an effective monetary policy will depend on an efficient and developed financial system. In concluding my remarks, let me emphasize that employment is a function of economic activity. Sustained economic growth is good for employment. One major solution for sustained growth is a wider market for trade and investment. EAC provides just that. But public investment infusion required to support the private sector investment is immense. Public investment especially in infrastructure will reduce transaction costs for the private sector and allow profitable regional trade. To date 43% of the total Kenyan exports of goods and services go to the EAC region. These exports are mostly manufactured exports. There is scope for more within the EAC and locational advantages. This is what we want to strive for in EAC and these are the positive development agenda EAC presents to Kenya and East African countries. Thank you for your attention.
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Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 12th Seminar by African Economic Research Consortium, Mombasa, 22 March 2010.
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Njuguna Ndung’u: Bank regulation reforms in Africa: enhancing bank competition and intermediation efficiency Keynote address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 12th Seminar by African Economic Research Consortium, Mombasa, 22 March 2010. * * * Prof. William Lyakurwa, Executive Director, African Economic Research Consortium; Senior Policymakers here present; Distinguished Guests; Ladies and Gentlemen; I am delighted to be with all of you here in Mombasa and to speak on Bank Regulatory Reforms in Africa: Enhancing Bank Competition and Intermediation. But before I make my remarks, let me take this opportunity to thank the African Economic Research Consortium (AERC) for their invitation to give the keynote address at this seminar. This is indeed a timely topic as we continue to assess the effects of the global financial crisis and find long term solutions to mitigate and prevent recurrence. I am informed that approximately 70 senior policymakers from over 20 countries in Sub-Saharan Africa (SSA) are in attendance. This signals the importance of this seminar and the policy spin-offs it will generate. At the outset, Ladies and Gentlemen, I would like to recognize the important role that AERC has played in strengthening local capacity for managing economies within Sub Saharan Africa. The Consortium has contributed to advanced policy research and graduate training in economics. Most institutions of policy in Sub-Saharan Africa today are led by AERC alumni. I am happy to be part of this group myself. Ladies and Gentlemen; this seminar is taking place at a time when countries in Africa are taking stock of the second and third round effects of the global financial crisis. You will agree with me that the crisis which initially hit African countries with stronger financial linkages to international capital markets; significant trade relations with the Western world and rich natural resource countries set the stage for challenging times in policy making and implementation. Africa’s prospects in the post-crisis period are contingent on the behaviour of policymakers. Indeed, there is need for better regulation that can readily identify emerging vulnerabilities; properly price risks; and strengthen incentives for prudent behaviour. It is tempting after the crisis to call for more regulation – but we should emphasize better regulation. Second, we should emphasize building strong institutions. Globally, the remedial actions taken by governments to deal with the crisis have borne fruit and the green shoots of recovery are beginning to sprout. For us here in Kenya, we remain committed to fostering a stable market-based financial system as mandated by law. An efficient financial system collects and collates deposits from micro-savers and channels them to investors. This is the intermediation process. This process allows economic agents to evaluate the risks and prices in the market and align their investment portfolio and investment gestation. The Kenyan case is both interesting as well as a policy strategy. It reflects a case of segmented markets. But the cost of credit and interest rates spread remains high. The spread is a major challenge in the banking sector because it acts as an impediment to expansion of credit and development of financial intermediation and signals inefficiency in the sector. The challenge for a policymaker is to develop a financial sector that answers to the challenges of the economy. In order to address market inefficiencies, the Central Bank and other stakeholders have undertaken significant reforms for the banking sector. These reforms include the operationalisation of the credit reference bureaus, payment systems improvements, opening of new currency centres, automation of trading system for treasury bonds, and the activation of horizontal repos. I will spend the next few minutes to highlight these initiatives. Operationalisation of credit referencing mechanism: The Banking (Credit Reference Bureau) Regulations were operationalised on 2nd February 2009. This will facilitate the sharing of credit information by institutions licensed under the Banking Act. This link will allow the industry to build information capital that is critical in the credit market. It will also enhance access to credit by SMEs and individuals that have been constrained by lack of physical collateral. Further, the Banking Sector will be able to address the problem of non-performing loans at the origination point as credit history of applicants will be taken into account during the credit appraisal process. Licensing of deposit taking microfinance institutions: The Microfinance Act was operationalised effective May 2008. Currently, one institution has been licensed and eight applications for license are being processed. With the unique business models of microfinance institutions mainly targeted at the lower end of the market, bringing them under the purview of the Central Bank will not only give them a legal basis in dealing with depositors but will also boost access to formal financial services by the populace. Deposit Taking Microfinance Institutions are free to be community-based or nationwide. The national payments system sits at the centre of the financial system. It is imperative that payments systems are secure and efficient. The Central Bank continues with its initiatives to modernize the national payments system. Accordingly, from 1 October 2009, value capping was effected with all payments above Kshs.1 million being made through the Real Time Gross Settlement System (RTGS). This initiative enhanced the security and efficiency of high value payments. The celebrated MPESA falls under this category of reforms. As we have seen this market unfolding, MPESA account holders have soared to 9 million, total transactions surpassed Ksh.48 billion a month (or averaging Ksh.1.6 billion a day) and agents increased to 17,000 in the last 3 years. Ladies and Gentlemen; on the monetary policy front, the CBK has observed that despite signalling efforts by the Monetary Policy Committee to bring down the rates of interest by lowering the Central Bank Rate (CBR), banks have not responded accordingly. Further, the failure of the banking system to extend the maturity of their loan products is a consequence of the characteristic nature of their deposits which are largely short term, but also their assessment and pricing of risk. To support economic development, there is need for the development of banking products that support long term lending. These development banking products will play a significant role in influencing a downward trend in commercial banks lending rates. The Central Bank will therefore explore how development banking products can be introduced into the market to enhance the monetary policy transmission mechanism and lengthen the maturity profile of commercial bank term loans. Developments in the bond market: The Central Bank has successfully raised funds for infrastructure development for the Government through infrastructure bonds. These infrastructure bonds have not only facilitated financing of the Government’s infrastructure program but also set the pace for the issuance of similar bonds by corporate entities such as KENGEN and Safaricom. This, coupled with automated trading in the Nairobi Stock Exchange will be important for a vibrant bond market. In addition, to deepen and widen the bond market, the Central Bank implemented the following measures: Issuance of benchmark bonds: The Bank together with Market Leaders Forum adopted 2, 5, 10, 15 and 20 year maturities as benchmark bonds. This move has not only firmed up the yield curve, but has improved pricing, reflected through improved secondary market trading. Reopening of benchmark bonds: This has increased trading activities in the secondary market. The shape and position of the yield: The vibrant bond market has led to a downward shift in the Yield Curve with an upward gentle slope reflecting stability. This has created reliable pricing benchmark for corporates, many of who raised required capital via issuance of corporate bonds in 2009/10. It is also a useful tool in pricing credit facilities as it signals the direction of interest rates. You will recall that the Central Bank of Kenya, the Nairobi Stock Exchange and the Capital Markets Authority collaborated in the automation of trading of Treasury Bonds through the NSE. The main objective of this initiative was to make bonds trading secure, efficient and to create a vibrant market. The expected improvement in market activity will also improve market liquidity and encourage more investors to participate in the bond market. Operationalisation of the horizontal repos: We have introduced the Interbank Master Repurchase Agreement otherwise known as the Horizontal repo which is aimed at deepening the capital and money markets and enhancing the intermediation process. I am happy to note that the horizontal repo as a tool of redistributing liquidity in the market has also provided a useful barometer on the status of liquidity in the banking sector. The horizontal repo is an additional facility for commercial banks to use alongside the vertical repo which is an instrument between commercial banks and CBK. Other initiatives: The changing market dynamics in the Kenyan Banking Sector has necessitated the Central Bank to reinvent itself and become proactive in detecting opportunities and threats to financial sector stability. With a view to not only enhance intermediation and competitiveness of the banking sector but also to increase efficiency and access, the Central Bank has been in the forefront in encouraging various financial services providers e.g. mobile phone money transfer providers such as M-PESA and ZAP SACCOs and Agency Banking models Shariah compliant banking products – we have seen the introduction of two Shariah compliant banks and growing interest in a number of institutions seeking to offer Shariah compliant products. Ladies and Gentlemen; we have now started to realize the dividends of the reforms we have undertaken in the financial sector. Kenya now has a healthy, sound and strong banking system. The size of the banking system has been enhanced both in terms of deposits mobilised, credit growth and competition. Specifically: Deposit accounts have increased from 2.6 million (end 2005) to 8.4 million (end 2009) and deposits have doubled from Ksh.545 billion (US$7.2 billion) to Ksh.1,065 billion (US$14 billion) in the same period. Lowering barriers to entry – via removal of minimum balances has supported financial reach. Banks have taken their services to the customers due to increasing competition and improvements in the delivery channels. Banks are opening and re-opening branches in areas with none or few branches. Efficiency is achieved when there are strong institutions with requisite capacity to satisfy market needs while complying with statutory and prudential requirements. Ladies and Gentlemen: One of the main challenges of monetary policy has been the presence of currency outside banks. In March 2008, it was Ksh.9 billion above the Central Bank target. However, in March 2010 it was Ksh.4.9 billion below CBK target as a result of banks increased coverage of rural and low income areas. Ladies and Gentlemen; Financial sector reforms are far from being accomplished. Given the changing dynamics of the economy and its growing complexities, the financial industry has to remain responsive and supportive of the broader economic ambitions and agenda. All the major players and stakeholders in the banking system will have to strive for continuity, broadening and deepening of reforms; build and sustain the already implemented reforms and fill the remaining gaps. The growing competition along with increasingly diversified services both across the regions and sectors, as well as improved access to customer-base on the back of progressive reliance on technology, are the harbingers of the changing and efficient intermediation role of banks in the days ahead. The Central Bank is committed to reforms in the banking industry towards enhanced competitiveness. In line with this, the Central Bank has earmarked amendments to the Banking Act and Microfinance Act going forward. The amendments to the Banking Act and Microfinance Act are expected to further enhance efficiency and competitiveness of our financial sector. CBK in collaboration with the Government and the market players will enhance its efforts in addressing other structural rigidities that contribute to market inefficiencies to take stock of developments as well as other emerging constraints. Before I conclude, Ladies and Gentlemen, let me once again take this opportunity to reiterate the critical role of the financial sector in Africa’s economic development. This potential can only be realized when African policymakers implement reforms to remove binding constraints in the sector. I am sure that in this gathering we have the capacity to identify those constraints to unleash Africa’s potential. Finally, I do hope that you will find time in your busy schedules to enjoy our world renown beaches. I wish you fruitful deliberations. Thank you!
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at an Interactive Forum on "Growing Agriculture through Finance", at the Kenya School of Monetary Studies, Nairobi, 17 March 2010.
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Njuguna Ndung’u: Growing agriculture through finance Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at an Interactive Forum on “Growing Agriculture through Finance”, at the Kenya School of Monetary Studies, Nairobi, 17 March 2010. * * * Deputy Prime Minister & Minister for Finance, Hon. Uhuru Kenyatta; Minister for Agriculture, Hon. William Ruto; US Government Representative – Deputy Chief of Mission, Mr. Lee A Brudvig; CEOs of Commercial Banks Present; Resource Persons; Distinguished Participants; Ladies and Gentlemen: It gives me great pleasure to be with you this morning, and to welcome you all as we deliberate and exchange views on this crucial matter of growing Agriculture through Finance. The Agricultural sector is the livelihood of many in Kenya. The sector contributes directly about 24% of GDP, 65% of the country’s export earnings and employs about 80% of Kenya’s labour force, directly and indirectly. But more important, food security is the most critical and cuts across all other developmental objectives. The policy paradigm that supports this sector is indeed the cornerstone of our development blueprint. It is tempting to say that financing Agriculture will rely on the financial sector in totality. The subject is broader than this and this is what we want to generate via dialogue this morning. But what is not in doubt in financing Agriculture is the presence of long-term funds as well as appropriate avenues to develop crop insurance. Small-holder farmers have done well in increasing quality production and adoption of high yielding varieties, but have done poorly where they are not supported by cooperatives to market and create buffers for them. That is, they have been failed by lack of supporting agricultural infrastructure. A policy to support Agricultural infrastructure should focus on: – Financing production – crop insurance/crop finance – Financing processing – Investing in storage – Investing in distribution and marketing networks – Complemented with an appropriate credit policy. In this way, the farmer can participate in the market fully. This is what will ensure food security and stability of domestic prices – food is now accounting for 36% of the Consumer Price Index (CPI) basket – an important tool to fight national inflation. To that extent, increased agricultural productivity, particularly in food helps reduce food inflationary pressure that also feeds to the national inflation. In addition, GDP growth in this country is determined by growth in this sector. From the Central Bank side, our support in this initiative is important. The Central Bank of Kenya through its capacity building arm – the Kenya School of Monetary Studies (KSMS) intends to develop a certified agricultural finance program in collaboration with COMPETE – USAID. This program will be suitable for agricultural officers as well as credit officers. This is important in developing the critical mass of human capital that fully understands agribusiness, such as agribusiness cycles, risk management practices, farm cash-flows and finance and insurance. This will support farmers and also develop a strong drive to lift the policy paradigm in this area. But the wider scope of monetary policy support is not in doubt. Finally, Distinguished Guests, Ladies and Gentlemen, I would like to conclude my brief remarks by wishing all of you fruitful deliberations this morning. Thank you very much for your kind attention.
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Speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the African Women's Economic Summit, Nairobi, 18-20 March 2010.
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Njuguna Ndung’u: Investing differently in women Speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the African Women’s Economic Summit, Nairobi, 18–20 March 2010. * * * The Right Hon. Raila Odinga, Prime Minister of the Republic of Kenya; Hon. Uhuru Kenyatta, Deputy Prime Minister and Minister for Finance of the Republic of Kenya; Mrs. Graca Machel, Founder, New Faces, New Voices Network; Dr. Donald Kaberuka, President, African Development Bank; Distinguished Guests; Ladies and Gentlemen: First, Rt. Hon. Prime Minister, may I take this opportunity to thank you most sincerely for finding time from your busy schedule to grace this important Forum whose theme is Investing Differently in Women. Your presence demonstrates the seriousness with which the Government of Kenya embraces the role of women and participation in the development process and more importantly their role in the financial sector. May I also heartily thank the New Faces, New Voices Network (NFNV), the Founder Madame Graca Machel and the African Development Bank (AfDB) represented by the President, Dr. Donald Kaberuka for choosing to host the inaugural African Women’s Economic Summit (AWES) in Nairobi. This is a great honour to us in Kenya. I also warmly welcome all international delegates represented here including fellow central bankers from the region. The Rt. Hon. Prime Minister, the Central Bank of Kenya is delighted to partner with AfDB and NFVN in this Summit especially when the Central Bank and indeed the Government of Kenya is in the process of promoting more inclusive financial policies. In the recent past, the Government has introduced new institutions to support, shape and deepen the financial sector. Examples include: Licensing and supervision of Deposit Taking Microfinance Institutions; Savings and Credit Co-operatives (SACCOs) and the SACCOs Regulatory Authority; Amendment of the Banking Act to allow Shariah-compliant banking products; Licensing of Credit Reference Bureaus to facilitate credit information sharing; Agent Banking for cost effective financial outreach. Since we have seen commercial bank branch expansion by over 100 branches in three years, deposits have increased from KSh.800 billion on to KSh.1.01 trillion and accounts from 2.4m to 8.4m in the same period. The Rt. Hon. Prime Minister, as we commence deliberations at this important Summit, it is prudent to identify the issues that limit women’s access to financial products and services and explore innovations to expand the access to affordable financial services to women at all income levels. Ladies and Gentlemen, ultimately this Summit offers us the opportunity to identify and propagate key actions that financial sector market players and policy makers need to take to invest differently in women and towards building stronger financial sectors and competitive economies in Africa that are inclusive. We should therefore identify the policy drive expected in this regard and be the agents of the change required towards this end. The Rt. Hon. Prime Minister, with these few remarks, it is now my pleasure and duty to welcome your Rt. Hon. Raila Odinga of the Republic of Kenya to make a few remarks and to welcome you to address this Forum. Rt. Hon. Prime Minister, you have the floor.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Launch of the Study Report on "Costs of collateral in Kenya", Nairobi, 24 March 2010.
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Njuguna Ndung’u: Costs of collateral in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Launch of the Study Report on “Costs of collateral in Kenya”, Nairobi, 24 March 2010. * * * Hon. Uhuru Kenyatta, Deputy Prime Minister and Minister for Finance; Permanent Secretaries, here present; Mr. Martin Oduor Otieno, Chairman, Kenya Bankers Association; Mr. John Wanyela, Chief Executive Officer, Kenya Bankers Association; Mr. David Ferrand, Director, Financial Sector Deepening Trust Kenya; Distinguished Guests; Ladies and Gentlemen: It is with great pleasure that we congregate here this morning to chart the way forward on another avenue of enhancing efficiency in our banking system. This is through changes in the collateral technology in use. But before I make my remarks, allow me to thank the Hon. Deputy Prime Minister and Minister for Finance for agreeing to grace this occasion and deliver a keynote address. Also, allow me to thank KBA and FSD for their tireless effort to deepen the financial sector. Yesterday, we held our Monetary Policy Committee meeting in Mombasa CBK Branch. The first review was a survey on what sustains high interest rates – The response from the market showed two factors; cost of credit and credit risk sustains high interest rates. But what is behind cost of credit and credit risk – perhaps the collateral technology in use. The cost of collateral is being addressed today by this study. Ladies and Gentlemen: Kenyan banks have persistently cited cost of collateral as contributing a significant portion of premium factored in the interest rates they charge. To demystify the assertion, CENTRAL BANK OF KENYA (CBK) and Kenya Bankers Association (KBA) in conjunction with Financial Sector Deepening Trust (FSD) Kenya commissioned a study to review the Kenyan collateral process with a view to determining the costs associated with each step in the process. The consultants were also required to put forward succinct recommendations based on their findings. Evidence seems to show that the three steps of collateral process in Kenya; that is: creation, perfection and enforcement, entail enormous costs and time. Ladies and Gentlemen: The report has brought forward several recommendations. They will be implemented and will result in both cost and time reduction. The implementation of the recommendations touches on several Government agencies, most of which are represented here today. I believe your presence in this occasion goes a long way in showing your readiness to play your part in addressing the constraints noted. The study has indicted the collateral process in Kenya; the collateral process is flawed and as a result it is characterized with high costs. There are more than 20 applicable statutes relating to collateral creation and perfection. This makes the process cumbersome, expensive and complex. It is high time the statutes are looked at to not only ensure uniformity but also simplify the process. Lenders have cited the slow and expensive judicial process as contributing to premiums they factor in their interest rates. A certain and reliable judicial process facilitates quick recovery by lenders when secured facilities are defaulted. Good borrowers will thus not be penalized for a mistake that is not of their making. In addition, there are many manual and uncoordinated registries. Ladies and Gentlemen: What are the other complementing initiatives to this study: Going forward the following two events will shape the outcome of the recommendations of the report. First, the licensing of credit reference bureaus has introduced a substitute to physical collateral, which is information capital and reputational capital as well as appropriate risk pricing. CRB Africa was launched early this month. It is expected that the credit information sharing mechanism will be fully operational by July this year and as a result we expect to subsequently see a reduction in costs of credit as banks pass the resultant benefits to their customers. Similarly, it is high time that Kenyans henceforth adhere to their credit contract terms in order to build favourable credit track records for use as information collateral. Second, the CBK and KBA have formed a committee to drive forward the recommendations of the study. The formation of the committee reflects the importance attached to the study by both KBA and CBK. The implementation of the recommendations will not only be beneficial to the financial sector but the entire economy. This will happen at three levels: – First, through the supply of required credit in future. – Second, through lengthening the maturity profile of term loans. – Third, the appropriate definition of property rights and certainty in enforcement of contracts will be strong building blocks of a deepened financial sector. It is therefore important and complementing to explore the widening of the membership of the committee to include the various players represented here today. A broad based implementation committee will support the quick execution of the cross cutting recommendations contained in the report. Ladies and Gentlemen: As I conclude let me take this opportunity to thank FSD Kenya, our development partner in several projects aimed at inclusive financial markets in Kenya; Kenya Bankers Association who partnered with us in this study; ShoreBank International and Walker Kontos who authored the report being launched today; and all market players who took part in the study; but more importantly those who came here today to take part in the launch and I am sure they do believe we can achieve the prescribed results. Finally, Ladies and Gentlemen, let me let me take this opportunity to invite our chief guest to address this gathering. Welcome Deputy Prime Minister, Hon. Uhuru Kenyatta.
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Introductory remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the official opening of the Africa-Middle East Microcredit Summit, Nairobi, 7 April 2010.
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Njuguna Ndung’u: Strategies to increase the popularity of microcredits Introductory remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the official opening of the Africa-Middle East Microcredit Summit, Nairobi, 7 April 2010. * * * Your Excellency Hon. Mwai Kibaki, President and Commander-In-Chief of the Armed Forces of the Republic of Kenya; Your Majesty Queen Sofia Margret Victoria Frederica of Spain; Your Royal Highness Princess Maxima of the Netherlands; Hon. Uhuru Kenyatta, Deputy Prime Minister and Minister for Finance of the Republic of Kenya; Prof. Muhammad Yunus, Nobel Peace Laureate and Managing Director of Grameen Bank; Mr. Sam Daley-Harris, Director Microcredit Summit Campaign; Mrs. Lydia Koros, Chairperson, Association of Microfinance Institutions; Delegates, Distinguished Guests and Participants; Ladies and Gentlemen: The Central Bank of Kenya is happy to be part of this very important Summit. So let me extend a warm welcome to all the delegates who have come to this Summit. It is indeed an honour for Kenya to host the 14th Africa-Middle East Microcredit Summit. The Summit will focus on strategies for ensuring that the vast majority of the world’s poorest households can access markets for affordable credit. This Summit comes at an opportune time when the microfinance industry in Kenya is experiencing rapid changes and legislative support following the enactment of the Microfinance Act, 2006 which became operational in May 2008. The major challenge prior to the enactment of the Act had been lack of a specific legal and regulatory framework as well as appropriate regulatory oversight to guide the specific operations of deposit taking microfinance business in Kenya. I should also point out that it was the microfinance practitioners who helped to initiate the process of developing Kenya’s microfinance legal and regulatory framework through a consultative process. Your Excellency; The MFI sector is now transforming to deposit taking institutions. The Central Bank of Kenya has so far issued two licences to Faulu Kenya DTM and Kenya Women Finance Trust DTM to conduct nationwide deposit taking microfinance business. Further, a total of eight applications for deposit taking microfinance licences have been received and are in different stages of review and appraisal. The Central Bank has also approved 34 business names, which is the first step in the licensing process of DTMs. While considerable progress has been made in licensing two DTMs, the Central Bank is concerned at the slow uptake of this new avenue for Microfinance Institutions to be mainstreamed into the financial sector. We are therefore engaging the microfinance industry through its umbrella body the Association of Microfinance Institutions (AMFI). This engagement aims at identifying the bottlenecks for Microfinance Institutions some of which include: Costs associated with roll out of branch networks and ICT infrastructure. Restructuring of shareholding of Microfinance Institutions to comply with shareholding restrictions specified in the Microfinance Act. The Act restricts shareholding by an individual or entity to 25% of the institution’s share capital. MFIs are constituted in various forms including Non Governmental Organisations and Trusts. Under the Act, transforming MFIs are required to be incorporated as limited liability companies registered under the Companies Act. The incorporation process takes considerable time and expense and may deter some MFIs from applying for a DTM license. Anecdotal evidence also seems to suggest a “wait and see” approach by a number of potential deposit taking MFIs as they assess the experience and performance of the pioneer regulated DTMs. The Central Bank would like to take upon itself the task of dislodging the “waiting option” from this sector of the market. The Central Bank of Kenya is currently drawing up proposals for review of the microfinance legal and regulatory framework. I should stress that the Bank will continue to consult with market players as this process moves forward. We therefore, look forward to drawing valuable lessons from this Summit to enhance Kenya’s microfinance legal and regulatory framework. We stand ready to advice, cultivate partnership and only regulate when rules are flouted. With these few remarks, Ladies and Gentlemen, it is now my honour to welcome the Deputy Prime Minister and Minister for Finance, Hon. Uhuru Kenyatta to make some remarks to this Summit and to invite His Excellency the President of the Republic of Kenya to officially open the Africa-Middle East Microcredit Summit. Thank you.
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Introductory remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the second scenario building workshop on "The future of financial service delivery in Kenya", Nairobi, 16 April 2010.
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Njuguna Ndung’u: The future of financial service delivery in Kenya Introductory remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the second scenario building workshop on “The future of financial service delivery in Kenya”, Nairobi, 16 April 2010. * * * Chief Executives of Commercial Banks here present; Distinguished Guests; Colleagues; Ladies and Gentlemen; I am honoured this morning to be addressing this distinguished gathering. Allow me therefore at the outset to thank you for accepting our invitation to attend this second scenarios building workshop on the future of financial service delivery in Kenya. I am deeply convinced that our deliberations today will go a long way in shaping the future of our financial industry as was the case with the first workshop held last year. Ladies and Gentlemen: This year, Nairobi Scenario II Workshop comes at a time when a number of countries around the world are increasingly pursuing the development of branchless banking policy frameworks. This indicates branchless banking is receiving increasing international attention and capturing the imagination of a wide array of players and international bodies. In particular, as part of its commitment to financial inclusion, the G-20 has established the Access Through Innovation (ATI) subgroup of the Financial Inclusion Experts Group. Ladies and Gentlemen: Kenya’s financial inclusion agenda is premised on its current development blueprint, Vision 2030. Under this Vision, Kenya aspires to be a middle income country by 2030 and the financial sector is expected to mobilize substantial financial resources required to realize this Vision. In addition, savings rate are targeted to increase to 32.0 percent within the period. For this to happen, financial reach, inclusion, and deepening to increase financial instruments will need to take place. The Central Bank on its part will have to foster stability and accessibility of the Kenyan financial system. In this regard, we will continuously implement reforms to: Strengthen the banking sector through an enhanced legal and regulatory framework including scaling up minimum capital requirements. Address structural rigidities that impact adversely on the cost of financial services. Some of these we need to learn from you and then we can improve the environment for you. Enhance efficiency and safety of payment and settlement systems through use of innovative internet and mobile based solutions. As it were, reliable and efficient payment systems increase both the effectiveness of monetary policy and minimize payment system risks. Ladies and Gentlemen: In order to accomplish the tenets of branchless banking across the globe, we need to unanimously come up with minimum benchmarks to guide its application and regulation. These may include: the need for creation of enabling environments for private sector initiatives to thrive; continuous private-public sector dialogue to facilitate formulation of innovative policy solutions; and balancing access with stability to safeguard integrity and stability of the financial system. Further, today’s scenario building process will benefit a lot from the lessons of the four scenarios of the Scenario Building 2020 by CGAP and DFID. These are: (a) Existence of untapped opportunities in the environment that can be exploited through innovation. (b) The fact that opportunities are available everywhere including post-conflict countries which can potentially be exploited through branchless banking. (c) Successful branchless banking regimes may be vulnerable to disruptions like court decisions and other underlying forces which make branch-intensive strategies unviable. However, data-enabled phones may present the best strategy to mitigate such risks. (d) Successful transition to a cashless society may present a big challenge to successful mobile phone money transfer service providers, regulators, and the economy. Ladies and Gentlemen: I would like to reiterate that while the Central Bank welcomes innovative products, it evaluates all such products to ensure safety and efficiency concerns are adequately addressed. The Central Bank has the necessary capacity to properly evaluate and appraise technology driven financial services to ensure they meet international standards and provide comprehensive consumer protection. Finally, may I assure you that the Central Bank will always strive to provide an enabling legal and regulatory framework to encourage innovations by all players in our financial sector in order to enhance access to financial services. In this regard, we will continue to work with stakeholders as we are doing today to put in place an enabling environment for business to thrive. With these remarks, Ladies and Gentlemen, it is now my pleasant duty to declare this workshop open.
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Opening remarks by Prof Njuguna S Ndung'u, Governor of the Central Bank of Kenya, at the 3rd joint CMA/CBK/RBA/IRA Board Members seminar, Mombasa, 25 March 2010.
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Njuguna S Ndung’u: Collaboration among domestic financial sector regulators Opening remarks by Prof Njuguna S Ndung’u, Governor of the Central Bank of Kenya, at the 3rd joint CMA/CBK/RBA/IRA Board Members seminar, Mombasa, 25 March 2010. * * * Board Members; Colleagues; Ladies and Gentlemen: 1. I am delighted and honoured to be here this evening at the commencement of this important retreat. 2. To start with, let me extend my congratulations to the Board Members and Management of Insurance Regulatory Authority (IRA) for hosting the 3rd Joint Retreat for Board Members of Domestic Financial Sector Regulators. 3. Allow me to take this opportunity and touch briefly on the achievements of CBK since we last met in Naivasha in July 2009. 4. The Monetary Policy Committee (MPC) for instance, has since September 2009 been implementing decisions aimed at signaling to the market the need to expand credit to the private sector at affordable interest rates. In an effort to make credit cost effective we have several policy initiatives: Agent banking: Central Bank has been pursuing a policy of broadening financial inclusion to the majority of Kenyans at lower costs through innovations. To this end, The Finance Act, 2009 amended the Banking Act to enable banks to use third party agents. This will enable them to leverage on additional cost effective distribution channels to offer financial services. Similarly, the model will enable banks to enhance delivery of financial services by use of third parties that include some of the entities that are regulated by the other domestic regulators. Credit Reference Bureau: To improve the living standards of the majority of Kenyans, higher economic growth is required. Economic growth cannot be achieved without enhanced private sector lending. In this regard and to ensure access to credit at affordable rates, a robust credit information mechanism is key. To this end, CBK licensed the first ever Credit Reference Bureau which has already commenced operations. It is our hope that this move will positively alter the Kenyan banking sector landscape and facilitate the lowering of the cost of credit. It is our belief that the experience from the banking sector credit information sharing initiative will sooner rather than later be expanded to include other lenders and utility service providers to hasten the elimination of information asymmetry and hence promote efficiency in the market. Cost of collateral: Institutions have on several occasions cited the cost of collateral as one of the major components contributing to high interest rates. To gain an understanding of the underlying factors in the collateral process, Central Bank, Kenya Bankers Association (KBA) and Financial Sector Deepening (FSD) Kenya commissioned a study aimed at reviewing the cost associated with collateral in the credit granting process. The study brought forward some invaluable insights on the intricacies surrounding the collateral process and recommendations which when implemented will result in both cost and time reduction. Provision of long-term finance: A small committee to look into development banking products was formed in February 2010 to explore avenues through which development banking products, also referred to as “Long-Term Financing Products”, can be introduced into the market. This was necessitated by several reasons, among them; the commercial banks credit market structure that focuses more on short term loan maturities; the moribund development financial institutions; the opening opportunities with flow of international funds that are intermediated by local institutions; and the need to develop the bonds market. The basic question: how can we lengthen the maturity profile of term loans to 5–10 years for SMEs? Interactions with market players: Since September 2009, the MPC has been holding regular meetings with the Chief Executive Officers of commercial banks to brief them on the background to its decisions in the bi-monthly meetings. The meetings are part of a wider strategy to enhance the transmission of monetary policy decisions to the real sector through feedback, sensitization of the market on the activities of the MPC, as well as engaging banks on the need to lower the cost of credit in order to support economic growth. 5. On the market front, the Central Bank of Kenya, the Capital Markets Authority and the Nairobi Stock Exchange undertook significant reforms in the domestic bond market. These reforms included introduction of an Automated Trading System aimed at enhancing the safety and efficiency in the processing of secondary trading of government securities as well as corporate bonds in the market. The move is also expected to improve market liquidity thereby encouraging more investors to participate in the bond market. This development fits in very well with the aspirations of the capital markets development as envisaged in Vision 2030. 6. We have accomplished much since we last met, but a lot more remains to be done to expand the depth and breadth of the financial sector. I am sure that together as the financial sector regulators we shall seek the necessary synergies to foster a safe, sound, efficient and inclusive financial system. But more demands as the EAC Monetary Union shapes up will be coming to us. 7. Being cognisant of the onerous task ahead of us, I shall not extend my remarks any further. I look forward to the fruitful deliberations which I am sure we shall have. Thank you for your attention.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 2nd Gulf African Bank Annual East and Central Africa Islamic conference, Nairobi, 3-4 May 2010.
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Njuguna Ndung’u: Islamic finance – the African experience Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 2nd Gulf African Bank Annual East & Central Africa Islamic conference, Nairobi, 3–4 May 2010. * * * Suleiman Shahbal, Chairman, Gulf African Bank Ltd; Najmul Hassan, Chief Executive Officer, Gulf African Bank Ltd; Board Members; Distinguished Guests; Ladies and Gentlemen: I am delighted and honoured to be here this morning to preside over the opening ceremony of this important conference. To start with, let me extend a very warm welcome to all of you who are attending this 2nd Gulf African Bank Annual East and Central Africa Conference titled “Islamic Finance: The African Experience”. Allow me in particular to extend a special hand of welcome to the international participants “Karibuni Kenya”. I also wish to convey the apologies of the Governor, Professor Njuguna Ndung’u, who would have wished to personally preside over this occasion but had to attend to other engagements. I will make some remarks that reflect his strong views on Islamic finance and extend his best wishes for fruitful deliberations at the conference. The conference is important as it offer opportunities for the banking and financial sector fraternity to meet and discuss emerging industry developments, to learn from their accomplishments and challenges and to share views on sound practices. Islamic Finance is so far the fastest growing segment in the global financial industry. Despite the global financial crisis, Islamic finance has demonstrated strong growth with new areas of business such as mutual funds and Takaful industry attracting a lot of attention. We need to understand this business model that will support our relative comparative advantage in the EAC region. Kenya was the first country in the East and Central African region to introduce Islamic banking. In this regard, two banks were licensed in the last two years to exclusively offer Shariah-compliant products with many other conventional banks establishing a window specifically for Shariah-compliant products. With this, I am proud to inform this gathering that the concept of shariah complaint banking has emerged as an alternative vehicle for mobilisation and supply of finance. For example, the two banks have already contributed in development agenda of the country by participating in Shariah-compliant (Sukuks) components of infrastructure bonds issued by the Central Bank of Kenya on behalf of the Government of Kenya. We are still waiting for “Structured Sukuk” to cover the bonds and T-Bills market. However, although the concept of Islamic Finance has generated a lot of interest and overwhelming support from both muslim and non-muslim population in Kenya, as a regulator, we have faced certain challenges which I wish to share with this gathering. Key among these are: a) Islamic Banking prohibits interest and allows profit sharing. However, most of our prudential returns and disclosure report formats were tailored for institutions which have the element of interest in their financials. We have therefore tailored our returns and disclosures formats to cater for the new market niche; b) The Banking Act prohibits wholesale trading and restrict holding land and buildings while Sharia compliant lending has an element of trading and land and building. However, this challenge has been cured through granting of exemptions to institutions concerned upon request. But also we are happy that this allows theses banks and their clients to endogenise risk; c) The law requires all banks to pay interest on savings accounts as long as the minimum balance is maintained. This challenge has also been addressed by incorporating in the Banking Act the leeway for banks to give some form of return for Shariah-compliant savings products. It is worth noting that the two fully fledged Shariah-compliant banks currently boast of 1570 loan accounts and 58,548 deposit accounts and control 0.8 percent of banking sector’s net assets after being in operation for less than two years. These developments have enabled the formerly unbanked Kenyans and specifically the muslim community in the marginal areas have access to financial services adding to the wealth creation in the economy. This is a solid testimony of the vast potential of Islamic finance in Kenya, which should be tapped, and opportunities explored in the insurance (takaful) and capital market segments using sharia compliant vehicles. On the regional front, there is a move by the countries in the region to permit their institutions to offer Islamic products. Central Bank of Kenya is therefore sharing its experience in Shariah-compliant banking with other Central Banks in the East African Community. Therefore, there is growing interest in Shariah-compliant banking in our neighbouring countries and Kenya has the potential to be regional Islamic finance hub. This is tandem with vision 2030 aspirations. Under this Vision, one of the key aspirations for the financial sector is positioning of Nairobi as a regional financial hub by 2030. With these few remarks, it is now remains for me to wish you very fruitful deliberations over the next two days and to declare the 2nd Gulf African Bank Annual East and Central African Islamic Conference officially opened. Thank you.
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Keynote address by Prof. Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the dinner hosted by the African Development Bank and new faces new voices network gender equality and financial inclusion, Restaurant les Quatre Coins du Monde, Abidjan, Cote d'Ivoire, 25 May 2010.
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Prof. Njuguna Ndung’u: “Being a driver of change to invest differently in women” Keynote address by Prof. Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the dinner hosted by the African Development Bank and new faces new voices network gender equality and financial inclusion, Restaurant les Quatre Coins du Monde, Abidjan, Côte d’Ivoire, 25 May 2010. * * * Dr. Donald Kaberuka, President, African Development Bank; Madame Graça Machel, Founder, New Faces New Voices Network; Distinguished Guests; Ladies and Gentlemen It is indeed an honour and privilege for me to address this gathering tonight following the fruitful discussions during the African Women’s Economic Summit held in March 2010 in Nairobi, Kenya. I would like to take this opportunity to thank the African Development Bank and the New Faces New Voices Network for organizing tonight’s dinner. This event provides a platform to raise awareness about commitments made at the Summit and the need to invest differently in women. It also offers us the opportunity to review the various pledges made at the summit and to recommend concrete actions for the way forward. Ladies and Gentlemen, women form a big proportion of the population and command a sizeable role in our societies’ socio-economic activities and are therefore important economic and social change agents. In Africa, women constitute more than half of the population and form the majority of our labour force, especially in agricultural activities and household welfare, which remain the backbone of our economies. A large number of them also run micro, small and medium enterprises (MSMEs) that constitute a significant share of economic activity in our economies. It cannot be doubted, therefore, that women play a critical role in the process of economic development in the African Continent. Despite this, women have remained largely marginalized in terms of access to, and control of resources that are crucial in wealth creation, welfare and the development process. An example from my own country, Kenya, in terms of access to finance illustrates this clearly. Although two national financial access surveys conducted in 2006 and 2009 have shown general improvements in financial access with access to formal finance improving from 19 to 23 percent; semi-formal improving from 8 to 18 percent; informal declining from 35 to 27 percent; and the excluded falling from 38 to 33 percent; access to finance has remained worse for women with 66 percent of women not accessing formal financial services and 33 percent being excluded altogether from any form of financial services. You will agree with me that without financial access, the poor cannot save or build their assets – we will, therefore, have no hope of eradicating poverty from the Continent. Ladies and Gentlemen: The Government of Kenya has played a pivotal role in the promotion of women empowerment and gender equality. The Women Enterprise Fund, a flagship project created by the Government of Kenya in 2007, has been mandated to economically empower women by providing them access to affordable credit. Through the Fund, subsidized credit for business start-ups or expansion is provided and so are business training, market linkages and other infrastructure support to women-run businesses. Through the revolving Fund, women have been able to access loans and venture into a variety of productive economic activities and employment, which have triggered positive multiplier effects. These businesses have created jobs for the women themselves as well as thousands of other Kenyans. Increases in their disposable incomes have translated into better nutrition for their families, better clothing, healthcare, food security and education. The Fund is also strengthening women voices and their decision-making, bargaining power in the household as well as within the community and the nation. The Women Enterprise Fund’s motto that “if you empower a woman, you have empowered a family and a whole nation”, captures it all. Ladies and Gentlemen: Given this scenario of access to finance for women, the timing of the African Women Economic Summit was very timely. At the Summit, we sought to explore the barriers to mainstreaming women in accessing finance and decision-making in the financial sector. More importantly, we sought to identify pragmatic approaches to breaking these barriers. At the end of the Summit, various pledges were made by financial institutions, development finance institutions, network organisations and regulators. As regulators, we committed to identifying and addressing barriers to women accessing finance in the legal and regulatory framework. We would then identify innovative ways of mitigating these barriers. I therefore wish tonight to outline the progress made by the Central Bank of Kenya. (CBK) in enhancing access to finance by women since the Summit. The first landmark was on 31st March 2010 – barely two weeks after the Summit – when CBK licensed the second deposit-taking nationwide microfinance institution, Kenya Women Finance Trust Deposit Taking Microfinance Limited (KWFT). With a customer base of close to 400,000 female clients, it is safe to say that Kenya Women Finance Trust Deposit Taking Microfinance Institution is women-centric. Thus the transformation to a deposit-taking microfinance institution will enable KWFT to offer a wider range of appropriate products and services targeting low-income women entrepreneurs. Ladies and Gentlemen: At the beginning of this month, the Central Bank further bridged the financial exclusion gap through the operationalization of Agent Banking Guidelines. The guidelines allow banks to extend their outreach to approximately 78 percent of the Kenyan population, majority of who are women residing in the rural areas. This will be through the use of third party agents such as retail outlets, Microfinance Institutions and Savings and Credit Cooperative Societies by banks. The Agent Banking model will enable banks extend their outreach cost effectively particularly in the rural areas. In these areas, significant transaction costs and time are incurred in accessing the nearest bank branches. Ladies and Gentlemen: The Central Bank of Kenya together with sister Central Banks of the East African Community (EAC): Uganda, Tanzania, Rwanda and Burundi, on May 10th 2010, committed to conducting diagnostic surveys to clearly identify the demand and supply constraints in accessing financial services. This commitment was made during the 13th Governors’ Meeting of the Monetary Affairs Committee (MAC) of the EAC. MAC is tasked with the creation of a Monetary Union for the EAC. These diagnostic studies will play a key role in providing an empirical analysis of the constraints that women face in accessing financial services. The surveys are then expected to inform the formulation of targeted policies to address the identified constraints. Ladies and Gentlemen: Last week, in an affirmative move to expanding access to finance, Equity Bank, a leading Kenyan bank partnered with Safaricom, a leading Kenyan telecom operator, to provide an integrated banking and telecommunication financial services product. This product known as M-Kesho is accessible through a mobile phone alongside the internationally celebrated money transfer service, MPesa. M-Kesho will offer a low cost savings, micro-credit and micro-insurance product. Customers will be able to transfer amounts as little as Ksh.100 (USD 1.5) from their M-Pesa account to an Equity Bank interest earning account at no cost. Customers will also be able to complete the account opening documentation not just at Equity Bank branches but also at M-Pesa Agents spread throughout Kenya. Innovative technological products such as M-Kesho will ultimately extend the distribution of financial services to the unbanked population who are not reached by traditional banking networks while reducing the distances travelled, the transactions cost, and improved security for both the banks and clients. At present, the Central Bank has approved 500 M-Pesa agents, which is half the total number of commercial bank branches to serve as account origination points for the product. We expect to approve over 5,000 agents by the end of July 2010. M-Kesho goes beyond urbanrural money transfer. It attracts recipients to save the funds received for intermediation. This in turn enhances a culture of saving which will promote growth and wealth creation. Finally, the Central Bank of Kenya and the Association of Microfinance Institutions (AMFI) are looking for ways to hasten the speed of rolling out microfinance institutions. The MFIs are an important vehicle for reaching out to the rural economy where most women in Kenya are found. One bottleneck has been the branch network requirements and the investments required. The Central Bank is studying ways of overcoming these bottlenecks. Ladies and Gentlemen: As I draw to a close, I urge fellow regulators and policymakers to seek to understand the barriers to accessing finance by women. It is only by understanding these barriers that effective policies can be formulated to extend financial inclusion frontiers for women. Financial institutions including banks, Microfinance Institutions and Savings and Credit Cooperative Societies also have a critical role to play. With a critical mass of women entrepreneurs, they will find a ready market form the women fraternity. Ladies and Gentlemen: As a driver of change, I would like to reiterate the commitment of the Central Bank of Kenya, as declared during the African Women’s Economic Summit, to improving financial access to women and enhance their opportunities to become key actors towards change and, ultimately, the development of our economies. I look forward to fruitful deliberations tonight and wish you a pleasant stay in Abidjan. Thank You.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of the Family Bank's mobile phone banking services, Nairobi, 3 June 2010.
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Njuguna Ndung’u: The advantages of mobile phone banking services Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of the Family Bank’s mobile phone banking services, Nairobi, 3 June 2010. * * * Mr. Titus K. Muya, Chairman of the Board of Directors, Family Bank Ltd., Mr. Peter Kinyanjui, Chief Executive Officer, Family Bank Ltd., Board Members, Family Bank Ltd, Distinguished Guests, Ladies and Gentlemen, I am privileged to be here this morning on the occasion of the launch of Family Bank’s mobile phone banking services. Today marks yet another milestone on Family Bank’s growth trajectory and also another important innovation in the banking products that enlarge the range of financial services. I therefore feel honoured to have been invited to launch this product. It would not have been possible for us to assemble here and witness the rolling out of this product into the market without the wise stewardship of the Board and Management of the bank. I therefore salute the Board, management and staff of Family Bank on the introduction of the mobile phone banking services that we shall be launching this morning. I have been informed that these mobile banking services dubbed “PESA PAP” have been made possible through the use of the Safaricom M-Pesa Platform. On this note, I salute Safaricom for having partnered with several banks in providing innovations that will not only enhance access to financial services but also the growth of commerce in both the rural and urban markets. In his Madaraka Speech to the Nation, H.E. the President, Hon. Mwai Kibaki particularly singled out the innovation in Information Technology and the support it has provided to mobile phone money transfer services – as leading innovations in the world. The World Bank’s Doing Business Report on Access to Credit places Kenya at 4th position of 183 countries. Allow me to mention that the PESA PAP product being rolled out today is a consolidation of three products with key distinct features as follows: The M-Pesa Super-Agency providing electronic value to Safaricom Agents countrywide will be of benefit in terms of improving M-Pesa availability in the market and ensuring M-Pesa Agents maintain optimum levels of float. Bulk Value Payments through M-Pesa will allow bulk remittance of payments including salaries and loan disbursements to employees, borrowers and agricultural farmers and the; M-Pesa Paybill for the acceptance of deposits will enable the transfer of electronic value from Safaricom’s M-Pesa money transfer platform to a customer’s bank account. The benefits of the PESA PAP products just like other mobile products already existing in the industry cannot be gainsaid. This product is a technological solution that will provide the following key benefits: Build up of savings: With the transfer of electronic value from Safaricom’s M-Pesa money transfer platform to a customer’s bank account, a synergetic relationship is created in terms of deposit mobilization for the bank while the customers benefit in building up their savings for future investment. Convenience: Access to financial services on the mobile phone will certainly lower the cost of transfer of remittances, improving the safety and security of cash and make payments more convenient. Serving the unbanked and the under-banked: With 32 percent of Kenya’s bankable population being excluded from formal and informal financial services as indicated by the National Financial Access Survey in 2009, mobile phone banking services will reduce the cost of running banking operations in order to enhance access to affordable, flexible and faster services to customers and by and large the “unbanked” population in Kenya. Part of this exclusion has been due to costs and physical distance. These twin problems have been solved by PESA PAP products. Supporting Vision 2030: The rolling out of such innovative products will bring about immense contribution in deepening the financial sector. It is through financial deepening that a majority of the Kenyan population will access financial services easily and affordably. This will increase savings and build up of assets through affordable credit, and through increased savings and investment we will walk the path determined by Vision 2030. Ladies and Gentlemen: I am delighted and encouraged by the way the banking sector is embracing technology and demystifying the mobile and internet banking services from the perception that it is suited for the rich and well-educated but that the poor and the marginalized can as well be brought on board. Markets are developed by increased participation. Increased participation reduces unit costs. That is why cost of credit, via base lending rates are declining. As I conclude my remarks, let me reiterate that the Central Bank appreciates the initiatives and innovations by the banking sector in coming up with new products targeted at niche consumers and is committed to the creation of an enabling regulatory environment. We shall, on a continuous basis, revise relevant regulations that will ensure that the dynamic banking environment is adequately served as we gather more knowledge through innovations and market demands. Ladies and Gentlemen: It is now my honour and privilege to launch the Family Bank “PESA PAP”, I am sure the market is anxious for uptake of this product. Thank You.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the unveiling of the Consolidated Bank of Kenya's new look, Nairobi, 4 June 2010.
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Njuguna Ndung’u: Consolidated Bank of Kenya’s new look Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the unveiling of the Consolidated Bank of Kenya’s new look, Nairobi, 4 June 2010. * * * Eunice Kagane, Chairlady, Consolidated Bank of Kenya Ltd; Mr. David Ndegwa Wachira, Chief Executive Officer, Consolidated Bank of Kenya Ltd; Board Members; Management and staff; Distinguished Guests; Ladies and Gentlemen: 1. I am delighted to have been invited to this auspicious occasion of unveiling the new look of Consolidated Bank of Kenya. Allow me at this early juncture to commend the board, management and staff of Consolidated Bank of Kenya for their contribution in the growth of the institution from the reigns of the failed institutions of the 1980’s to where it is currently. It is a stark reminder of our failures in the past and how we have managed to turn it into an opportunity. The re-branding identity is a significant development aimed at achieving this goal. 2. I am aware that Consolidated Bank of Kenya has come a long way since it was incorporated in 1989 under the financial sector reform program established by the Government with the objective of taking over and re-structuring various troubled institutions. The process of rationalising, reorganising and re-structuring of the failed institutions into a viable professionally managed commercial bank was initially expected to take about five years and thereafter its shares were to be sold to the public. However, the institution’s mandate was changed in 2001 to operate as a fully fledged commercial bank offering a full range of both retail and corporate banking services. 3. The banking industry has become very competitive in the recent past and for you to compete effectively within your market niche you need to keep abreast of various innovative technological advancements that will support the service platform of your market niche. It is therefore important that this re-branding is seen not only in terms of a corporate identity but should also reflect an improved service delivery by the institution as well. 4. The Government of Kenya unveiled the country’s development blueprint, “Vision 2030” in 2008. The vision for the financial sector is to “Create a vibrant and globally competitive financial sector, driving high levels of savings and financing Kenya’s investment needs” To achieve this, the Banking Sector is expected to increase efficiency and banking services reach especially to rural areas to help drive increased domestic savings. 5. In this regard, it is imperative for stakeholders to explore mechanisms to deliver financial services and push forward the financial inclusion frontiers in tandem with Vision 2030. As a first step in pushing the initiative forward, the Banking Act was amended through the Finance Act 2009 permitting banks to use third parties (Agent Banking) to provide certain banking services on their behalf. I take this opportunity to urge banks to take advantage of the new provision. The agent banking model was designed to assist banks to lower their cost of offering banking services while at the same time improving their earnings as more Kenyans are offered an opportunity to access financial services. 6. The Kenyan banking Sector continues to perform well despite the global financial turbulences and challenges on the domestic front. The sector’s total assets increased by 21% from Ksh.1.20 trillion in March 2009 to Ksh.1.45 trillion in March 2010 whereas deposits increased by 23% to Ksh.1.14 trillion over the same period. Profit before tax for the sector increased by 33% from Ksh.12.8 billion in the first quarter of 2009 to Ksh.17.0 billion in the first quarter of 2010. This is remarkable, especially against the backdrop of domestic shocks and global financial crisis. 7. Despite the impressive performance by banks, customers still have to contend with high borrowing costs. Although many banks have responded to Central Bank’s plea of lowering interest rates, it is our expectation that all the banks should follow to support the economic growth via the support of expanded private sector credit at an affordable cost. On our part, we should now ask the real sector to access and negotiate credit in line with their potential investment. 8. Finally, let me reiterate that Central Bank and indeed the Government of Kenya will continue to pursue policies that create a conducive environment for growth of the financial sector and encourage the provision of banking services to majority of the un-banked Kenyan population at affordable cost. For us to be successful in this, we need to support strong institutional growth and remove underlying constraints that inhibit growth and financial reach. 9. With these few remarks ladies and gentlemen, it is now my honour and pleasure to declare the new brand of Consolidated Bank of Kenya officially launched. Thank you and God bless you all.
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Keynote speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, to the Nakuru Business Association, Nakuru, 11 June 2010.
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Njuguna Ndung’u: Nakuru as a financial actor and upcoming currency centre Keynote speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, to the Nakuru Business Association, Nakuru, 11 June 2010. * * * Hon. Lee Kinyanjui, Assistant Minister for Roads and MP for Nakuru Town; His Worship the Mayor, Councillor John Kitilit; The Regional Commissioner, Central Rift, Mr. Amos Gathecha; The District Commissioner, Nakuru, Mr. Kangethe Thuku; Mr. Boniface K. Muhia, Chairman, Nakuru Business Association; Mr. Thomas Kaberi, Chief Executive Officer, Nakuru Business Association; Governing Council Members; Business Leaders; Distinguished Guests; Ladies and Gentlemen: I am pleased to join Nakuru Business Association in this meeting. I am here today because I was extremely impressed with the areas of interest to the businessmen and women of Nakuru that I was asked to address. This is quite timely with the support the business community was given by the Minister for Finance in the Budget presentation yesterday. Nakuru being centrally located in Kenya has the potential of achieving a higher growth rate than other towns based on its locational advantage. I was asked to talk to you today on broadly two topical issues; Nakuru as a financial actor and the upcoming currency centre in Nakuru, that will contribute to ease of doing business. But I will want to pick a few important additions from the budget policies read yesterday. Ladies and Gentlemen: Under Vision 2030, Kenya aspires to become an international financial hub. In this regard, I am aware that efforts are currently underway towards the realisation of this objective. On the same note, it may be a high time to consider establishing smaller financial enclaves within Kenya as we build towards the aspired international status. We do know that expanding cities and towns increases productivity growth and overall hinterland growth. As a result, the thought by Nakuru Business Association of making Nakuru a financially vibrant town is not misplaced. What you need to do is to concretize your ideas into a plan of course drawn from the Vision 2030, and to expand the city to provide a diversified economy. To assist in this line, it is necessary to know what the prerequisites of a strong financial town are; several factors have been cited as being prerequisites, however, the paramount prerequisites include: Financial infrastructure: Banks, Insurance, brokerage firms, outlets, agents etc; Adequate human resource skills and a flexible labour market; A transparent and effective regulatory framework; A critical mass of vertically integrated financial institutions in one location operating in a conducive business environment; and Observing rules of the game. As Nakuru aspires to become a vibrant financial town, you will need to assess whether the prerequisites indicated above exist and if not what steps need to be taken to put them in place. All the prerequisites can only be put in place with a unity of purpose among all stakeholders. Ladies and Gentlemen: The linkage of any form of business and banking need not be overemphasized. Business and banking complement each other. The banks’ role of financial intermediation takes place through various forms. As banks allocate resources (mainly deposits), they focus on productive sectors of the economy whose potential to default is minimal. This demonstrates the fact that economic growth can only be achieved through efficient resource mobilization and allocation in the economy. Banks are bestowed with the ability to undertake this function. They collate savings and deposits from micro-savers to investors. They allow access to finance where their customers accumulate capital through savings and affordable credit. However, resource mobilization and allocation is not an end in themselves. Economic growth can only be realised if businesses efficiently utilise the resource towards the desired results. The financial sector is therefore in place to encourage a cycle of savings and investment. Credit risks are declining as witnessed by declining non-performing loans in banks. We need to take advantage of this. Over the last ten years, the trend has drastically changed with a continued drop in the level of non-performing loans from as high as 38 percent of gross advances in 2002 to 7 percent as at March 2010. This is an indication of improved resource management in Kenyan businesses and perhaps the efficiency of screening and monitoring the role the banks have invested in. Ladies and Gentlemen: Over the last 5 years, Kenya has witnessed significant growth in the outreach of Kenyan banks. The number of bank branches have increased from 534 in 2005 to 996 in 2009; a growth of 87 percent. The increase is mainly attributed to intense competition among banks and their desire to venture into new territories which are deemed unsaturated. Banks have also seen the benefit of banking the unbanked and removing barriers to entry. Nakuru has greatly benefited from this expansion. Over the period, the number of bank branches in Nakuru has increased from 18 in 2006 to 27 in 2009 but even more in its hinterland. This increase explains the prevailing business potential in Nakuru town and its environs. The increase in the number of banks in Nakuru is in line with Central Bank’s desire of promoting financial inclusion. As per the Financial Access Survey of June 2009, only 23 percent of the Kenyan population aged above 18 years is banked. This state of affairs is not acceptable and we expect the level to increase significantly by the year 2012 given the various efforts Central Bank and its partners have put in. These include: The licensing of deposit taking microfinance institutions, whose focus is the lower end of the market, which is concentrated in the rural and peri-urban areas. The licensing of credit reference bureaus, which provides an opportunity for individuals and businesses to rely on their information capital as an alternative form of collateral unlike the traditional physical collateral, to secure credit facilities from banks. Approval for banks to engage third parties to provide certain banking services. We believe that this will further increase the outreach of banks to most corners of the country. Flexible space for banks to roll out very incentivised products using the available technological platforms. Currency centres to reduce costs of doing business. Ladies and Gentlemen: The increase in the number of banks in Nakuru is an indication that the town is in the process of developing the requisite infrastructure necessary to support the activities of the banks. Banks have probably been attracted to Nakuru by its uniqueness of being both an agricultural, tourism and industrial town. Institutions of higher learning have also not been left behind in realizing the potential of Nakuru to create adequate employment opportunities for their graduates. Partnerships between businesses and such institutions of learning is one of the surest ways of developing relevant professionals to contribute to the town’s growth. Nakuru is thus ready for a vibrant business centre and to serve its hinterland. Ladies and Gentlemen: Allow me now to move on to my second point which is the upcoming currency centre in Nakuru. The cash based nature of our economy cannot be overemphasized. The Central Bank has therefore been reviewing the currency management mechanism to ensure availability of “clean money” at a reasonable cost to Kenyans. The Bank, in conjunction with the Kenya Bankers Association (KBA) has embarked on the establishment of currency centres. These centres are expected to reduce the operational costs incurred by banks in moving cash to and from the existing Central Bank branches. This move is also expected to support the provision of “clean” notes and coins to Kenyans across the country. In conjunction with KBA, CBK identified Nyeri, Meru and Nakuru as the appropriate towns to pilot currency centres. The Nyeri currency centre is already operational and progress towards establishing the Nakuru currency centre are at advanced stages. We expect the Nakuru currency centre to commence operations by end of July 2010. This centre will be housed by KCB. Besides benefitting Nakuru residents by getting clean notes and coins, it is expected that the costs saved by banks from the lower transportation costs will translate to better, cost effective and efficient services to the customers. I must emphasize that the centres are a joint partnership between the Central Bank and commercial banks via KBA. The centres should therefore not be confused with the Central Bank’s operated branches. In the case of currency centers, commercial banks provide the physical infrastructure while CBK provides the necessary human and technical support necessary. In the long run, the CBK will leave currency distribution to be handled by commercial banks. Finally, let me touch on three issues that featured in the budget and I think they are critical to our discussions today: The revamping of investment in infrastructure – Complement private investment – Public investment to reduce cost of doing business – Residue binging constraints Empowering the youth to secure a future SME support through a revolving fund operated by bank on a 1 to 5 basis: that is, at the minimum this revolving fund will operate on “for each 1 shilling the government brings, banks will contribute 5 shillings” Ladies and Gentlemen: As I wind down my remarks, I urge all businesses in Nakuru to take advantage of the current trend of falling interest rates to fully exploit the potential of your businesses. The capacity of Kenyan banks to extend credit to all types of businesses has been increased following the increase in the statutory minimum core capital from Ksh.250 million to Ksh.1 billion. The increase took effect from 1st January 2009 and will progressively be increased to Ksh.1 billion by 31st December 2012. The increase was informed by the increasing demand for funding from the banks beyond what they could accommodate based on their capital levels. I also take this opportunity to urge all of you to exercise your rights while engaging with the banks. You must demand to be charged a fair interest rate commensurate to your businesses risk profile investment proposals. This is the only way we can succeed in reducing the cost of credit and also grow your business. There is no other opportune moment for all businesses including banks to realise that success is sweeter when all players prosper and success begets success. With these remarks, ladies and gentlemen, it now remains for me to wish all the businessmen and women in Nakuru success in their endeavours towards prosperity of their businesses. Successes of your businesses will directly contribute towards our desired economic growth of becoming a middle income country as envisaged in Vision 2030. Thank you and God bless you all.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of Ecobank Kenya's Rapid Transfer Product, Nairobi, 17 June 2010.
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Njuguna Ndung’u: The agent banking model Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of Ecobank Kenya’s Rapid Transfer Product, Nairobi, 17 June 2010. * * * Mr. Peter Kanyago, Chairman, Ecobank Kenya; Mr. Anthony Okpanachi, Managing Director of Ecobank Kenya; Board Members; Management and staff; Distinguished Guests; Ladies and Gentlemen: I am delighted to have been invited to the launch of the new Rapid Transfer Product by Ecobank. I am informed that this new product will provide Ecobank customers with a fast, convenient, reliable and secure way to transfer funds at all Ecobank branches across 27 African countries, making Ecobank a truly “Pan African Bank”. Allow me at this juncture to commend the Board, Management and Staff of Ecobank Kenya for the introduction of this new product that will not only enhance customer service but also boost trade across the African continent. The launch of Rapid Transfer Product is indeed another milestone for the banking industry and demonstrates Ecobank’s commitment to financial innovation. It is noteworthy that since Ecobank Kenya’s entry into the Kenyan market in June 2008, the bank has grown its branch network from 9 to the current 20 branches including the Head Office. This indeed shows the level of confidence that the Board and the Management of Ecobank have in the Kenyan Market. Despite the various local and global turbulences experienced over the past two years, the banking sector continues to exhibit resilience and has remained strong. The impressive 2009 end year performance has been largely supported by growth in deposits, injection of capital, retention of profits and also declining costs of doing business supported by technology. During the period ended April 2010, the sector’s assets stood at Kshs.1.5 trillion, with gross loans and advances at Kshs.799.5 billion. Deposits increased to Kshs.1.1 trillion supported mainly by branch expansion, receipts from exports and remittances from abroad. At the same time, the banking sector registered a pre-tax profit of ksks19.5 billion, in the four months to April 2010 compared to Shs 48 billion in the twelve months of 2009. The sector is therefore likely to achieve better results this year compared to the previous year. Despite the impressive performance by banks, customers continue to shoulder the heavy burden of high transactional costs. This historical burden has to be dislodged now. In an effort to bring down the cost of offering financial services to the Kenyan public, Central Bank together with other stakeholders have put in place a business model aimed at broadening financial inclusion to the majority of Kenyans at a lower cost – The Agent Banking Model. It is envisaged that this model will enable banks to leverage on additional cost effective distribution channels to offer financial services. To achieve this, the Banking Act was amended through the Finance Act, 2009, to permit banks to contract third parties to provide certain banking services on their behalf. The guidelines to facilitate the rolling out of agency model were issued by the Central bank and took effect from May this year. Second, the cost of screening and monitoring existing and potential borrowers will decline with the introduction of Credit Reference Bureaus. This is the time to use this screening and monitoring technology to reach the SME in need of support to invest and expand. The Budget proposals in the Finance Bill 2010 have come up with a wonderful proposal on SME to enhance this. The Monetary Policy Committee (MPC) has since September 2009 been implementing decisions aimed at signaling to the market the need to expand credit to the private sector at affordable interest rates. This has been achieved by way of lowering Central Bank Rate and Cash Ratio requirements. I am happy to note that the MPC decisions have started to bear fruit as evidenced by lowering of base rate by a number of major banks in Kenya, with the lowest base rate currently standing at 10%. We have room to do more, commensurate with returns on investment that banks screen and monitor. Finally, let me reiterate that Central Bank and indeed the Government of Kenya will continue to pursue policies that create conducive environment to allow the growth of the financial sector by encouraging the provision of banking services to majority of the unbanked Kenyan population and to support the real sector of the economy. We want to encourage Pan African Banks like Ecobank to have foot prints in Kenya to broaden the financial services platform. With these few remarks ladies and gentlemen, it is now my honour and pleasure to declare the Rapid Money Transfer Product officially launched. Thank you and God bless you all.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official opening of Fina Bank's, Ngong Road Branch, Nairobi, 17 June 2010.
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Njuguna Ndung’u: Financial inclusion through the agent banking model and credit reference bureaus Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official opening of Fina Bank’s, Ngong Road Branch, Nairobi, 17 June 2010. * * * The Chairman and Board Members; Group Chief Operating Officer; Management and Staff; Distinguished Guests; Ladies and Gentlemen: It gives me great pleasure to be with you today at the official opening of Fina Bank’s, Ngong Road Branch. As the regulator for the Banking Sector, the Central Bank is pleased to be associated with the achievements of the banks we regulate, particularly where these developments lead to increased access to banking services for the Kenyan public. This is what Fina Bank is doing this evening. It is evident that Fina Bank is focused on its programme of expansion and growth strategy, having started its operations as Finance Institution of Africa in 1986 before converting to the present day Fina Bank in 1996. With the opening of this branch, the bank will have a network of 14 branches in the country. I also note that the bank has established its presence regionally by opening subsidiaries in Uganda and Rwanda. This is encouraging indeed. Mr. Chairman, let me take this opportunity to compliment the Board, Management and Staff of Fina Bank for this great achievement. I note that as at April 2010, the bank commanded an impressive asset portfolio of Ksh.13.5 billion and customer deposits of Ksh.11.5 billion, while riding on a capital base of Ksh.1.3 billion. The Central Bank is particularly encouraged by the bank’s leading role as a lender in the Small and Medium Enterprise (SME) sector, a growth sector in Kenya’s economy which has been described as the “jewel” of Kenya’s economic growth. This is indeed important following from the Budget proposals that created a revolving fund for SME – It may well be the best policy in our times to support the growth pole provided by SMEs. Ladies and Gentlemen, Kenya’s growth picked up in the last quarter of 2009, extending into 2010 and on the back of good rainfall and a resurgence of tourism, we are optimistic that this positive trend will continue, and therefore forecast that the economy will post a 4 to 5 percent growth in 2010 on average. Equally the banks have had a spectacular performance. For the period ended March 31, 2010, the Kenyan Banking sector registered an increase in asset base largely supported by growth in deposits. Assets increased by 20.8 percent to stand at Ksh.1.5 trillion while deposits increased by 22.8 percent to Ksh.1.1 trillion. This growth is by and large attributed to the growth of our economy that increases opportunities for investment and demand for credit. The Central Bank is pleased to note that the banking sector has put up strategies that support and stimulate the economy and responded positively to the successive reduction of the Central Bank Rate and Cash Reserve Ratio. While it is noteworthy and encouraging for banks to post healthy profits, this should also go in tandem with the reduction of lending rates to stimulate private sector borrowing and financing of investments, working capital as well as reducing the risks of default. At this juncture I want to register my compliments to Fina Bank for having reduced its base lending rate to 14.75 percent. I am sure there is room to do more. The continued lowering of base lending rates by commercial banks will not only stimulate our economy but also reduce non-performing loans in the industry. However, lending rates reduces the risk of default. Ladies and Gentlemen, The Central Bank will endeavour to pursue prudent policies that foster financial stability, increase financial inclusion and improve financial efficiency. Let me at this juncture highlight two policy issues that are at the heart of the of financial inclusion; Agent Banking Model: An amendment to the Banking Act through the Finance Act 2009 has enabled the banking industry embrace agent banking. Agent banking will permit banks to contract third parties to provide certain banking services on their behalf without having to put up brick and mortar. This model will therefore increase financial inclusion to the majority of the unbanked Kenyans at an affordable cost to both the bank and the customer. The Central Bank is pleased by the level of interest and financial innovation the model has generated. Credit Reference Bureaus: To ensure the growth of credit lending at affordable and sustainable rates, the Central Bank has licensed the first Credit Reference Bureau (CRB) and a few more are in the pipeline. A robust credit information apparatus will enable the banking industry share critical customer information that will lead to lowering the credit risk in the industry and hence the lowering of lending rates in the banking industry. This policy aims at building information capital that will allow the credit market to function properly and efficiently and change the collateral technology and reduce the cost of collateralization. The Central Bank of Kenya will continue to pursue policies that drive financial innovation, build strong banks and partnerships in the banking industry to ensure a stable financial sector in the country. Strong banks can weather shocks more easily. Strong banks will support economic growth. Ladies and Gentlemen, I wish to conclude by congratulating Fina Bank for opening the Ngong Road Branch and to assure the Board and Management of Fina Bank of the Central Bank’s support in your growth initiatives and progression. With these few remarks Ladies and Gentlemen, it is now my honour and pleasure to declare Fina Bank – Ngong Road Branch – officially open. Thank You and God bless you all.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Forum on Growing Real Estate through Finance, Kenya School of Monetary Studies, Nairobi, 23 June 2010.
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Prof Njuguna Ndung’u: Growing real estate through finance Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Forum on Growing Real Estate through Finance, Kenya School of Monetary Studies, Nairobi, 23 June 2010. * * * The Permanent Secretary, Ministry of Housing, Mr. Tirop Kosgey The Counsellors of Real Estate Distinguished Guests Ladies and Gentlemen It is my great pleasure to warmly welcome you all to this important interactive forum on “Growing Real Estate through Finance”. I thank all present for accepting our invitation. In particular, I wish to thank the Counsellors of Real Estate represented here for joining us to deliberate on growth and financing of such an important sector in the Kenyan economy. Ladies and Gentlemen: In any economy, long-term finance is one of the key drivers of economic growth. Long-term finance allows for the provision of affordable and adequate housing which is a major thrust of Kenya’s Vision 2030. Indeed, in line with the objective of this forum, one of the flagship projects under the “Housing and urbanization” as stipulated in the Vision 2030 is “Mortgage Financing Initiatives”. At an estimated annual demand of about 150,000 housing unit, the supply is barely at 35,000 leaving a gap of 115,000. The sector thus portends enormous opportunity and a major market; appropriate and innovative financing mechanisms are therefore absolutely essential. This forum brings together bankers, regulators, practitioners, researchers, academics and senior government policy makers to discuss this vital agenda – Real Estate Financing in Kenya, but I do believe that one of the solutions is not only the source of long-term finance but also the collateral technology and its process must be improved and simplified. The outcomes and policy conclusions of this interactive forum are, therefore, an important input into policy responses in addressing the binding constraints in this sector and the economy. The Kenyan financial system through its intermediation role remains the key pillar in providing mortgage financing. Although there is evidently enormous opportunity in the sector, lending to the building and construction and real estate sector stands at 12.2% (Ksh 92.5 billion as at end of 2009) of the total credit by banks and mortgage finance companies. The bulk of financing, it does appear, is through household savings. This is a clear indication that financing is one of the major constraints. While most deposits are of short term nature, mortgage finance is long-term. The traditional mismatch constraint therefore comes into play. This requires a well developed mortgage market to address longterm funding requirements of the sector. Developing mechanisms for long-term finance is good for monetary policy transmission as well. The MPC has been trying to address the issue of long-term finance; we do hope this forum can provide some viable and feasible options. Ladies and Gentlemen: The Government’s commitment to growth of real estate sector is in our blueprint for Vision 2030 and is also well articulated in the Finance Bill, 2010. The Finance Bill outlines a number of measures to spur growth in the property market. In particular, in order to facilitate provision of adequate housing to Kenya’s growing population, The Finance Bill, 2010 contains proposals to amend the Banking Act: (i) To allow mortgage finance companies to operate current accounts; and (ii) To allow banks to advance up to 40% of their total deposit liabilities up from 25% for purchase, improvement or alterations of land. These measures will unlock the sector’s potentials by availing funding required to finance growth of real estate in Kenya. The Central Bank will continue to work with the sector to improve the operating environment. It is equally important for the players in the real estate sector to design innovative ways of securing funds to exploit opportunities available. For instance, pension funds are needed for guaranteeing members’ mortgages. This is happening in Kenya, but still at a low scale. Leveraging on such long-term instruments will lower costs and make decent and low cost housing available to potential borrowers. Also, other investment vehicles such as unit trusts have the potential of pooling funds required for specific projects. In addition, the success of the Kenya Government infrastructure bond as well as other corporate bonds that have followed, demonstrates enormous potential of the bond market. In 2009 alone the Government raised a total of Ksh 54.7 billion through bonds issues, and the infrastructure bonds were oversubscribed every time. This is a clear testimony of the market’s ability to provide cheaper source of funding for long-term projects such as mortgages. To further deepen the bond market, the Central Bank has implemented a number of measures, including introduction of benchmark bonds and re-opening of these benchmark bonds to create liquidity and facilitate trading. We can then use this infrastructure bond platform to develop housing bonds. Ladies and Gentlemen: In all this, a vibrant financial sector with adequate and dynamic human capital is a vital component. The Kenya School of Monetary Studies as the capacity building institution of the Central Bank of Kenya and the region is well placed to develop and implement a curriculum that fits 21st century Real Estate Financing. This curriculum is expected to be broad and multi-disciplinary cutting across various fields in demand for capacity building. Such a multi-faceted capacity building program will provide the requisite skill sets to unlock potentials of the real estate sector in Kenya. Distinguished Guests, Ladies and Gentlemen, with these remarks on the future of this market, it is my pleasure to declare this interactive forum officially open. I wish you all fruitful deliberations. Thank you.
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Opening remarks by Prof. Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Public Service Master Trainers Workshop for Financial Education, Nairobi, 12 July 2010.
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Njuguna Ndung’u: The role of financial education in financial sector development Opening remarks by Prof. Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Public Service Master Trainers Workshop for Financial Education, Nairobi, 12 July 2010. * * * Mr. David Ferrand, Director, FSD Kenya; Ms. Bilha Maina, Project Manager, Financial Education, FSD Kenya; Facilitators; Participants; Ladies and Gentlemen: I am delighted and honoured to be here today to officially open this training workshop geared towards developing master trainers in financial education in the public sector in Kenya. To start with, let me extend my appreciation to FSD Kenya for inviting me to officially open this training workshop. I also thank Microfinance Opportunities for accepting to facilitate this valuable workshop. Ladies and Gentlemen: This training workshop aims to achieve four goals. As participants you will: learn about financial education in general; develop skills in adult learning and facilitation; examine the Global Financial Education Program in detail; acquire the necessary tools and skills to train others, and equip customers with the knowledge to demand services. These objectives revolve around the direction we want to take on financial development. I urge each one of you to go into this programme with an open mind. The perspective of this training is totally different from the academic courses we have all gone through – it is a focus on the basics, practicality and application. Ladies and Gentlemen: Allow me now to briefly share with you, in simple terms, the role of financial education in financial sector development. As we are all aware, the global financial sector is extremely dynamic and these dynamics feed into the domestic financial sector. The innovations have covered financial products, services, processes and procedures. These innovations are only possible with continuous upscaling of the financial market players’ knowledge. Similarly, innovations arise based on market demands which are driven by the desire of customers for a safe and efficient financial sector. The financial services providers would want to see their market niche increasing but not be challenged by other competitors. But the customers must use the financial services and demand more of those services. We did not know what we had missed over the years until M-PESA came to the scene. When consumers are financially informed they are in a position to demand quality financial services at fair prices. This makes it necessary for the providers to innovate products suitable for their customers’ needs. In this regard, the demands by customers and innovations by financial sector players as a result of being empowered through financial education drive financial sector development. This scenario clearly confirms that each one of us requires financial education. All aspects of our lives entail financial decisions and limited financial knowledge is a precursor to poor savings and investment decisions. Ladies and Gentlemen: FSD Kenya and the Central Bank of Kenya in conjunction with several other financial sector players have undertaken two financial access surveys (FinAccess) in 2006 and 2009. The surveys were aimed at establishing the level of Kenya’s population that utilises formal financial services. The two surveys established the banked population as 19 percent in 2006, It has increased to 23 percent in 2009. I am sure with financial education and more products in the market this proportion will increase. The FinAccess surveys have also included questions on financial literacy and use of technology in financial transactions. Following the release of the 2006 FinAccess survey results, FSD Kenya brought together several financial and education sector players to form the Financial Education Partnership (FEP) to spearhead the development of a national strategy on financial education. The efforts of the partnership are progressing well. In addition, I have been appointed as the National Champion of Financial Education in Kenya and the launch of four pilot projects to inform what modes of financial education work in Kenya are important dimensions. Ladies and Gentlemen: The Partnership’s quest to develop a national strategy for financial education in Kenya is mainly informed by the need to protect the consumers of financial services. The best way to protect consumers is to empower them with financial knowledge which they can use to demand quality services at fair prices. As the financial education strategy is being developed, the Government through the Ministries of Finance and Trade are spearheading efforts towards coming up with a comprehensive financial services consumer protection law. However, the law alone will not be enough, since for consumers to take advantage of it they must be enlightened on their rights and obligations regarding financial transactions. Ladies and Gentlemen: Let me now share with you the aspirations of the Central Bank of Kenya (CBK) as regards financial education. Other than its participation in the partnership, the core mandates of the Bank, which are price and financial stability, demand that we explain to the public all that we do to achieve these mandates. In this regard, CBK takes up available opportunities to disseminate financial knowledge to the public. In particular, the success of the new developments in our banking sector such as mobile banking, agent banking and credit information sharing are pegged on effective awareness and sensitisation of all the players. The Central Bank has over the past few years increased its level of interaction with the public. This has enabled us to explain our role in the economy especially the ongoing initiatives aimed at creating a more stable and efficient financial system as well as increasing the level of financial access by the Kenyan public. I encourage each one of you to visit the Central Bank’s website, which has been greatly enriched to enhance dissemination of information to Kenyans. In conclusion, Ladies and Gentlemen, I am informed that the participants in this workshop will be certified as master trainers in financial education. In this regard, I urge all of you to take the workshop seriously and to disseminate the knowledge gained throughout your organisations and to the public your organisations interact with. It is only through dissemination of the knowledge that you will acquire over the next one week that the financial sector and the economy as a whole will benefit. Ladies and Gentlemen: Being cognisant of the intensive training programme ahead of you, I shall not extend my remarks any further. I therefore take this opportunity to wish all of you an enjoyable and exciting workshop. With these few remarks, ladies and gentlemen, it is now my honour and pleasure to declare this training workshop officially opened. Thank You and God bless you all.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 9th Meeting of the Association of African Central Banks (AACB) Eastern Africa Sub-region, Nairobi, 14 July 2010.
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Njuguna Ndung’u: Consolidating economic integration in Africa Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 9th Meeting of the Association of African Central Banks (AACB) Eastern Africa Sub-region, Nairobi, 14 July 2010. * * * Hon. Uhuru Kenyatta, Deputy Prime Minister and Minister for Finance of the Republic of Kenya; Fellow Central Bank Governors of the Eastern Africa Sub-region; The Executive Secretary General of the AACB; Chief Executives of Regulatory Authorities in Kenya; Distinguished Guests; Ladies and Gentlemen: Hon. Deputy Prime Minister and Minister for Finance, allow me to thank you most sincerely for finding time from your busy schedule to grace this important meeting in the calendar of Central Banks in the Eastern Africa Region. Your presence here today demonstrates the serious commitment of the Government of Kenya to monetary and financial integration in the Continent as we strive to become a regional financial hub in line with Kenya’s Vision 2030. For instance, just this month, we witnessed the launching of the implementation of the East African Common Market. May I also extend a hand of welcome to my fellow Governors from the Eastern Africa subregion present here today. I heartily thank you for finding time to be in Nairobi. This is indeed a very great honour to the Central Bank of Kenya and our country. I also warmly welcome the Executive Secretary of the AACB whose presence and contributions in the deliberations we look forward to. We also appreciate the presence of the Chief Executives of other Financial Sector Regulatory Authorities in Kenya, whose presence here today signifies the all important synergy required between the different regulators in the process of financial integration. Hon. Minister, the Abuja Treaty envisaged the integration of the African Continent through, among others, the strengthening of the sub-regional groupings and harmonization of national policies for the eventual evolvement of a monetary union in the continent. In line with this, the Assembly of Governors in the Continent have been implementing the African Monetary Cooperation Programme (AMCP) since they adopted it on September 4, 2002 in Algiers. The objective of this program is to put in place a common single currency and a common single central bank at continental level by 2021, at the end of a successful convergence process, in accordance with the African leaders’ vision of consolidating economic integration in Africa. Commendable progress in the implementation of the AMCP by the Eastern Africa sub-region has been made. Most of our active members have been meeting a number of the macroeconomic convergence targets, as we continue harmonization and co-ordination of macroeconomic and monetary policies. We recently embarked on Stage III (year 2009–2012) of the programme, whose successful implementation and assessment of macroeconomic performance will form a basis for the establishment of a Continent wide common Central Bank. In addition Hon. Minister, the assembly of Governors are working on a common strategy with regard to the establishment of the African Central Bank (ACB) as well as advising on the formation of both the African Investment Bank (AIB) and the African Monetary Fund (AMF). The realization of these institutions will bring us closer to a Continent wide monetary union. Hon. Minister and Fellow Governors, benefits of integration have been evident across the globe, including securing access to larger markets, enhancing trade flows and in the process attracting the much needed foreign direct investments, lowering trade costs among neighbours, leveraging or locking in domestic reforms, increasing bargaining power and political cohesion among others. Notwithstanding these benefits, regional groupings in Africa have tended to give less emphasis to monetary integration. Under the AMCP, the Eastern Africa sub-region Central Banks evaluate each other annually to ensure convergence in policies as we pursue further monetary integration. This meeting, Hon. Minister, will therefore consider the progress on the implementation of the African Monetary Co-operation Programme (AMCP) by the Eastern Africa sub-region countries in 2009; consider macroeconomic performance against the AMCP targets and the status of execution of the decisions of the 8th meeting of Governors of the sub-region held in Moroni, Comoros. My fellow Central Bank Governors, Ladies and Gentlemen, with these few remarks it is now my humble duty to invite the Hon. Deputy Prime Minister and Minister for Finance to address and officially open this meeting. Welcome Hon. Minister.
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Talking notes by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the American Chamber of Commerce of Kenya monthly luncheon, Nairobi, 20 July 2010.
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Njuguna Ndung’u: Talking notes on the state of Kenya’s economy Talking notes by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the American Chamber of Commerce of Kenya monthly luncheon, Nairobi, 20 July 2010. * * * Distinguished members of the American Chamber of Commerce and invited guests: 1. It is my pleasure to join you at this monthly luncheon and I thank you for inviting me. 2. This Luncheon has an important timing: First, it comes after the visit of the American Vice President to this country, an important visit for Kenya. Second, it comes soon after the Minister for Finance put forward the budget proposals and policies to achieve them. Finally, it comes at a time when Kenyans are debating and campaigning for a positive vote to a new constitution. I am very sure that since I am addressing an audience comprising mainly investors, entrepreneurs and business people who wish to live in an environment of high economic growth and low and stable prices, I am certain that the superior law is important. The Constitution protects and safeguards their interests. This is how markets work – that is how development of markets and institutions takes place. The government economic agenda is guided by the strategic framework for faster development underpinned by a stable macroeconomic environment and structural reforms aimed at raising productivity and improving business climate. This is key to enhancing Kenya’s competitiveness and accelerating private sector development. Personally, I do believe that for growth to be achieved, it depends on investments. Investments in turn depend on incentive mechanisms and legal safeguards to protect them. I believe also in strong institutions. Strong institutions define the appropriate incentives that encourage prudent behaviour. This is what the superior law – the New Constitution will do to institutions and give confidence to markets. 3. The Kenyan economy has undergone a turbulent time from 2008 stemming from multiple shocks: the domestic political crisis; the drought; high petroleum and food prices as well as the global financial crisis. However, we have started to see some recovery. From the steep decline to 1.6 percent growth in 2008 the economy recovered to post 2.6 per cent growth in 2009. This growth was mainly supported by a resurgence of activities in the tourism sector and resilience in the building and construction industry. We do hope the Greek crisis will not prolong the recession in Europe – that may produce further knock-on effects in the Kenyan economy. 4. Economic prospects for 2010 and medium term prospects are quite optimistic. Growth is forecast at 4–5 percent for 2010. This is a conservative forecast as various indicators point to a higher growth rate. Growth will be driven mainly by increased investment in key sectors including agriculture, services, infrastructure, health and education. After this recovery, Kenya will be in a good position to refocus its efforts towards achieving vision 2030 goals. The government has identified the binding constraints whose resolutions will lower the cost of doing business substantially and propel the growth forecast higher; Kenya’s growth diagnostic studies have identified a lack of complementary factors: They include infrastructure gaps and poor private appropriability factors that prevent the private sector to reap full returns to their investment such as: crime, corruption and relics of political instability. The proposed constitution once adopted will herald institutional changes of unprecedented proportions for this great nation. To ease infrastructural constraints the 2010/11 national budget continues to allocate more funds for infrastructure. The infrastructure budget for FY 2010/11 is equivalent to 23.3 percent of total expenditure reflecting the critical role infrastructure is expected to play towards reducing cost of doing business to improve domestic production competitiveness. The Central Bank has developed an effective instrument for this; the Infrastructure Bonds – they have been very successful in the market. They have a further dimension of enhancing a savings-investment platform for Kenyans and a strong stimulus to crowd-in rather than crowd out the private sector. 5. As a central banker, I want to reiterate the importance the Government attaches to macroeconomic stability. You might have heard some assertions in some sections of the media that Kenya’s debt position might be a problem in the future. Given the developments in the Euro zone where investors have punished countries for their fiscal position (we call this debt overhang problem or risk – the private sector believes taxes will be increased in future to affect resource transfers from the private sector to the Government to pay for high debt). It is imperative that I parade the Kenyan case to this esteemed audience. As of May 2010, Kenya’s debt level stood at 44 per cent of GDP, external debt to GDP is at 28 per cent – a level much lower than for most countries in this region (it has moved from 60 percent in 2003 to 40 percent in 2009 and to 44 percent as at May 2010). You will agree with me that this is commendable for a country which has not been a beneficiary of the HIPC initiative. The overriding fiscal thrust of the Government, is to contain the stock of debt to a sustainable level of 40 percent of GDP. Debt sustainability analysis carried out by the Ministry of Finance, the IMF and the World Bank have not found any significant risk posed by our debt levels. To demonstrate this commitment of reducing the domestic debt, the government will reduce its domestic borrowing from 5.1 percent of GDP in 2009/10 to 3.8% in 2010/11. This fiscal space, as was demonstrated during the drought and global financial crises is important for propelling growth even in times of crisis – the fiscal stimulus would not have been possible – Gives room for monetary policy to perform. 6. It is the Central Bank’s belief that the fiscal and monetary policies currently in place will enhance investor confidence by increasing expectations of economic recovery or reducing tail risks associated with the exogenous shocks that have buffeted Kenya’s economy in the recent past. In particular the government expenditure programs and the current monetary policy stance are likely to have larger than normal positive impacts on demand and benefits that may persist for a significant period of time. 7. For us in the Central Bank, our pre-occupation is to align monetary policy with the growth and development goals while at the same time maintaining low and stable inflation – a target of 5%. In addition, a stable and market driven exchange rate, increased efficiency in the financial system, financial stability, and a reliable and efficient national payment system. To give you some indication: Inflation was provisionally 3.2 percent for the month of June 2010. Inflation expectations as indicated in the MPC Market Surveys are anchored at a lower level. The current exchange rate movements of the Kenya shilling against other major currencies is largely a response to external developments especially the uncertainty in the Euro zone market. The exchange rate in this case works as an automatic stabilizer via relative price movements. Interest rate structure that carries with it cost of investment as well as inflation expectations have declined drastically since the middle of 2009. Distinguished members, ladies and gentlemen 8. Let me note that the current economic environment in Kenya is based on policies that are market leaning and offer a level playing field for potential investors. 9. In the banking sector, our vision is to build a strong financial sector and be the financial hub of the East African Community. The strength and presence of Kenyan banks is now being felt in the region, specifically within the East African Community where some of our banks have opened branches. 10. One of the more recent reforms is the licensing of credit reference bureaus. The credit information sharing mechanism is now fully operational and as a result we expect to subsequently see a reduction in costs as banks pass the resultant benefits to their customers. 11. As a Researcher, I would like at some point in future when doing my economic analyses on the Kenyan economy, to find a very significant “Obama Effect” on Kenya’s growth and development. That “Obama Effect” together with a renewed political leadership able to undertake political and social reforms supported by a Superior Law – the Constitution – will be noticed in our econometric studies in future. But this will only be realised if all of you in this room and elsewhere scale-up your investments in Kenya. Finally, Distinguished Guests, Ladies and Gentlemen, I conclude by wishing you fruitful discussions. Thank you.
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Bank of India's 105th Foundation Day celebrations, Nairobi, 7 September 2010.
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Njuguna Ndung’u: How to bring down business costs in banking Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Bank of India’s 105th Foundation Day celebrations, Nairobi, 7 September 2010. * * * Your Excellency Sibabrata Tripathi, High Commissioner of India to Kenya; Dr. Manu Chandaria, Chairman, Bank of India Local Advisory Committee; Mr. Maganbhai Dhodia, Chief Executive, Bank of India, Kenya; The Local Advisory Committee Members; Management and Staff of Bank of India, Kenya; Distinguished Guests; Ladies and Gentlemen: It is my pleasure to join you on this auspicious occasion celebrating Bank of India’s 105th foundation day. I appreciate the invitation to share in the celebrations. Allow me at the onset to commend the Bank of India, its advisory committee members, management and staff for steering the institution from a single office in Mumbai in 1906 to its current international status. Kenya has benefited a lot in these developments. Ladies and Gentlemen: From 1969 the Bank of India became public owned and has expanded in leaps and bounds to claim its position in the global market with 29 foreign offices, and more than 3,200 branches, including 141 specialized branches and 48 zonal offices in India. In Kenya, the bank has grown from the one branch established in Mombasa in 1953, to the current four branches country wide. With regard to its Kenya operations, I note that as at July 2010, the bank had an impressive asset portfolio of Ksh.17 billion and customer deposits of Ksh.14 billion, supported by a capital base of Ksh.2.4 billion. Mr. Chairman: The impressive performance of Bank of India is consistent with the continued commendable performance of Kenya’s banking industry. Some key highlights of this performance for the period from July 2009 to end of July 2010 are; Assets grew by 26 percent to stand at Ksh.1.6 trillion; Total deposits grew by Ksh.270 billion, representing a 28 percent growth rate, to stand at Ksh.1.2 trillion; Gross advances amounted to Ksh.848 billion, having grown by Ksh.128 billion from a similar period in 2009; A profit before tax of Ksh.42.8 billion was registered in the last seven months compared to Ksh.28.5 billion in July 2009, a growth rate of 50 percent; The number of bank branches at the end of July 2010 stood at 1,020 an increase of 24 branches from the end of December 2009; The number of bank accounts has increased by 35 percent from 7.9 million accounts in July 2009 to 10.7 million as at the end of July 2010. This impressive growth has been supported by the expansion of banks into new market segments, prudent risk management and enhanced economic prospects underpinned by a stable macroeconomic environment. The Central Bank expects the banking sector to continue on this growth trajectory. Ongoing reform initiatives by the Government and CBK will serve to further propel the banking sector to new frontiers of financial inclusion for more Kenyans. For this reason, the Central Bank together with Kenya Bankers Association has been keen to move in the directions that market requires support. Mr. Chairman: We need now to concentrate on reducing costs of doing business for banks so that we can bring down costs of financial services. For example, the recently introduced credit information sharing platform will enable banks to extend more credit to productive sectors boosting wealth and employment creation. The information sharing platform will help develop the required information capital that will support an adoption of a new collateral technology in the market and reduce the information search costs. This will be especially important for Small and Medium Enterprises and individuals who have been constrained in accessing credit due to lack of physical collateral. However, the benefits of credit information sharing will only accrue if banks and other information providers ensure information availed to the Bureaus is accurate and credible. It is therefore imperative that banks and their customers and licensed Credit Reference Bureaus continue to work together to ensure accuracy and credibility of records. On its part the Central Bank will continue to work with other players to extend the reach of the credit information sharing mechanism beyond the banking sector. But so far, we are encouraged with the first batch of information sent to CRB Africa – 78 percent of it was accurate – with no errors. This shows that the information template reflects the true picture in the banking sector. Ladies and Gentlemen: The second area in reducing cost of doing business is the cost of rolling out branch networks to reach Kenyans cost-effectively. This will work well with the introduction of Agent Banking. The CBK has so far licensed 5,892 Agents since the roll out in May 2010. Ladies and Gentlemen: The third area to lower cost of doing business is for you banks – you have to develop innovative products for the market. You have to lower cost on these products to ensure uptake and volume. The Central Bank will continue more forcefully with its four dimensional approach: Advise; cultivate partnership; develop and regulate the market. This approach will ensure innovative policies that work for the market and ensure financial inclusion for all Kenyans and also market’s stability. With these few remarks, Ladies and Gentlemen, let me once again applaud the Bank of India on your 105th Foundation Day, and wish the bank continued prosperity in the years to come – not only in Kenya but also in the EAC market. Thank you.
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Keynote speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 1st Annual Africa Banking and Finance Conference, Nairobi, 21 February 2011.
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Njuguna Ndung’u: Strengthening regulatory frameworks in the finance industry – a key enabler for private sector development Keynote speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 1st Annual Africa Banking and Finance Conference, Nairobi, 21 February 2011. * * * Distinguished Speakers, Distinguished Guests, Ladies and Gentlemen: It gives me great pleasure to be here today at this inaugural African Banking and Finance Conference. This is an appropriate forum for the financial sector in Africa to reflect on pertinent developments affecting the sector globally and share experiences. But more importantly dwell on solutions to structural constraints that hinder its’ development. To start with, let me extend my profound appreciation to the organisers for putting together this forum, and to all participants for the honour of your presence. I take this opportunity to welcome all those visiting Kenya for this Conference, and wish you all a delightful stay during and after the conference. Ladies and Gentlemen: My task this morning is to share with you some thoughts on strengthening regulatory frameworks in the financial sector as a key enabler to private sector development. The Financial Sector supports the development of the country through: Resource mobilization and their allocation. Collating savings from savers and delivering them to investors. The intermediation process. The traditional regulatory environment delivered the appropriate structures for the financial sector. But it was tried during the global financial crisis. The global financial crisis brought out some very important lessons. We should not think of more regulation but better regulation. What does better regulation entail? A regulatory regime that can readily identify weaknesses and emerging vulnerabilities. A regulatory regime capable of analyzing risks and so adequately pricing risks. A regulatory regime that provides appropriate incentives (penalties) to induce prudent behavior in the market place. A regulatory regime that encourages innovations and strong institutions to develop. Where the regulator has the role to develop the market in the African countries we live in. The efficiency through which these roles are performed depends very much on the sector and the regulatory technology in place. Ladies and Gentlemen: The theme of this forum “Achieving Innovative Solutions Relevant for Africa’s Banking & Finance Industry – Key Issues” is timely and weighty because it is only through innovative solutions that African economies can move to the next level of development frontiers. It is therefore my expectation that the diversity of the participants in this forum will enable you to identify the various relevant innovations in the financial sector that are consistent with the African Landscape and to drive development in the sector. Ladies and Gentlemen: Allow me now to briefly share with you Kenya’s experience on innovations in the banking sector. In pursuit of the financial sector’s vision in the Kenya’s BIS central bankers’ speeches development blueprint, Vision 2030, CBK and the players have embraced a partnership approach. Consequently, several initiatives have been undertaken over the last 4 years aimed at the three envisaged goals of stability, efficiency and financial inclusion. These initiatives include: Rollout of mobile phone financial services – Approval for banks to leverage on mobile phone technology to present convenience and lower costs for their customers without compromising quality of service. Through mobile banking, customers are now able to perform their transactions “anytime anywhere”. Mobile money transfer has evolved from the initial concept of transferring money from one individual to another to include other functions such as payment of utility bills, loans, salaries and for deposits mobilization. Introduction of agent banking mechanism in May 2010 where banks are allowed to engage third parties to provide certain banking services. The aim is increased outreach of banks to the vast under-banked and unbanked Kenyan populace by introducing “banking beyond branches”. It also enables banks to leverage on additional cost effective distribution channels to offer financial services. Agency banking takes banking to the people unlike previously when people had to go to the banks. Licensing of credit reference bureaus to collect, collate, analyse and disseminate credit information among credit providers. Credit information sharing provides an opportunity for individuals and businesses to rely on their credit history (information capital) as an alternative form of collateral to the traditional physical collateral, to secure credit facilities from banks. Individuals will also be able to use their positive credit history to negotiate for better terms and conditions from their banks. On the other hand, banks will benefit from the mechanism since it will address the problem of information asymmetry and by extension the problem of non-performing loans which has in the past threatened the stability of the banking sector. The traditional challenges of the moral hazard and adverse selections can hinder financial sector growth. Licensing of deposit taking microfinance institutions (DTMs), whose focus is the lower end of the market, which is concentrated in the rural and periurban areas. The Microfinance Act, 2006, which empowers CBK to licence and supervise DTMs, was operationalised in 2008. Formalizing the operations of DTMs is expected to bring more people, especially those previously unbanked or under banked, into the realm of the formal financial sector not only through their lending activities but also savings mobilization. Lowering the cost of doing business: Several modalities including establishment of three currency centers in towns outside the key Kenyan cities to lower cash in transit costs for banks. CBK is also actively pursuing modalities of reducing the cost of establishing branch networks for Deposit Taking Microfinance Institutions, in addition to agency mechanism. Ladies and Gentlemen: As a result of CBK’s adoption of a new approach to regulating the financial sector through dialogue with the players and acting as a development agent, the Kenyan financial sector has experienced a structural transformation. This transformation is evidenced by the following achievements: Exponential growth of bank branches from 740 in 2007 to 1,063 as at end of 2010. Increase in the number of deposit accounts from 4.7 million in 2007 to 12.8 million as at end of 2010. Increase in the number of loan accounts from 1.2 million in 2007 to 1.8 million as at 2010. BIS central bankers’ speeches Licensing of five deposit taking microfinance institutions with 41 branches as at 31st December 2010, which had opened 1.01 million deposit accounts with deposits worth Kshs. 7.90 billion(USD 99m). Increase in the automated teller machines from 1,012 in 2007 to 1,940 as at 31st December 2010. Banks contracting 8,809 agents by December 2010. Mobile money transfers increased their total transactions to Kshs. 2.3 bn or USD 29 m per day. Well over 15 million Kenyans have subscribed to mobile money transfers since their roll out in 2007. This is expected to increase especially with the confidence to be generated by the draft E-Money Regulations recently issued by CBK. Mobile phone financial services have generated micro-savings accounts (MKESHO) to the tune of over 700,000 accounts with Kshs. 678m in deposits. Ladies and Gentlemen: The structural transformation of Kenya’s financial sector has not been achieved on a silver platter. There has always been the task of surmounting prevalent challenges. Key among these is the need to balance the goals of financial efficiency, stability and integrity on one side with financial inclusion on the other. The pursuit of these goals requires delicate balancing given their importance. However, as already alluded, balancing of these goals is made easier when regulators embrace their new role of being a market developer in addition to their traditional regulatory role. A developing financial sector increases efficiency and the regulator ensures stability. Ladies and Gentlemen: The structural transformation experienced thus far is just but the beginning. CBK and other players have earmarked several other reforms which are expected to take the development of the financial sector to new frontiers. CBK has embraced financial education as a critical component of its financial inclusion strategy. When consumers are financially literate, they are able to make informed financial decisions. In this regard, CBK and all the other financial sector regulators are members of the Financial Education and Consumer Protection Partnership (FEP), a private–public partnership, spearheaded by the Financial Sector Deepening Trust Kenya with an aim of developing a National Strategy for Financial Education in Kenya. On the same token, Ladies and Gentlemen, as efforts progress towards a more developed financial sector, there is need to ensure existence of adequate disclosure of information by providers of financial services, efficient dispute resolution mechanisms, comparability of offers and data protection. As financial regulators embrace innovations in their jurisdictions, there is need to ensure that the innovations have adequate consumer protection safeguards. Kenya’s new constitution promulgated in August 2010 entrenches consumer protection in the Bill of Rights and mandates Parliament to enact consumer protection legislation. But in addition the constitution allows for strong institutions and protects them. Strong institutions define appropriate incentives and the rules of the game to encourage prudent behavior. This is good for the financial market to allow defined entry and orderly exit from this important market. Ladies and Gentlemen: As I conclude, let me reiterate that innovative solutions for strengthened regulatory framework for a financial sector lie with the players. The regulators, the regulated and market participants should think outside the box. They exist for each other and it is only through their acceptance to promote, advise and partner that a smarter regulatory framework is put in place that enables the private sector to prosper. With these remarks, Ladies and Gentlemen, I take this opportunity to wish you fruitful deliberations while I look forward to receiving the forum’s report in due course for us to consider the relevant innovative solutions tailored to our circumstances. Thank you. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the workshop on the review of Forex Bureau guidelines, Kenya School of Monetary Studies, Nairobi, 24 February 2011.
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Njuguna Ndung’u: Review of Forex Bureau guidelines Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the workshop on the review of Forex Bureau guidelines, Kenya School of Monetary Studies, Nairobi, 24 February 2011. * * * The Directors and Principal Officers of Forex Bureaus; Distinguished Guests; Ladies and Gentlemen: 1. It gives me great pleasure to be here today to officially open this consultative workshop that will comprehensively review the Forex Bureau Guidelines. At the outset, I would like to take this early opportunity to express my sincere appreciation to all forex bureaus represented here and to those that took time to study the proposals made and submitted comments on the guidelines. This has allowed the Central Bank of Kenya team to revise them considerably. 2. Ladies and Gentlemen, forex bureaus were first licensed in January 1995 to foster competition in the foreign exchange market and to narrow the exchange rate spread through this micro-structure of the market. As you are aware, the forex bureau sub sector has experienced rapid growth since it was first established with the number of operating bureaus having increased from 48 in 1998 to 126 as at December 2010. This rapid growth has to do with units in the market and also the volume of their trading. But this has also come with challenges. While the initial objectives have largely been met, it has become necessary to take stock of achievements and challenges so far. 3. Ladies and Gentlemen: in the last few years, the Central Bank has carried out comprehensive on-site and off-site review of the operations of forex bureaus. The review exercises have revealed major weaknesses in the operations of some of the bureaus that include; Engaging in unauthorized business activities; Non-compliance with the legal and regulatory requirements such as the Central Bank of Kenya Act and the laws that govern taxation; and Limited understanding of regulations and weak capacity in management of the bureaus. It is in light of this that Central Bank embarked on the process of identifying gaps in the regulatory framework and reviewing the guidelines in order to streamline the sub-sector, facilitate growth and ensure that all the players operate in accordance with the law. 4. The revised guidelines also seek to deal with the various challenges; strengthen the corporate governance structure and financial position of the bureaus; enhance competition in the foreign exchange market and more importantly re-define the basic tenets of this market. From the comments and discussions we have held, we know that forex bureaus in line with the market dynamism, would like to expand their sphere of operations by offering more services and more products. In this regard and like any other good investment, the desire calls for enhancement of capital to be employed. In addition, the guidelines must be reviewed to align them with the provisions of the existing laws, like the Proceeds of Crime and AntiMoney Laundering Act 2009, which came into operation on June 28, 2010. This law together with the guidelines define the reporting methods of transactions by institutions. 5. Ladies and Gentlemen, despite the numerous challenges experienced in the forex bureau sub-sector in the recent past, the Central Bank recognizes the important role the BIS central bankers’ speeches sector plays in the economy by offering foreign exchange at competitive rates and providing employment to many Kenyans. But the market can only expand and thrive if rules and guidelines are followed. In this case, only those investors who are ready and willing to conduct their business within the set rules will be allowed to remain in the market. As we align ourselves with the dynamics of the market, adherence to the rules of the game become more important and critical for the survival of the market. 6. To enhance market discipline and encourage constructive engagement with the regulator and so develop the market, I urge the owners of forex bureaus to strengthen the Kenya Forex Bureaus Association (KFBA). This will entail reviewing the constitution of the association, putting in place a code of conduct and allocating more resources to the secretariat. The main objective of the initiative is to develop a vibrant market, to promote and uphold professionalism, enhance high ethical standards, foster self-regulation and above all keep the line of engagement with the regulator alive so that market vulnerabilities or any challenges can be addressed. For these reasons, membership to the KFBA has been made mandatory and a pre-requisite for license renewal. 7. Ladies and Gentlemen, the workshop has been organized with one major objective of facilitating a consultative process. I therefore urge you all to actively participate fully and build consensus on the content of the guidelines before they are finalized. The Central Bank believes that this approach will foster an inclusive enabling environment for the growth and development of the forex bureau sub-sector. 8. Finally, let me once again reiterate that the Central Bank of Kenya as a financial regulator of this market and as an agent of developing this market will continue to pursue policies and guidelines that create a conducive environment for growth of the financial sector, encourage provision of financial services to the majority of the population at affordable cost and enhance the safety and soundness of the financial system. 9. With these few remarks, ladies and gentlemen, it is now my honour and pleasure to declare this workshop officially open and presuppose a fruitful engagement. Thank you and God bless you all. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 3rd Gulf African Bank Annual East & Central Africa Islamic Finance Conference, Nairobi, 28 March 2011.
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Njuguna Ndung’u: Islamic finance – a paradigm shift in Africa Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 3rd Gulf African Bank Annual East & Central Africa Islamic Finance Conference, Nairobi, 28 March 2011. * * * Mr. Suleiman Shahbal, Chairman, Gulf African Bank Ltd; Mr. Najmul Hassan, Chief Executive Officer, Gulf African Bank Ltd; Board Members of Gulf African Bank Ltd here present; Distinguished Guests; Ladies and Gentlemen: I am delighted and honoured to have been invited to preside over the opening ceremony of this important conference. At the onset, let me extend a warm welcome to all participants attending the 3rd Gulf African Bank Annual East and Central Africa Islamic Finance Conference, with the theme: “Islamic Finance: A Paradigm Shift in Africa” Allow me to compliment Gulf African Bank for organising this Islamic Finance Conference. Indeed, this landmark conference brings together financial experts, central bankers, financial regulators, lawyers, financial institutions and Islamic banking consumers from Kenya and beyond. To all international participants, let me extend a particularly hearty welcome, “Karibuni Kenya”. This conference gives participants the opportunity to discuss emerging industry developments as well as reflect on the gains and challenges since the last Islamic Finance Conference held in May last year. Ladies and Gentlemen: Sharia compliant banking is viewed by many as the fastest growing segment of the banking sector in the world. In Africa, Islamic banking is a fast growing financial sector attracting all customers even of different religious orientation. The uptake of Islamic banking is projected to grow exponentially in sub-Saharan Africa. Kenya is among other African countries, that are taking up the lead in Sharia compliant banking services. Today, Sharia compliant banking services in Kenya have made huge strides since its introduction in 2007. The banking sector boasts of two exclusively Sharia compliant banks. As at the financial year ended December 31, 2010 the two banks collectively commanded a market share of 0.9% of the banking sector with gross assets of Ksh.16.54bn, net loans and advances of Ksh.9.23bn and deposits of Ksh.13.76bn. The two banks had 58,101 deposit accounts and 2,609 loan accounts as at the end of December 2010 – in less than 4 years of operation. In addition, several conventional banks now offer Sharia compliant products as part of their product range through specifically created Islamic banking divisions or windows. Other conventional banks have also expressed interest in providing Sharia compliant products to an increasing customer base. Ladies and Gentlemen: Among the challenges facing Kenya’s ambition to be a hub of Sharia compliant investment products to compliment the Islamic banking in the country are lack of; Shariah compliant investment vehicles, an enabling legal and regulatory framework and awareness by majority of the populace that hinder the uptake of these investments. For the country to fully embrace Islamic Finance, there is need to extend beyond the offering of Sharia compliant products by introducing such investment vehicles like unit trusts, corporate bonds (sukuks) and insurance (takaful) products and Sharia compliant treasury bills and bonds (government Sukuk). BIS central bankers’ speeches It is encouraging to note the ongoing efforts by the Government and other players especially the Capital Markets Authority and Insurance Regulatory Authority to come up with a range of shariah compliant financial products. Already there are positive signals of these efforts with the introduction of Shariah compliant investments and Insurance Products. It is in this spirit that the Kenyan government through the Finance Act 2010, amended Section 45 of the Central Bank of Kenya Act, to allow the Central Bank as the Government’s fiscal agent to recognize the payment of a “return” rather than “interest” on government securities. This amendment opens up the spectrum of Sharia compliant investments in the country. Ladies and Gentlemen: The future of Islamic finance in Kenya and in the region remains bright. On its part, the Government of Kenya will continue to pursue policies that create an enabling environment that will eventually culminate in Kenya establishing itself as a regional financial hub as envisaged in Vision 2030. In addition, the Central Bank will continue to partner with the sector to promote financial inclusion by supporting innovation in the Sharia compliant banking sector. With these few remarks, let me wish all participants to this conference, fruitful deliberations over the next two days and declare the 3rd Gulf African Bank Annual East and Central African Islamic Conference officially opened. Thank You. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the opening of the workshop on the harmonization of monetary and financial statistics in the East African Community, Nairobi, 29 March 2011.
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Njuguna Ndung’u: Compilation and harmonization of monetary and financial statistics in the East African Community Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the opening of the workshop on the harmonization of monetary and financial statistics in the East African Community, Nairobi, 29 March 2011. * * * Mr. B. Rajcoomar, Chief of Financial Institutions Division, IMF; Mr. Jaroslav Kucera, Senior Economist, IMF; Mr. Thomas Morrison, EDDI Project Manager, IMF; Mr. Robert Maate, Senior Statistician EAC Secretariat; Distinguished Participants; Ladies and Gentlemen; I welcome you all to Kenya and to this very important workshop on the compilation and harmonization of monetary and financial statistics in the East African Community (EAC). I thank you all for attending this workshop. Ladies and Gentlemen, This workshop is taking place at a critical stage in the integration process of the EAC and monetary and financial statistics play a critical role. This will support the institutions to be formed under the regional integration process. Previous milestones achieved comprise of the establishment of an EAC Customs Union and the launch of the Common Market Protocol. These developments, Ladies and Gentlemen, underscore the need for a statistical harmonization framework and related capacity building strategies for the region. The success of the regional integration initiative is anchored on a number of convergence criteria that require information and analysis: In this regard, the computation, concepts, definitions and methods used in compiling the indicators that determine the convergence criteria must be understood, harmonized and consistent across all Partner States. Furthermore, since the EAC regional integration initiative envisages a centralized approach to the policy making process, it has to be anchored on appropriate and adequate indicators and centralized statistical information. Thus the harmonization of monetary and financial statistics, among other statistics, will be critical for policy formulation and implementation within the EAC region. In fast-tracking the process of statistical harmonization among the Partner States, the EAC Central Bank Governors recently approved the hiring of short-term consultants from among Partner States. I am aware that the consultants have begun work and we believe this workshop has come at the most appropriate time so as to complement their efforts. Ladies and Gentlemen, Towards this end, I want to thank the International Monetary Fund (IMF) for the Technical Assistance they continue to provide in the development and harmonization of statistics, in the EAC region. About two years ago, most of our countries concluded the second phase of the General Data Dissemination System (GDDS) project which was aimed at improving the availability and quality of data, in developing countries. This was important in order to conform to international standards. Some of the major achievements of the monetary module of this project include the correct classification of key financial assets and liabilities and sectorization of transactions for the main deposit taking institutions in our financial sectors. The end result was the compilation and filing of standard reports by most of the EAC countries with the IMF Statistics Department. BIS central bankers’ speeches Again I recall that towards the end of last year, the IMF approached most of our countries to consider joining the Enhanced Data Dissemination Initiative (EDDI). The focus of the EDDI is to consolidate the gains realized under the GDDS while expanding the institutional coverage in statistical compilation to include other deposit taking institutions such as SACCOs and microfinance; and other key financial sector institutions such as pension funds and insurance companies. I am aware that the work plans were prepared during the first EDDI workshop in Kampala and the IMF has identified technical experts for each of our countries. This workshop is therefore part of the greater plan towards the improvement of statistics in the region by the IMF. I wish to sincerely thank the IMF for these initiatives. It is only appropriate at this juncture to recognize, Ladies and Gentlemen, the critical role that the EAC Secretariat has played in providing an elaborate roadmap on how statistical harmonization can be achieved within the EAC region. However, for this to succeed, an appropriate mechanism, in terms of institutional arrangements and legal frameworks, has to be put in place to guard and guide the production of harmonized and quality statistics in the EAC Partner States and more importantly, at the regional level. These statistics will inform policy formulation and implementation in the integration process. All countries have their own data collection, storage and processing centres. It is a question of how we can pick the important aspects from our own areas for use, standardization and centralization. Ladies and gentlemen, In concluding my remarks, I welcome you once again to Kenya and to this workshop. Though the duration of the workshop is short, please find time to visit some of our beautiful sceneries around town and sample what the City of Nairobi has to offer. It is now my pleasure and humble duty to declare this workshop officially open. Thank you. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of the Small and Micro Enterprises Programme Deposit Taking Microfinance Limited (SMEP DTM Ltd), Nairobi, 5 April 2011.
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Njuguna Ndung’u: Microfinance development in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of the Small and Micro Enterprises Programme Deposit Taking Microfinance Limited (SMEP DTM Ltd), Nairobi, 5 April 2011. * * * Mr. Gabriel Kivuti, Chairman, SMEP DTM Ltd; Board of Directors, Management and Staff of SMEP DTM Ltd; Representatives from National Council of Churches of Kenya here present; Distinguished Guests; Ladies and Gentlemen: It gives me great pleasure to be here today to witness the launch of the Small and Micro Enterprises Programme Deposit Taking Microfinance Limited (SMEP DTM Ltd). I join you in celebrating this milestone that SMEP DTM Ltd has achieved by being the fourth deposit taking microfinance institution to be licensed by the Central Bank of Kenya under the Microfinance Act. It is important to note that the Central Bank has to date licensed five deposit taking microfinance institutions; approved 26 business names; and is processing six applications for licence which are at various stages of review. The launch today provides us with an opportune moment to review the progress made since the operationalisation of the Microfinance Act in 2008. More specifically, today’s launch is a great achievement for SMEP DTM Ltd and provides an opportunity for the institution to provide to its clientele more diverse financial products, including savings. Ladies and Gentlemen: The SMEP DTM’s commitment to offering financial services to the unbanked populace dates back to 1975 when it started as a small project of the National Council of Churches of Kenya (NCCK) under the name Small Scale Business Enterprise (SSBE). The project was aimed at providing the poor in a number of slum areas with food and later small business grants. The project was then modified, developed and evolved into a microcredit company that was registered as a company limited by guarantee in 1999. Today, the institution boasts of 87,500 clients and an outstanding loan balance of approximately Ksh.1.1 billion. The transformation into a deposit-taking microfinance institution will enable SMEP DTM offer savings products to its clients in addition to the loan products as well as enlarge its resource base due to the build up of deposits base. This will undoubtedly position SMEP DTM Ltd to enhance financial outreach towards becoming a major player in the microfinance sub-sector in the years ahead. The microfinance sub-sector has achieved rapid growth. The sector has opened a branch network of 44 branches which had mobilised 0.8 million deposit accounts valued at Ksh.8.59 billion and advanced loans amounting to Ksh.16.6 billion as at 28th February 2011. The licensing of SMEP DTM is therefore another milestone towards the development of an all inclusive financial system in Kenya as envisaged by Kenya’s economic blue print Vision 2030. Ladies and Gentlemen: Over the past few years, the Central Bank of Kenya in addition to licensing and regulating Deposit Taking Microfinance Institutions has embraced policy reforms to build an adequate financial infrastructure to support the development and deepening of the financial sector. Innovative models such as agent banking and credit information sharing aimed at scaling up financial inclusion are some recent examples. These initiatives are guided by CBK’s resolve as a regulator to advise, form partnerships, develop and regulate the market with an aim of enhancing access and reducing the cost of doing business in financial services. I am happy to note that according to the FinAccess Report of 2009, access to financial services improved with access to MFIs service doubling from 1.7% in 2006 to 3.4% in 2009, BIS central bankers’ speeches the picture has changed drastically by now. These improvements, however small, are an indication that financial sector transformations and reforms being undertaken based on the three pillars of stability, efficiency and access are translating into increased financial inclusion and consequently spreading financial services to the poor. Financial inclusion actors globally, like CBK, believe that poverty can be reduced sustainably and consistently with access to finance. Access to finance allows the poor to develop a savings base and enlarge their asset base that supports them to ride over shocks and escape poverty. Ladies and Gentlemen: The licensing of SMEP DTM progresses the financial inclusion initiatives. The Central Bank is focused on addressing entry barriers for unbanked and underbanked Kenyans to access financial services. It is our belief that we will scale up financial inclusion through reducing barriers to entry and lowering transaction costs through these initiatives. In turn, these initiatives continue to support a rolling out of financial services and products as well as increasing the delivery channels. It is expected that Microfinance Institutions will address any entry barriers by focusing on areas that have not been well served by mainstream financial institutions by offering demand-driven, affordable and convenient products. Ladies and Gentlemen: I am happy to assure the microfinance industry that the Central Bank will continue to initiate key reforms and structural changes that are necessary in the sector’s legal, regulatory and supervisory frameworks. As you are aware, key among these legislative changes was the specific amendment to the Microfinance Act in January 2011 that introduced agency definition. The amendment anchored agency business in the law and, the Central Bank is in the process of designing guidelines to facilitate the contracting of agents to provide financial services on behalf of deposit taking microfinance institutions. The move will undoubtedly allow microfinance institutions to leverage on additional cost effective distribution channels to offer financial services. This initiative is informed by the need to leapfrog access to financial services to Kenya’s bankable who remain totally outside the orbit of these services at affordable cost. Ladies and Gentlemen: Another remarkable initiative in the pipeline is in the area of credit information sharing (CIS) for Microfinance Institutions. As you are aware, the CIS mechanism is already in place for commercial banks. The Central Bank is currently working on modalities of incorporating the Deposit Taking Microfinance Institutions into the CIS mechanism. Indeed, it is the Government’s intention to create a framework whereby all financial institutions such as banks, Deposit-Taking Microfinance Institutions, SACCO’s and other licensed credit providers will have access to and exchange credit information across the board. It is hoped that the merging of credit information from these various players will provide for a stronger credit market that will improve the pool of credible borrowers, decrease defaults, reduce credit costs and ultimately result in a stable financial sector. Before I conclude, Ladies and Gentlemen, I would like to once again congratulate SMEP DTM for its achievement as a Deposit Taking Microfinance Institution. On its part, the Central Bank would like to assure SMEP and the industry and all the stakeholders of its continued support in the development of the Microfinance Industry and look forward to working collaboratively with the market to increase access to financial services in the country. The Central Bank is out to create strong financial institutions. Indeed, the New Constitution has provided us the wonderful space to create strong institutions. Strong institutions both from the regulator and the regulated will support the market, define appropriate incentives (and for a regulator, define appropriate penalties as well) to encourage prudent behavior in the market. That is the way we can develop and deepen the financial market. With those few remarks, Ladies and Gentlemen, it is now my pleasure to declare SMEP DTM Limited officially launched. Thank you. BIS central bankers’ speeches
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the Inaugural Session of the 11th Bank Human Resources Conference 2011 of the Indian Institute of Banking and Finance, Nairobi, 28 April 2011.
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Njuguna Ndung’u: Transformation of banks in Kenya Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the Inaugural Session of the 11th Bank Human Resources Conference 2011 of the Indian Institute of Banking and Finance, Nairobi, 28 April 2011. * * * Distinguished Guests; The Chief Executive Officer, Indian Institute of Banking and Finance; Members of the Institute; All Protocols Observed; Ladies and Gentlemen: I am delighted and honoured to have been invited to preside over the opening ceremony of this Conference organized by the Indian Institute of Banking and Finance. At the onset, kindly allow me to extend a warm welcome to all participants attending this important Conference. The theme: “Managing Transformation for achieving Growth” is indeed compelling. Growth is driven by fundamental factors, but key among them is the transformation of markets and institutions to guard the market and define appropriate incentives. One such market is the financial market guided and regulated by several institutions. Today, I will share my thoughts on how the Central Bank has transformed the banking sub-sector as a means of transforming and deepening the financial sector in line with Kenya’s development goals. Let me parade at least seven of them: 1) Rollout of branch networks to provide financial services to remote and lower income areas: The expansion of branch networks in the financial services industry has registered significant growth over the last 4 years and is well distributed across all regions in both rural and urban centres. Currently, we have 1064 branches from 740 in 2007. 2) Allowing mobile phone financial services to provide a new technological platform: This entails approval for banks to leverage on mobile phone technology to present convenience and lower costs to their customers without compromising quality of service. Through mobile phone banking, customers are now able to perform their transactions “anytime, anywhere’’. Mobile phone money transfer has evolved from the initial concept of transferring money from one individual to another to include other functions such as payment of utility bills, disbursement and repayment of loans, payment of salaries and deposit mobilization. 3) Introduction of Agent Banking mechanism: This is the “banking beyond branches’’ model where commercial banks are allowed to engage third parties to provide certain banking services to increase outreach of the banks to the vast under-banked and unbanked Kenyan populace. In a nutshell, Agency Banking enables banks to leverage on additional cost effective distribution channels to offer financial services. So far 5552 Agents have been approved and are providing financial services. 4) Credit Reference Bureaus (CRBs): Through licensing of Credit Reference Bureaus, the CBK has enabled credit providers to collect, collate, analyse and disseminate credit information. Credit information sharing provides an opportunity for individuals and businesses to rely on BIS central bankers’ speeches their credit history (information capital) to support the process of collateralization and even change the collateral technology in the country. Individuals will also be able to use their positive credit history to negotiate for better terms and conditions from their banks. On the other hand, banks will benefit from the mechanism since it will address the problem of information asymmetry and by extension the problem of non-performing loans which has in the past threatened the stability of the banking sector. The traditional challenges of the moral hazard and adverse selection can hinder financial sector growth. As a result, credit appraisal by bank staff will greatly benefit from credit information sharing. What staff need to do is appreciate how the mechanism operates, its benefits and embrace it as a tool to enhance relationship with their clients. 5) Lowering the cost of doing business through Currency Centres: CBK believes that through cost reduction, banks will be able to extend credit to the productive sectors of the economy at reasonably cheaper costs. Consequently, CBK has in partnership with the Kenya Bankers Association, established currency centers in towns outside the Central Bank branch networks. 6) Licensing Deposit Taking Microfinance Institutions (DTMs): The Central Bank is also actively pursuing a policy of licensing DTMs as a means of reaching out to all segments of the market. DTMs are free to choose to be Nationwide or Community Based. 7) Capacity Building through HR training and development: CBK assists industry players empower their employees to embrace strategies aimed at making the banking sector safe, efficient, effective and all inclusive. The strategic initiatives include: a) Playing a leading role in the Human Resources Sub-committee of the Monetary Affairs Committee of East African Central Banks – Through this forum partner central banks are addressing emerging HR issues by revising the frameworks governing HR policies and strategies such as recruitment, retention policy and succession plans among others, in line with international best practice. b) Facilitating capacity building through the Kenya School of Monetary Studies (KSMS) – The KSMS was established to provide capacity building programmes for the financial sector in Kenya and the Region and I am happy to note that the School has offered relevant programmes in Banking and IT at Certificate and Diploma levels for over 10 years. We believe that by partnering with the Indian Institute of Banking and Finance, new programs and new initiatives can be developed in future. c) Advanced Academic and Management Development Programs – The KSMS has responded to new demand-driven capacity needs of the financial services sector by introducing advanced academic and management development courses, including the following programs : (i) A Masters degree in Banking and Finance through a grant from the African Capacity Building Foundation (ACBF); (ii) Postgraduate Diploma in Financial Management in collaboration with Moi University targeting the Eastern and Southern Africa Region; (iii) Academic programmes through a collaborative agreement with the Jomo Kenyatta University of Agriculture and Technology, targeting the financial services and other related disciplines; and lastly, BIS central bankers’ speeches (iv) A Multilingual Diploma in Business Sciences and Islamic Financial Services approved by the Ministry of Higher Education. Ladies and Gentlemen: Moving forward, CBK and the industry players are in the process of developing a national strategy for financial education and consumer protection in Kenya as another avenue of taking financial inclusion to the next frontier. The starting point for financial education is at the level of individual players – the agents for disseminating the knowledge. I would like to commend the Indian Institute of Banking and Finance for organizing annual conferences like this which present an opportunity for banks to not only share experiences but to also exchange ideas on innovations and other emerging issues that require bank staff to prepare themselves to handle. This is an important platform to also inform the regulators the emerging challenges and opportunities not only for growth but further improvements on capacity for growth. I urge other similar institutes such as the Kenya Institute of Bankers to embrace the idea as an avenue to bring together HR practitioners and policy makers in the banking sector to share ideas on innovations that require proactive HR training and development. This is an important avenue to transform institutions and create capacity for growth. Successful banks are those that proactively prepare their staff to cope with the ever evolving trends in the global financial scene. With these few remarks, let me wish all participants of the 11th Bank Human Resources Conference, fruitful deliberations and a joyous stay in Kenya. Thank you. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the opening of the 3rd AFRACA Central Banks' Forum, Kenya, 9 May 2011.
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Njuguna Ndung’u: The future of financial service delivery in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the opening of the 3rd AFRACA Central Banks’ Forum, Kenya, 9 May 2011. * * * The Deputy Prime Minister and Minister for Finance, Honourable Uhuru Kenyatta; The AFRACA Chairman and Deputy Governor, Central Bank of Congo; The Secretary General, AFRACA; Governors of Central Banks here present; Representatives of Banks, Microfinance Institutions and other Financial Institutions; Distinguished Guests and Participants; Ladies and Gentlemen: I am delighted to be with all of you here in Mombasa to make some brief remarks at this very auspicious 3rd AFRACA Central Banks Forum. I am here to welcome the Deputy Prime Minister and Minister for Finance to officially open this forum, but before doing that, I wish to make a few remarks. On behalf of the Central Bank of Kenya which is co-hosting this Forum with AFRACA, let me extend a very warm welcome to all delegates to Kenya and in particular to Mombasa, a spectacular tourist town. It is my sincere hope that you will enjoy your stay in Kenya and will also find time during the Forum or after to sample Kenya’s tourist attractions. Ladies and Gentlemen: AFRACA organizes this bi-annual Central Banks Forum as an avenue for AFRACA member central banks and other regulatory bodies to share experiences on workable solutions towards enhanced agricultural and rural financing as well as to challenge each other on possible policy solutions to increase agricultural and rural financing. In this regard, the Forum serves to further AFRACA’s vision of “achieving a rural Africa where people have access to sustainable financial services for economic development”. The theme of this Forum; “Financial Services for Food Security: Leveraging on Innovation” is quite timely and anchors well with the emerging trend whereby most of the agricultural land is being urbanized as well as the drastic climatic changes arising from global warming, which are posing a serious threat to food security for the future generations. Time to generate solutions to curtail this trend is now. But from our end, we focus on financial support investment to increase productivity in the sector. Although Kenya’s two financial access surveys conducted in 2006 and 2009 have shown general improvements in financial access with access to formal finance improving from 19 to 23 percent; to semi-formal improving from 8 to 18 percent; informal declining from 35 to 27 percent and the excluded falling from 38 to 33 percent, access to finance for rural areas is still low, with 64 percent of the rural populace not accessing formal financial services and 21 percent being excluded from any form of financial services. This is a huge drag to development that is driven by financial access. We know from established wisdom that poverty is very rural based in countries we come from. Access to finance allows the poor to escape poverty by building their assets through savings and credit. At the Central Bank of Kenya, we remain committed to promoting innovations that will enhance financial access and inclusion for the people of Kenya. These reforms we believe will inevitably enhance access to finance in rural areas. My colleagues will be alluding to these reforms in the course of this conference. Ladies and Gentlemen: The size of credit to the agricultural sector in Kenya by the banking sector has risen over the last five years from USD335 million (Ksh.28.1 billion) in December 2007 to USD620 million (Ksh.52.7 billion) as at February 2011. This growth is explained BIS central bankers’ speeches partly by the outcomes of the initiatives enumerated above. The level is expected to increase once the reform initiatives take root. To conclude my remarks, Ladies and Gentlemen, let me take this opportunity to reiterate the commitment of Central Bank of Kenya to contribute to the fulfillment of AFRACA’s vision. It is my hope that this conference shall provide participants with key lessons on how to achieve a rural Africa where people have access to sustainable financial services for economic development. I also reiterate that it is only through the concerted efforts of all players, governments, development agencies, donors, regulators and service providers that we will be able to deliver on this vision. With those few remarks, ladies and gentlemen, it is now my honour and pleasure to welcome the Deputy Prime Minister and Minister for Finance, Hon. Uhuru Kenyatta to deliver his keynote address and to officially open the 3rd AFRACA Central Banks Forum. Thank you. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the official opening of Standard Chartered Bank Kenya Limited s Head Office, Nairobi, 20 June 2011.
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Njuguna Ndung’u: Developments in the banking sector in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the official opening of Standard Chartered Bank Kenya Limited’s Head Office, Nairobi, 20 June 2011. * * * Your Excellency Honourable Mwai Kibaki, President and Commander-In-Chief of the Defence Forces of the Republic of Kenya; Honourable Uhuru Kenyatta, Deputy Prime Minister and Minister for Finance; Mr. John Peace, Group Chairman of the Board of Directors, Standard Chartered Bank; Mr. Peter Sands, Group Chief Executive Officer, Standard Chartered Bank; Mr. Wilfred Kiboro the Chair of the Board of the Standard Chartered Bank Kenya; Mr. Richard Etemesi, Chief Executive Officer, Standard Chartered Bank Kenya; Board Members present; Staff of Standard Chartered Bank Kenya; Distinguished Guests; Ladies and Gentlemen: I am delighted to join you on this auspicious occasion in celebrating Standard Chartered Bank Kenya’s 100th Anniversary. It is indeed a momentous achievement for the bank and perhaps to plan for the next 100 years will even be more exciting. May I take this opportunity to appreciate the presence of His Excellency the President which gives this function great significance and importance. Let me also commend the Board, Management and Staff of Standard Chartered Bank for steering the institution from its formation in 1911, and for successfully providing financial services to Kenyans for the last 100 years. Over the years, the Bank has achieved several milestones with a number of strategic alliances and acquisitions. These milestones have extended the customer base, geographic reach and broadened the product range that Standard Chartered offers. The bank has strongly focused on developing its franchises in Asia, Africa and the Middle East through concentration on consumer, corporate and institutional banking. In Kenya, the bank focuses on two core business divisions, Wholesale banking and Consumer banking. With regard to its financial operations in Kenya, the bank as at March 2011, was among the top 6 banks with an asset portfolio of Ksh.149 billion, thereby commanding a market share of 7.9 percent. Customer deposits stood at Ksh.105 billion being supported by a capital base of Ksh.21 billion, while loans and advances amounted to Ksh.72 billion. Your Excellency: Despite various shocks that have hit the economy in recent years, the banking sector continues to exhibit resilience. The sector grew by 8.8% in 2010. Some indicators of the financial sector performance witnessed in the last twelve months to March 2011 are as follows: The sector’s asset base expanded by 20 percent from Ksh.1.5 trillion in March 2010 to Ksh.1.8 trillion in March 2011 as banks continued to expand their lending portfolio; The deposit base increased by 16.7 percent from Ksh.1.2 trillion to stand at Ksh.1.4 trillion in March 2011 on account of branch expansion, financial inclusion and domestic economic activity expansion; The Total and Core Capital Adequacy to Total Risk Weighted Assets Ratios stood at 21.1 percent and 18.9 percent, well above the statutory minimum of 12 percent and 8 percent respectively, signifying the stability of the sector; The sector’s pre-tax profits increased by 16.5 percent from Ksh.17.0 billion in March 2010 to Ksh.19.8 billion in March 2011 while the average liquidity at end of March BIS central bankers’ speeches 2011 was 43.5 percent, well above the statutory minimum requirement of 20 percent. This impressive growth has been supported by the expansion of banks into new market frontiers, improved risk management and continuous legal and regulatory reforms by the Government and Central Bank in a bid to enhance financial inclusion by reaching out to the unbanked population. Your Excellency, Ladies and Gentlemen: I would like to assure the banking sector and stakeholders that the Central Bank will continue to develop cardinal policies aimed at financial inclusion, development and deepening in consultation with the market. So far we have seen the supply-side; the deposit accounts solved. We need to make it easier and cheaper to borrow and loan accounts will grow from the current 2 million accounts compared to 14 million deposit accounts. On the demand side, demand for loans is lagging because of costs. The CBK will is to create a conducive business environment for the sector to operate efficiently, effectively and soundly. We continue to support and build strong institutions both the commercial banks and the regulator must be strong. Strong institutions will always define the appropriate incentives (and penalties) to encourage prudent behavior in the market. We hope such measures and the ensuing environment will of necessity benefit clients of banks who have taken financial inclusion seriously. Your Excellency, Ladies and Gentlemen; Finally, allow me once again to applaud Standard Chartered Bank Kenya Limited on your Centenary celebrations and wish the bank continued prosperity in the future here in Kenya and in the East African region as a whole. It is now my honour and singular pleasure to invite the Honorable Deputy Prime Minister and Minister for Finance Hon. Uhuru Kenyatta to make his remarks and welcome His Excellency, The President. Welcome, Honorable Deputy Prime Minister. Thank You and God bless you all BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 3rd ICPAK (Institute of Certified Public Accountants of Kenya) Financial Services Conference "Sustaining transformation and innovations", Nairobi, 5 July 2011.
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Njuguna Ndung’u: Sustaining transformation and innovations Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 3rd ICPAK (Institute of Certified Public Accountants of Kenya) Financial Services Conference “Sustaining transformation and innovations”, Nairobi, 5 July 2011. * * * Mr. Patrick Mtange, Chairman, Institute of Certified Public Accountants of Kenya; Ms. Caroline Kigen, Chief Executive Officer, Institute of Certified Public Accountants of Kenya; Distinguished Guests; Ladies and Gentlemen: It gives me great pleasure to be here today to open this 3rd financial services conference. Let me at the outset thank the Institute of Certified Public Accountants of Kenya for organizing this forum and for extending an invitation to the Central Bank of Kenya. Ladies and Gentlemen: The theme of this conference is “Sustaining Transformation and Innovations”. The choice of this theme is timely given the ongoing reforms in the Kenyan financial sector. Ladies and Gentlemen: Kenya’s current development blueprint Vision 2030 envisages the development and deepening of the financial sector. This will enable it to finance the development agenda while ensuring financial inclusion. For this reason, ambitious targets have been set of raising savings and investments to GDP ratio from 14% to over 30%. In pursuit of this strategy, the Central Bank in collaboration with market players has initiated several reforms geared towards creating an enabling environment and space for innovative financial services. With these reforms, we anticipate the financial sector will be stable, efficient and accessible. But also able to effect the necessary transformations. These initiatives include: Rollout of mobile phone financial services – The Central Bank has encouraged the adoption of innovative technological platforms such as mobile phones to extend the reach of financial services. Mobile financial services have in particular presented Kenya with an opportunity to significantly upscale access to financial services cost effectively. The Kenyan mobile financial services story has become a much acclaimed global case study. To date, over 15 million Kenyans transfer about Ksh.3 billion to each other daily with over one million transactions. Licensing Deposit Taking Microfinance Institutions (DTMs), whose focus is the lower end of the market, which is concentrated in the rural and peri-urban areas. The Microfinance Act, 2006 which empowers Central Bank to licence and supervise DTMs, was operationalised in 2008. Formalizing the operations of DTMs is expected to bring more people, especially those previously unbanked or underbanked, into the realm of the formal sector not only through their lending activities but also savings mobilization. This recognizes that in an economy with segmented markets, different vehicles are required for particular segments of the economy or market. So far 6 DTMs have been licensed with 1.35 million deposit accounts, 520,362 active loan accounts and Ksh.9.4 billion in deposits. Introduction of agent banking mechanism in May 2010 where banks were allowed to engage third parties to provide certain banking services. The aim is increased outreach of banks to the vast under-banked and unbanked Kenyan populace by introducing “banking beyond branches”. It also enables banks to leverage on additional cost effective distribution channels to offer financial services. We have seen agency banking take banking to the people unlike previously when BIS central bankers’ speeches people had to go to the banks. So far 6,368 agents have been approved and are delivering financial services to Kenyans. Licensing credit reference bureaus to collect, collate, analyze and disseminate credit information among credit providers. Credit information sharing provides credit history (information capital) as an alternative form of collateral to the traditional physical collateral, to secure credit facilities from banks. Individuals will also be able to use their positive credit history to negotiate for better terms and conditions from their banks. On the other hand, banks will benefit from the mechanism since it will address the problem of information asymmetry that was used to raise a risk premium on loans and by extension the problem of non-performing loans which has in the past threatened the stability of the banking sector. The traditional problems of moral hazard and adverse selection that hinder financial sector growth have been minimized. Ladies and Gentlemen: These innovations have seen our financial sector experience transformation as evidenced by the following outcomes: Exponential growth of bank branches from 740 in 2007 to 1,072 in April 2011. Increase in the number of loan accounts from 1.2 million in 2007 to 2.1 million in May 2011. The loan portfolio in the same period has increased from Ksh.533.8 billion in 2007 to Ksh.1.05 trillion in May 2011. Increase in the number of deposit accounts from 4.7 million in 2007 to 14 million in April 2011. Deposit values have grown from Ksh.709.8 billion in 2007 to Ksh.1.4 trillion in May 2011. Increase in the automated teller machines (ATMs) from 1,012 in 2007 to 2,153 as at 31st March 2011. Micro savings accounts operated through mobile phones have increased to over 700,000 with a deposit level of Ksh.737 million. Ladies and Gentlemen: The structural transformation of Kenya’s financial sector has not been achieved without challenges. Key among these challenges is the need to balance the goals of financial efficiency, stability and integrity on one side with financial inclusion on the other. The role of the regulator in an economy like ours is also to develop the market and balance out these challenges. The regulator should, and especially after the global financial crisis, not look for avenues of more regulation but support transformation and innovation through better regulation. What is better regulation? From Sir Andrew Crockett, it is a regulatory regime that: Can readily identify weaknesses and emerging vulnerabilities. Is capable of analyzing risks and so adequately pricing risks. Provides appropriate incentives (penalties) to induce prudent behavior in the market place. This will encourage innovations and strong institutions to develop in the economy. Ladies and Gentlemen: The structural transformation experienced thus far is just but the beginning. The Central Bank and other players have earmarked several other reforms which are expected to take development of the financial sector to new frontiers. In addition, the Central Bank has embraced financial education as a critical component of its financial inclusion strategy. The consumers will then be equipped with knowledge to make informed financial decisions and to analyze alternatives. In the same token, Ladies and Gentlemen, as efforts progress towards a more developed financial sector, there is need to ensure existence of adequate disclosure of information by providers of financial services, efficient dispute resolution mechanisms, comparability of BIS central bankers’ speeches offers and data protection. As financial institutions embrace innovations, there is need to ensure that innovations have adequate consumer protection legislation. It is therefore encouraging to note that the constitution promulgated last year makes provisions for consumer protection. The constitution creates adequate space to build strong institutions to implement these provisions which will define appropriate incentives and rules of the game to encourage prudent behavior in the market. Finally, Ladies and Gentlemen: While discharging your duties as accountants, auditors and advisers of financial institutions, you play a critical complementary role to the Central Bank in ensuring that such innovations are supported by sound internal controls of these institutions not to undermine safety and efficiency of the financial system, but at the same time provide enough room for innovation and development. Therefore, the Bank appreciates your role in supporting the banking sector reforms. But now, we also require your support on new ideas to introduce innovations in the financial markets to support and sustain its transformation as the theme of this conference ambitiously shows. Ladies and Gentlemen: It is now my honor and privilege to declare this conference officially open and to wish you fruitful deliberations. Thank you BIS central bankers’ speeches
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Talking notes by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Launch of the Reconstituted Market Leaders Forum, Nairobi, 6 July 2011.
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Njuguna Ndung’u: Launch of the Reconstituted Market Leaders Forum Talking notes by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Launch of the Reconstituted Market Leaders Forum, Nairobi, 6 July 2011. * * * Distinguished Chief Executives; Directors; Members; Ladies and Gentlemen: 1. Thank you all for finding time to attend this inaugural meeting of the reconstituted Market Leaders Forum. 2. As background information to our meeting today, I wish to mention that the Market Leaders Forum, popularly known as MLF, was formed in 2001 to promote and support the development of the Government Bonds Program. The membership of the Forum was drawn from stakeholders in the Government Securities Market that included Commercial Banks, Fund Managers, Stockbrokers, Investment Banks and Capital Markets Authority. 3. The Forum meets monthly and is chaired by the Governor, Central Bank of Kenya. The meetings of the Forum are purely consultative. The Bank takes into account the recommendations of the MLF in making decisions on bonds issuance, pricing and tenors and on other issues relating to the Financial Markets, and more specifically Government Securities Market. But it is also a good meeting to discuss macroeconomic situation policy issues. Achievements 4. Since its inception, the Forum has contributed significantly to the deepening and development of the financial markets in Kenya. Through the cooperation and support of the Forum the financial market has realized great milestones including: i. Lengthening of Debt Maturity Profile: The initial objective of the MLF was to lengthen the maturity profile of securities in the domestic debt portfolio in order to minimize refinancing risks associated with short term debt and to also deepen the local financial markets. This has successfully been achieved with the ratio of Treasury bills to bonds in the portfolio currently at 23:77 from 70:30 in 2001 and average maturity of all securities standing at 5 years 11 months up from 8 months in 2001. The average maturity for bonds alone is 8 years so far. In 2008, CBK issued the first long-dated paper of 20-years maturity. This was followed by successful issuance of a 25-year bond in 2010 and a debut 30-year savings development bond in 2011. ii. Secondary Market Infrastructure Development: In 2008, the CBK in partnership with the Nairobi Stock Exchange adopted the Automated Trading System (ATS) for Treasury bonds. The Adoption of ATS has improved efficiency and confidence in the Secondary bond market with the settlement cycle shortening to T+3. This initiative and other debt market developments have seen the secondary market activity improve with annual turnover increasing from Ksh.84.14 Bn ($1.05 Bn) in 2009 to Ksh.466.07 Bn ($5.83 Bn) in 2010. In 2008, the Horizontal Repurchase Agreement was introduced between commercial banks to improve liquidity in the market. The CBK together with the MLF has also moved to diversify bonds portfolio, mobilize a large mass of local and foreign investors to invest in government securities and thus deepening the bonds market in Kenya. As a result of these successes, the bond market has attracted private issuers of fixed income securities like corporate bonds and thereby diversified the investment opportunities. BIS central bankers’ speeches iii. The establishment and implementation of the benchmark bonds program: In conjunction with MLF, CBK has spearheaded the establishment and implementation of the benchmark bonds program in 2007. CBK adopted the introduction of a benchmark bond program to address the problem of bond fragmentation and thereby improve liquidity at the secondary market and firm up the yield curve. iv. Infrastructure Bonds (IFBs) Issuance: A total of four infrastructure bonds have been issued since 2009. Proceeds from these bond issues were specifically meant for financing certain infrastructural projects. These projects include those in the Transport Sector – e.g. Construction of new roads and rehabilitation of old ones. Water sewerage and irrigation – e.g. Construction of water supply and sewerage systems, water reservoir dams, boreholes and irrigation schemes around the country. Energy – e.g. Drilling of Electricity Generating Steam Wells (geothermal), upgrading the National Grid System with New Transmission Lines and expanding the Rural Electrification project. A debut IFB worth Ksh18.5 bn (USD231.25 mn) was successfully issued in February 2009. The largest successful single IB of USD 395mn issued in August 2010. Three other IFBs of total value: USD 807.5mn issued so far. In 2011 the CBK, in cognizance of the tenets of Kenya’s Vision 2030 of promoting savings among Kenyans, successfully issued a debut 30-year Savings Development Bond. Appreciation It is with sincere delight that I commend and highly thank the exiting members of the MLF for their invaluable contributions, support and cooperation without which the aforementioned milestones would not have been realized. Thank you once more. Responsibilities 5. The Forum will continue to be advisory through consultative engagements to advise the Bank on aspects of financial markets development including the following: i. Implementation of the Government Borrowing Programme. ii. Review performance of Government Securities in the Secondary Market and advice on issuance of Government Securities. iii. Issues relating to trading of Government Securities in the secondary market. iv. Development of efficient financial markets through dissemination of market information, marketing and investor education. v. Deepening of money and capital markets and efficient functioning of the financial markets. vi. Peer influence among stakeholders on policy reforms in their sectors. vii. Promote development and harmonization of financial markets and practices in the region. viii. Introduction of new financial markets products/developments for the consideration of the Bank. ix. Initiate, recommend and co-ordinate introduction of new financial markets products/developments for consideration by the Bank. BIS central bankers’ speeches Review of forum membership 6. As you have all observed over the last decade or so, the financial landscape in Kenya has undergone many transformations. The sector has seen the entrance of new players and stakeholders. For example, most brokerage firms converted into investment banks with varying business focus. 7. These dynamic developments have shown the need to include other emerging segments of the financial market in the Forum. Furthermore, change dynamics in the financial market sector have precipitated high representation turnovers in the MLF. It therefore became necessary to re-constitute the Market Leaders Forum to reflect the evolving financial landscape in Kenya and to enhance the relevance and effectiveness of the MLF in stimulating the government securities market in an expanding and dynamic financial market. 8. I congratulate all of you who have been nominated by your respective institutions or umbrella organizations to the MLF membership. 9. It is my hope and expectation that reconstitution of the Forum will re-energize the relevant financial sector development debate to effectively address emerging challenges in the financial markets and bring in new perspectives in the approach to financial sector growth in line with the Government policy to make Nairobi the Financial Hub for East and Central Africa. Meetings 10. The Forum will meet monthly. I warmly welcome the new members of the Forum and look forward to working with them in the coming days. The Financial Markets Department will continue hosting monthly technical meetings to review progress and provide advice on an ongoing basis. Thank you all very much for your time and for listening. BIS central bankers’ speeches
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Launch of the first and new currency of the Republic of South Sudan, Juba, South Sudan, 18 July 2011.
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Njuguna Ndung’u: Launch of the first and new currency of the Republic of South Sudan Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Launch of the first and new currency of the Republic of South Sudan, Juba, South Sudan, 18 July 2011. * * * Your Excellency, Salva Kiir, President of the Republic of South Sudan; Honourable Minister of Finance of the Republic of South Sudan (ROSS); All Honourable Ministers of the ROSS; Honourable the Governor of the Bank of South Sudan (BOSS); All invited guests; Ladies and gentlemen, It gives me great pleasure, honour and privilege to be part of this historic ceremony of launching the first Currency for the newly born Republic of South Sudan. Indeed I wish to congratulate the Republic of South Sudan for being able to introduce new Currency hardly ten days after the Country’s Independence Day. This is by all standards no mean achievement. I watched with great delight the recent celebrations that marked the birth of the Republic of South Sudan and consider it a great honour to have been invited to this equally important milestone event in the history of this new nation. This event is extremely important for the Central Bank of Kenya as it signifies the strong relationship that the South Sudan has had with the Central Bank of Kenya over the years. The Central Bank of Kenya hosted his Excellency the Governor of Bank of South Sudan some years back. This paved the way for the continued friendship the two institutions have enjoyed to date. Ladies and Gentlemen, I am also glad to note that recent consultations have identified additional areas in which technical assistance can be offered to the Bank of South Sudan by the Central Bank of Kenya. Your Excellency Mr. President, we recognize the enormous but not insurmountable task that the Bank of South Sudan has in transforming itself from a Branch to a fully fledged Central Bank and assure you of the Central Bank of Kenya’s commitment and support in this transformation process. Coming to the wider network of the Eastern African region, Leap frog with ease for Bank of South Sudan: 1. Payment Systems 2. Currency convertibility 3. Facilitate trade with the rest of the East African Community Region. With these few remarks, I wish to once again congratulate the Republic of South Sudan and the Bank of South Sudan for launching its new Currency. Thank you and God bless. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the signing ceremony of the Memorandum of Understanding between the Bank of Mauritius and the Central Bank of Kenya, Central Bank of Kenya, Nairobi, 8 August 2011.
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Njuguna Ndung’u: Cooperation between the Bank of Mauritius and the Central Bank of Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the signing ceremony of the Memorandum of Understanding between the Bank of Mauritius and the Central Bank of Kenya, Central Bank of Kenya, Nairobi, 8 August 2011. * * * Mr. Rundheersing Bheenick, Governor of the Bank of Mauritius; Members of the Press; Colleagues; Ladies and Gentlemen; I am privileged to welcome Governor Rundheersing Bheenick of the Bank of Mauritius to Nairobi and to the Central Bank of Kenya. Governor, we thank you for making the time to be here at this auspicious occasion and trust that you are having a pleasant stay so far. Ladies and Gentlemen: Today’s event is a monumental one in that it marks the establishment of formal supervisory relations between the Central Bank of Kenya and the Bank of Mauritius. We began the process of establishing formal cooperation between the Bank of Mauritius and the Central Bank of Kenya in 2009 and today’s signing of the Memorandum of Understanding between the Bank of Mauritius and the Central Bank of Kenya will be a culmination of that process. The MOU is premised on the need to enhance cooperation in the sharing of supervisory information between our two institutions. It will help define and guide our working relationships in addition to enabling the smooth exchange of supervisory information between us. One Kenyan bank (I & M Bank) has already established a presence in Mauritius while other banks are also considering exploring opportunities in Mauritius. Similarly, banks from Mauritius have direct and indirect commercial relations with our Kenyan institutions. Ladies and Gentlemen: The global financial crisis has reinforced the importance of effective dialogue and collaboration between banking supervisors. Indeed, one of the biggest lessons learnt from the financial crisis has been the need for better regulation of financial institutions. The crisis has also provided an abundance of examples highlighting the importance of supervisory cooperation. As a result, a key initiative of the Basel Committee on Banking Supervision has been to recommend enhanced promotion of cooperation between supervisors globally in order to facilitate an efficient exchange of information. Such coordination and communication is the basis for promoting robust risk management practices and developing sound supervisory standards. Cross-border cooperation is a prerequisite for establishing effective resolution techniques for systemically important banks having cross-border operations. It is therefore apparent that it is no longer possible for any one regulator to adequately supervise institutions that operate across the globe, hence cooperation among regulatory authorities is essential. As Regulators, we need to encourage and support transformation and innovation through better regulation instead of looking for avenues of more regulation. As per Sir Andrew Crockett, better regulation is a regime that: Can readily identify weaknesses and emerging vulnerabilities; Is capable of analyzing risks and adequately addressing pricing risks; BIS central bankers’ speeches Provides appropriate incentives (penalties) to induce prudent behavior in the market place; But also to add in our case, the regulator is an agent of market development. Better regulation encourages innovation and strong institutions to develop in the economy. Cross border banking has its opportunities and challenges. As regulators, it is in our mutual interest to ensure the soundness and stability of our respective financial sectors. We should therefore play our rightful role in ensuring effective supervision of banking entities operating in our respective jurisdictions. We should also ensure that any systemic risk that may be posed by one bank operating in another jurisdiction is mitigated and promptly brought to the attention of the home regulator. The MOU which we are signing today will thus enable us share a wide range of supervisory information on a more defined framework. Ladies and Gentlemen; Both Mauritius and Kenya are leading international hubs. Mauritius is a renowned international financial centre for its offshore financial services. Likewise, Kenya, because of its leadership in mobile money transfer services, is now referred to as the Silicon Valley of Africa. We can both learn from each other and share our respective experiences so as to increase the competitiveness of our markets as well as our financial institutions. The signing of this MOU will therefore set forth a pragmatic approach for cooperation and the sharing of supervisory information. We accordingly look forward to building on the existing good relations between the Central Bank of Kenya and the Bank of Mauritius and to a future of enhanced supervisory cooperation. I now invite Governor Bheenick to make some remarks before we proceed to sign the MOU. Thank you. BIS central bankers’ speeches
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Address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of Airtel Money Transfer Service, Nairobi, 10 August 2011.
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Njuguna Ndung’u: Improving access to financial services in Kenya Address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of Airtel Money Transfer Service, Nairobi, 10 August 2011. * * * Hon. Samuel Poghisio, Minister for Information and Communications; Dr. Bitange Ndemo, Permanent Secretary, Ministry of Information and Communications; Mr. Charles Njoroge, Director General, Communications Commission of Kenya; N. Arjun, Airtel Chief Projects and Transformation Officer, Airtel Africa; Rene Meza, Managing Director, Airtel Kenya; Distinguished Guests: Ladies and Gentlemen: It gives me great pleasure to be here this morning during this historic launch of Airtel Money Transfer Service brand into the Kenyan Financial Sector following the successful application early this year by Airtel to re-brand and re-launch the service and subsequent approval by the Central Bank of Kenya. Ladies and Gentlemen: I am informed that the key objective of Airtel Money Brand in line with this launch is twofold: First, to provide a convenient, affordable, and easily accessible money transfer service to Kenyans of all walks of life and second, to provide the banked members of the society with a convenient way to access and transact funds held in their bank accounts. This objective is in tandem with the Central Bank policy on adoption of innovative technological platforms to scale up access to financial services. In fact, Mobile Phone Financial services have in particular presented Kenya with an opportunity to significantly upscale access to financial services cost effectively. It has also shown there is a market and everyone now wants a slice of it. Ladies and Gentlemen: The Kenyan Mobile Phone Financial Services story has become a much acclaimed global case study. To date, over 17.8 million Kenyans transfer over Ksh.3.1 billion to each other daily with over 1.1 million transactions. In particular, and in terms of registered users and agents’ base, I am informed that Airtel controls 18 percent of the registered users and 25 percent of agents. Further, I wish to commend Airtel for planning to carry out an extensive awareness campaign immediately after this launch in order to stimulate the uptake of the service in addition to the recent extensive country wide agent recruitment exercise by the company. It is my firm belief that this will positively impact on the visibility of the Airtel Brand in the market. In fact, there are so many areas not yet fully covered out there to be served, go for them and increase the share of the population using mobile phone financial services. Ladies and Gentlemen: Effective and better regulation requires prudential guidelines to provide guidance in all policy and oversight activities of Payment System Operators and Regulators. In this regard, I am gland to inform you that the Bank early this year released draft regulations whose objective is to ensure that E-Money Issuers and Payment Service Providers conduct their businesses prudently and in accordance with the provisions of the relevant legal provisions including the Banking Act, Central Bank of Kenya Act, the Proceeds of Crime and Anti-Money Laundering Act, the Companies Act, the Microfinance Act, and the SACCO Societies Act. Ladies and Gentlemen: The public policy objective of Central Bank in the National Payments Systems is to ensure safety, efficiency and effectiveness of the payment system as a whole. In this regard, please allow me to point out that with increased use of mobile phone money transfer services by the wider general public, inherent system-wide implications are bound to arise and therefore it is prudent for all stakeholders to ensure; BIS central bankers’ speeches That appropriate measures are put in place to safeguard the integrity of the systems at all times in order to protect customers against risks such as frauds, loss of money and loss of privacy. That the system will provide adequate measures to guard against money laundering among others. That the system is capable of mitigating the risks of access by non-authorized persons such as hackers and others. We have operating platforms within reach and disaster recovery sites in secure locations and tested at all times. Ladies and gentlemen: In conclusion, I wish to thank Airtel and its Management team for the important role it is playing in the economy. With these few remarks I wish to declare Airtel Money Transfer Service Brand officially launched. Thank you. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of Currency Centres in Kenya and the official opening of Meru Currency Centre, Cooperative Bank, Meru Branch, 19 August 2011.
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Njuguna Ndung’u: Currency Centres in Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of Currency Centres in Kenya and the official opening of Meru Currency Centre, Cooperative Bank, Meru Branch, 19 August 2011. * * * The Deputy Prime Minister and Minister of Finance, Hon. Uhuru Kenyatta; The Provincial Commissioner, Eastern Province, Ms. Claire Omollo; The MP for North Imenti, Hon. Silas Ruteere; His Worship the Mayor of Meru, Councillor Mr. Mwalimu John; The District Commissioner, Imenti North, Mr. David Cherop; The Chief Executive Officer, Co-operative Bank Kenya Limited, Mr. Gideon Muriuki; The Chief Executive, Kenya Bankers Association, Mr. Habil Olaka; Commercial Bank Chief Executives and their Branch Managers here present; Distinguished Guests; Ladies and Gentlemen: I am greatly pleased and appreciative once again to witness another milestone achievement of the collaborative effort between the Central Bank of Kenya and the Kenya Bankers Association, that is , the launching of Currency Centres concept in Kenya and the official opening of Meru Currency Centre by the Deputy Prime Minister and Minister for Finance. Honourable Deputy Prime Minister and Minister for Finance, the banking sector has undergone major transformation in the last five years in light of changing consumer needs. The most notable changes have been the rapid expansion of branch networks, increase in client accounts and in the number of Automated Teller Machines (ATMs) across the country, use of agents and mobile phone infrastructure by banks to provide financial services and increased outsourcing of cash processing and movement services. These developments have significantly impacted on currency circulation patterns in the country making it inevitable for the Central Bank and commercial banks to review how these operations can be conducted cost effectively. Honourable Deputy Prime Minister, the Central Bank of Kenya in conjunction with the Kenya Bankers Association embarked on establishing Currency Centres two years ago. This was done as a way of supporting commercial banks to efficiently provide financial services in various regions of the country and reduce the distance over which cash is moved between one Central Bank Office and the upcountry branches of commercial banks. The main objective is to reduce cost of doing business. Honourable Minister, the first Currency Centre under this initiative was established in December 2009 in Nyeri followed by Nakuru Currency Centre in December 2010 and Meru in February 2011. The three Currency Centres currently serve a total of 172 commercial banks’ branches and account for over 12% of the total currency activities in the country. As the Banking Fraternity looks forward, the lessons learnt from these three centres will inform policy and strategies for the next phase of this initiative. Honourable Deputy Prime Minister and Minister for Finance, in finalizing my remarks, allow me to express our appreciation to the Government for the continued support to the banking sector initiatives. Notable areas of these initiatives are: Mobile Financial Services Platform; establishment of Credit Information Sharing Framework, establishment of Agency Banking; operation of Deposit Taking Microfinance Institutions and more recently, the Cheque Truncation System. These initiatives have been rolled out under the background support of the Government and more specifically the Ministry of Finance. The Central Bank of Kenya in collaboration with the Kenya Bankers Association will continue working hard to make a positive contribution for the prosperity of our country and to make Kenya investors’ financial hub of choice. BIS central bankers’ speeches With these few remarks, it gives me great pleasure to invite the Deputy Prime Minister and Minister for Finance, Hon. Uhuru Kenyatta, to address this occasion, officially launch the Currency Centres Initiative in Kenya and formally open Meru Currency Centre. Thank you BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the launch of the Certificate in Agricultural Finance (CAF) and the East African Agricultural Finance Network (EAAFN), Kenya School of Monetary Studies, Nairobi, 7 September 2011.
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Njuguna Ndung’u: A new agricultural finance training programme for Kenya Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the launch of the Certificate in Agricultural Finance (CAF) and the East African Agricultural Finance Network (EAAFN), Kenya School of Monetary Studies, Nairobi, 7 September 2011. * * * The Hon. Minister for Agriculture, Dr. Sally Kosgei; The Secretary General, East Africa Community, Amb. Dr. Richard Sezibera; Permanent Secretary, Dr. Romano Kiome; USAID East Africa Regional Director, Lawrence Meserve; Chief Executive Officers of Commercial Banks; Esteemed Members of AFRACA; Distinguished Participants; Ladies and Gentlemen: Good Morning: Hon. Minister, About a year and a half ago, on 17th March 2010, we gathered here to discuss innovative ways to increase financial flows to the agricultural sector. The delegates in that meeting identified limited human capacity in agricultural lending as an impediment to financing the sector. The Kenya School of Monetary Studies was tasked to address this human resource gap amongst lending institutions. Ladies and gentlemen: I am pleased to inform you that after extensive consultations with key stakeholders, the School with the support of USAID-Competitiveness and Trade Expansion Project (COMPETE), developed a Modular Certificate Training Program whose launch we are all here to witness. I wish to commend the team that steered the process of initiating this important program. In order to further develop this sector, this committee has been transformed into the East African Agricultural Finance Network (EAAFN) with a view to nurture, deepen and consolidate the sector’s capacity building agenda. Hon. Minister, I also recognize the presence, at this forum, of the inaugural class of the Regional Certificate Program in Agricultural Finance. I hope the course is has met your expectations. Hon. Minister, Ladies and gentlemen: The rapid growth of microfinance suggests that there may be a large market for rural and agricultural loans. It is therefore important to better understand the demand for and use of agricultural credit to develop effective products, institutions and policies. That is why the CAF program mainly targets staff working in the credit and product development units in regional commercial banks, agricultural SACCOs and Micro-finance Institutions. Hon. Minister, Ladies and Gentlemen, let me conclude by again expressing the Central Bank of Kenya’s appreciation of various institutions that have enabled the development of this capacity building programme as well as the 22 financial institutions that are represented by the pioneer CAF participants. BIS central bankers’ speeches While acknowledging that the challenges facing agriculture are huge given the growing population, declining land sizes, climate change that has imposed severe costs on the sector, all of which compound the problem of financing agriculture, the challenges are not insurmountable, if we work together. Ladies and Gentlemen, it is now my pleasure and privilege to welcome The Hon. Minister for Agriculture, Dr. Sally Kosgei to give the key note address and officially launch the East African Agricultural Finance Network (EAAFN) and inaugurate the Regional Certificate Program in Agricultural Finance. Thank you. BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the African Microfinance Pricing Transparency Leadership Forum, Nairobi, 6 October 2011.
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Njuguna Ndung’u: Microfinance transparency Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the African Microfinance Pricing Transparency Leadership Forum, Nairobi, 6 October 2011. * * * Mr. Ives Terracol, Regional Director, Agence Française de Développment; Mr. Chuck Waterfield, Chief Executive Officer, MicroFinance Transparency; Distinguished Guests; Ladies and Gentlemen: It gives me great pleasure to be with you this morning during this important African Microfinance Pricing Transparency Leadership Forum. Before I make my opening remarks, let me take this opportunity to thank the organizers of this conference, MicroFinance Transparency, for inviting me to share some thoughts on this pertinent topic. I would also like to extend a warm welcome to all the participants who have travelled from other countries to Kenya and to say “Karibu Sana”. I hope you will take some time to enjoy our beautiful country with its rich culture and diverse tourist attractions. Ladies and Gentlemen, financial inclusion has been recognized now in development debates and action across the globe. This is more so in developing and emerging economies, which record the highest poverty levels and constitute majority of the world’s unbanked population. The drive to enhance financial inclusion is thus critical given that increasing evidence shows that it is key in reducing the economic vulnerability of households, promoting economic growth, alleviating poverty and sustainably improving the quality of peoples’ lives. The push for financial inclusion is entrenched in Government of Kenya’s Development Blueprint, Vision 2030 and lies at the core of the Central Bank of Kenya’s strategic actions towards implementing this Vision. It is in this regard that the Central Bank, together with market players, has embraced several initiatives and reforms aimed at enhancing the level of financial inclusion. These include licensing of deposit taking microfinance institutions (DTMs) and credit reference bureaus (CRBs); introduction of shariah compliant banking products, mobile phone money transfer services and the agency banking model. These measures and new institutions help in completing the financial infrastructure picture in Kenya that reflects its market structures as well. Ladies and Gentlemen, in effect, we have seen a significant decline of barriers to entry into the financial sector, increased infrastructure distribution and innovative instruments targeting the lower segments of the population. These have resulted in tremendous increases in the levels, reach and depth of access to financial services. To highlight a few, bank accounts have grown from 2.5 million to over 14 million in just over 5 years, while mobile money transfer services have led to over 15 million Kenyans being integrated into the financial system. The regulated microfinance industry has also grown tremendously with the licensing of six Deposit Taking Microfinance institutions with 57 branches, 1.5 million deposit accounts valued at Ksh.9 billion and 0.53 million loan accounts with an outstanding loan portfolio of Ksh.15 billion. Despite these remarkable developments in the Kenyan financial sector, we are cognisant of the fact that there still remains great need within the Kenyan market for appropriate and more affordable financial services. Given that this situation is not unique to Kenya, but applies to most, if not all, African nations represented in this Forum, it is imperative that improving access to financial services remains key in our development agenda. We need to solve costs, barriers to entry, physical distance and market concentration problems. Ladies and Gentlemen, as we undertake to enhance access to financial services as regulators and policy makers, we must ensure that financial services are provided a BIS central bankers’ speeches competitive market environment. Let us learn from developments in the microfinance sectors in parts of Bosnia and India, that recently experienced crises. The challenges in these countries were instigated by issues such as multiple lending and client over-indebtedness, aggressive competition, erosion of credit quality standards, a lack of transparency in pricing, a weak credit information sharing framework and inadequate regulation. Beyond these challenges, currently the broader issue of transparent and responsible pricing is becoming a concern for the global microfinance industry. Price is an incentive. Transparent and responsible pricing is essential for stimulating growth, efficiency and effectiveness of the financial sector. It is indeed a key ingredient for incentivising innovation, enhancing informed decision-making by consumers and fostering the development of healthy, vibrant and competitive markets. Transparency in pricing is critical because consumers have the right to know the exact price of products in the market. Conversely, nontransparent (or opaque) pricing, prevents consumers from making informed decisions about borrowing. This ultimately reduces the ability of financial institutions to compete effectively, free market forces to operate properly and the financial sector to develop efficiently and sustainably. Policies to entrench relevant consumer protection measures, including transparency and truth-in-lending regulations combined with the promotion of competition and efficiency among credit providers, can go a long way toward expanding the reach of sustainable finance, particularly credit, while safeguarding consumer interests. We, as policymakers and regulators, therefore, have to take up the responsibility of stimulating competition in financial institutions and promoting innovation aimed at improving efficiency and lowering prices. We must, however, also endeavour to put in place consumer protection measures to ensure our consumers are not exploited. Financial institutions, on the other hand, should seek to maintain transparency regarding interest rates charged on the borrowers. Further they should adopt new technology to increase productivity and efficiency in their operations to reduce these rates. It is imperative that concerted efforts be put into educating financial clients. When clients are financially informed they are empowered to demand safe, cost-efficient and quality financial services at fair prices. This makes it necessary for service providers to competitively innovate products suitable for their customers’ needs and pockets. Ladies and Gentlemen: the push to enhance consumer protection is also entrenched in Kenya’s Vision 2030 strategy which aims at improving transparency and increasing competition in the financial sector to benefit customers and the overall economy. The Kenyan constitution also has specific provisions on consumer rights. In this regard, the Central Bank has initiated a number of reforms and initiatives including the amendment of the Banking Act and Prudential Guidelines, publication of information on charges and lending rates and the conducting of a series of studies and surveys to foster competition in the banking sector and develop a disclosure regime for consumer interest rates. To complement these efforts, the Bank also actively participates in financial education campaigns to aid consumers in making better and informed financial decisions. In particular, the Bank is a pivotal member of a public private partnership whose aim is to champion the development of a national strategy for Financial Education and Consumer Protection in Kenya. Effective consumer protection and financial literacy, especially with regards to price disclosure, are key in ensuring that lenders behave responsibly and ethically; and consumers, especially the poor, gain the capacity to use this information to make informed decisions about financial services in order to enhance their economic wellbeing. Ladies and Gentlemen, the practice of price transparency ultimately contributes to the health and vibrancy of our financial markets, and enhances the extension of access to, and use of, appropriate financial products and services. As I conclude, Ladies and Gentlemen, I express my confidence that this workshop will present an invaluable platform for African leaders in the microfinance industry and financial BIS central bankers’ speeches sector to share their experiences on pricing transparency in the various jurisdictions represented here. It will also present us with an opportunity to acquaint ourselves with the global best practices on the same. We should remember that PRICE is an incentive and can be a disincentive – it has to be appropriate. With these few remarks, I now declare this workshop officially open and take this opportunity to wish you fruitful deliberations. Thank you BIS central bankers’ speeches
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Keynote address by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the 5th Joint CMA/CBK/RBA/IRA Board Members retreat on collaboration among domestic financial sector regulators, Mombasa, 13 October 2011.
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Njuguna Ndung’u: Financial stability and financial inclusion Keynote address by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the 5th Joint CMA/CBK/RBA/IRA Board Members retreat on collaboration among domestic financial sector regulators, Mombasa, 13 October 2011. * * * Chairpersons here present; Board Members of Financial Sector Regulators here present; Chief Executive Officers; Colleagues; Ladies and Gentlemen: I am honoured by the invitation to address this gathering on financial inclusion and financial stability, an increasingly topical issue. At the outset, I would like to thank the Retirement Benefits Authority for hosting this 5th Joint Retreat for the Board Members of Domestic Financial Sector Regulators. Ladies and Gentlemen: At a time like this, a pertinent question begs an answer: what does financial stability entail? While the concept cannot be easily captured in a single word, a few attributes need to be demonstrated for a given system to be described as financially stable. These include: public confidence and trust in the institutional framework – owing to sound design of the infrastructure; predictability; efficiency; sound ethical behavior by market participants and competence of financial authorities, among others. To paraphrase, financial stability may be said to be present in an economy when the financial system functions as it is supposed to. Financial stability in a given jurisdiction serves to instill confidence in users of financial services. It encourages and facilitates productive economic activities and thereby contributes to a society’s overall well-being and progress. The role of regulators, in this regard, has historically been to oversee financial stability using traditional performance indicators as a guide. These indicators include conventional performance measures such as the quality of assets in institutions, earnings and performance, liquidity and capitalization. Ladies and Gentlemen: In our country’s history, the Kenyan financial sector has on a number of occasions undergone severe tests of its stability, involving failure of systemically important financial institutions, that have dented market confidence in our financial system. As regulators, we have a fiduciary role to maintain public confidence in the financial sector by addressing all factors that would undermine the sector’s long-term stability, without which it would lose its long-term relevance as a medium of economic interaction and payments system. Maintaining public confidence entails ensuring that the sector keeps up with all pertinent global developments to ensure it remains relevant to the needs of the public from which it derives its mandate. Ladies and Gentlemen: Alongside financial stability comes another topical issue in development debates across the globe, financial inclusion. For the financial system to be relevant to society, it needs to ensure that as much of the eligible target population has opportunity to access a variety of financial services ranging from credit, savings and payments, transfers, pensions, capital markets and insurance services. Inclusion is an essential pre-condition to enhancing wealth creation and poverty reduction and ultimately broad based economic development. The Consultative Group to Assist the Poor (CGAP) defines financial inclusion as a “state in which all people who can are able to have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients”. These financial services are BIS central bankers’ speeches delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations. Ladies and Gentlemen: Why should we, as regulators, be concerned about the levels of financial inclusion in our respective jurisdictions? Individuals and households lacking adequate access to a full range of responsibly delivered, affordably priced, convenient, formal financial services would be severely constrained in participating fully in the economy. As an entity, the financial sector would also face bleak prospects in terms of expansion and longevity, which holds back overall economic development. But more importantly, financial inclusion is supported by financial stability. In Kenya, the proportion of the population totally excluded from formal financial services, as revealed by the Finaccess 2006 and 2009 surveys, stood at 38.3% and 32.7% respectively. The proportionate reduction between the years is largely attributable to the advent of mobilebased financial services which have indeed revolutionized the provision of formal financial services and availed these to the market affordably and conveniently. For us to bring costs of financial services down, we need full inclusion. Ladies and Gentlemen: Given the statistics above, as financial sector regulators, we share common aspirations of making the financial sector more stable, efficient and accessible. Though these objectives may at times appear competing, they are for the most part complementary. Stability is a pre-requisite for efficiency, while both are in turn required to raise inclusion. In cognizance of this, the Central Bank, jointly with other players, has undertaken several initiatives and reforms aimed at boosting overall inclusion. These include: Licensing of Deposit Taking Microfinance Institutions (DTMs), focusing on the lower end of the market concentrated in rural and peri-urban areas. The licensed DTMs had 57 branches, 1.5 million deposit accounts valued at Ksh.9 billion (USD90 million) and 0.53 million loan accounts with an outstanding loan portfolio of Ksh.15 billion (USD150,000) as at the end of August 2011. Rolling out Agency Banking, with over 8,000 agents being contracted by 7 banks countrywide and more than Ksh.17 billion worth of transactions conducted through agents as at the end of August 2011 since roll-out in July 2010. Implementation of Credit Information Sharing, with more than 900,000 reports on customers on credit applicants being requested by banks as at 31st August 2011 since roll out just a year ago. Introduction of Sharia Compliant Banking, with two institutions so far offering exclusive Sharia products, with a growing market footprint. Mobile-Based Financial Services, utilizing technological platforms to enable the provision of innovative financial services. In just over 5 years, over 15 million Kenyans have been integrated into the financial system through this innovative channel. Financial Education Initiatives under the Financial Education and Consumer Protection Partnership (FEPP), which has commissioned four pilot financial education projects through Equity Bank, Faulu Kenya, Plan International and Mediae. These pilot projects aim to establish the feasibility of different approaches to financial education in Kenya in order to inform the development of a national strategy for financial education. Owing to the above, there have been notable improvements in financial access especially among the lower population segments, including the growth of bank deposit accounts from 2.5 million to close to 14 million to date. Ladies and Gentlemen: Beyond the local scene, the Central Bank has also been active in international forums with a view to learning from others’ experiences. The Bank has been an BIS central bankers’ speeches active member of the Alliance for Financial Inclusion (AFI), a global member-based network which provides an international platform for policymakers in developing countries to learn and share knowledge towards enhancing access to basic financial services for their unbanked and under-banked populace. AFI has a membership from 81 developing countries in Africa, Asia and Latin America. Through its membership of AFI, CBK was appointed as a non-G20 member of the Global Partnership for Financial Inclusion (GPFI) in December 2010. GPFI is a G20 initiative to propel financial inclusion through peer learning, knowledge sharing, policy advocacy and coordination. Now that AFI is opening its membership to associate members, I take this opportunity to urge fellow financial sector regulators to consider joining this worthwhile forum, in order to facilitate joint contributions towards greater inclusion in our local sector. In the same vein, I am pleased to note that both the CBK and CMA were recently invited, and accepted to join the Regional Consultative Group for Sub-Saharan Africa of the Financial Stability Board (FSB). FSB is a global association established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interests of financial stability. The Association brings together national authorities responsible for financial stability in 24 countries and jurisdictions, including regulators and supervisors. Membership in the consultative forum will provide both the CBK and CMA with an opportunity to contribute in key decision making and policy formulation from a regional and global perspective for the benefit of our entire financial sector. It will also create an avenue to contribute in shaping the development and implementation of financial sector policies aimed at realizing financial stability. I am sure that both the CBK and CMA will carry the voices of the other domestic financial sector regulators. Ladies and Gentlemen: The continuous evolution of the financial sector towards greater sophistication and value provision requires the regulators to move ahead in surveillance and vigilance to maintain the requisite stability and efficiency. For regulators to remain effective in their mandate, they need to remain in step with the financial services industry and its operating environment. For this reason, continuous capacity building is necessary, as is sustained cooperation between the different regulators to ensure coordinated efforts towards financial stability and financial inclusion. Thank you for your attention. BIS central bankers’ speeches
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Keynote speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers' (KIB) Annual Dinner, Nairobi, 25 November 2011.
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Njuguna Ndung’u: Kenya – successes, challenges and future path Keynote speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the Kenya Institute of Bankers’ (KIB) Annual Dinner, Nairobi, 25 November 2011. * * * The Chairperson, Board of Directors, KIB; Members of the KIB Council Here Present; The Chief Executive, Management and Staff, KIB; Chief Executive Officers of banks and financial institutions; Distinguished Guests; Ladies and Gentlemen: I am pleased and honoured to join you this evening. I therefore take this early opportunity to thank the Kenya Institute of Bankers (KIB) for inviting me to speak at this 2011 Annual Dinner. This is a valuable opportunity to celebrate our successes, reflect on the challenges during the year and chart our future path. Ladies and Gentlemen: In many ways 2011 has been a challenging year given the global and domestic shocks hitting the economy. The characteristic supply shocks – like fuel prices – have affected negatively both domestic prices and output. Despite the shocks, the economy has remained resilient and is expected to register a modest growth of 5% in 2011 compared with 4.6% in 2010. Having endured the shocks buffeting the economy, the Central Bank has focused its policy response on containing inflation and stabilizing the exchange rate. The Central Bank tightened monetary policy by raising gradually both the CBR and CRR to 16.5% and 5.25%, respectively. We have started to see these measures bearing fruit: there are signs of easing in domestic demand pressures while the exchange rate is stabilizing. Ladies and Gentlemen: Even with the shocks hitting the economy and the policy responses putting us on a tight rope, the banking industry performance in the first three quarters surpassed expectations. Let me highlight some of these performance indicators; The industry’s deposit base grew by an impressive 21% as at end October 2011 compared to October last year. Deposit mobilization efforts were boosted by the new delivery channels introduced in the year, including the adoption of agency banking that has taken root with more than 8,700 agents spread across the country. Branches of banks also continued to grow and by September 2011, bank branches stood at 1,113. The banking sector now has a presence in each of Kenya’s 47 counties, which provides banks with a vantage position to contribute to the development agenda of the nascent Counties. The asset base hit the KSh.2 trillion mark in September 2011. This is mainly attributed to the banks continued expansion of their lending portfolio through introduction of loan products that suit the needs of different market niches. The gross loans stood at KSh.1.2 trillion as at October 2011, a 35% increase from October 2010. Ladies and Gentlemen: The policy response to shocks has its pitfalls. Right now, the concern is on interest rates and fear of non-performing loans rising. Some commercial banks in November 2011 have revised their base rates to as high as 25%. BIS central bankers’ speeches There is growing public concern on the rising lending rates and the wide interest rate spread. Banks will, therefore, need to read the public mood and keep any increases to a minimum to take into account the difficult circumstances that borrowers are facing. We recognise that pricing of credit risk by banks had proved a major challenge in the past; however, the introduction of credit information sharing in 2010 has minimized this challenge. So far, over one million credit reports have been requested by banks and about 4000 by bank customers. In this regard, the Central Bank has spearheaded reforms aimed at lowering the cost of doing business. These include introduction of credit information sharing, roll-out of agency banking and setting up of Currency Centres. Banks should therefore pass on the cost savings from these initiatives to customers as you review lending rates. On the National Payment Systems front, the retail payments system continued to evolve in line with the payments system reform and modernization strategy. In particular, the Central Bank in conjunction with the Kenya Bankers Association successfully implemented the Cheque Truncation System that will eliminate the hitherto manual cheque clearing by automating the entire clearing cycle. The benefits accruing from improvement in the national payment system should be passed on to your customers. I am glad to inform you that on 23rd November 2011, Parliament finally passed the National Payments System Bill, 2011. The Bill seeks to provide for the regulation and supervision of Payment Systems and Payment Service Providers. In particular, the Bill will enables Kenya’s payment system to comply with the Bank for International Settlement Core Principles and give Central Bank enhanced legal and regulatory powers over the payment systems. Ladies and Gentlemen: Looking into the future, the economic outlook for the next 12 months is positive given the current short rains that have improved the food situation in the country; the Governments’ concerted efforts in implementing Vision 2030 flag ship projects and the current coordinated policy measures including monetary-fiscal policies aimed at maintaining macroeconomic stability while boosting broad based growth. On the financial sector front, the Central Bank in conjunction with the Government will scale up reforms to enhance the sector’s competitiveness, efficiency, access and stability as well as making Kenya a financial hub in the medium term. The banking sector is also expected to continue with its’ excellent performance underpinned by regional expansion and lowered cost of business as the various reforms take root. Looking ahead for Monetary Policy, the priority is to reverse inflation and inflationary expectations and exchange rate volatility to protect the economic growth base. Tight monetary policy will be sustained until inflationary pressures have been reversed and the foreign exchange market stabilized. From a historical perspective, we have seen the same measures work and we still have confidence it will work in 2012. The Bank will also continue with regular interactions with key stakeholders including market players to enhance the effectiveness of the transmission mechanism of monetary policy and other policy strategy actions. In closing, Ladies and Gentlemen, let me thank you all for the support and cooperation in developing the financial sector. I look forward to more fruitful collaboration and partnership going forward and in addressing any challenges facing the sector. Lastly, let me end by wishing you all a happy holiday season and fruitful 2012. THANK YOU. BIS central bankers’ speeches
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Speech by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at the opening ceremony of the Joint Kenya School of Monetary Studies (KSMS) and COMESA Monetary Institute (CMI) Symposium for central banks' human resource directors, Kenya School of Monetary Studies, Nairobi, 24 January 2012.
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Njuguna Ndung’u: HR challenges in the Kenyan banking sector Speech by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at the opening ceremony of the Joint Kenya School of Monetary Studies (KSMS) and COMESA Monetary Institute (CMI) Symposium for central banks’ human resource directors, Kenya School of Monetary Studies, Nairobi, 24 January 2012. * * * HR Directors here present; Coordinator of CMI, Mr. Ibrahim Zeidy and Specialists; Distinguished Speakers; Invited Guests: It is my pleasure to preside over the opening ceremony of this HR Symposium, the first of its kind in the region, jointly organized by the Kenya School of Monetary Studies and the COMESA Monetary Institute (CMI). This is the first meeting and KSMS are hosting. We thank COMESA for having faith with CBK to deliver DMI for policy conveyance. At the onset, let me take this opportunity to extend a warm welcome to all participants from the COMESA Region and speakers from different parts of the world who have found time and joined us today. Please feel very welcome and I trust you will find some time to enjoy the wonderful facilities available here at the School and enjoy some of the beautiful and fascinating sceneries of Kenya. Ladies and Gentlemen: The 2008 global financial crisis, coupled with the ever changing macroeconomic environment presented a complex financial and economic global landscape that was a challenge to central banks the world over. It therefore became clear that although the core mandate of central banks remains price and financial system stability, there should be coordination of regulatory structures across the financial system in totality. The idea is that we should not impose more regulation but better regulation. What does better regulation entail? It is a system that: Can readily identify weaknesses and emerging vulnerabilities Is capable of analyzing risks and so adequately pricing risks Provides appropriate incentives (penalties) to induce prudent behavior in the market place Building strong institutions that can withstand shocks and give confidence to the market: strong institutions of the regulated and strong institutions of the regulator These pillars hinge on HR capital availability and application. The challenges call for enhanced human capital development to cope with this changing dynamic world. As HR Directors, I want to encourage you to formulate capacity development initiatives to equip staff with necessary skills and competencies to effectively manage these challenges in a manner that guarantees a balance between efficiency and stability. Ladies and Gentlemen: For maximum impact, these initiatives must be accompanied by effective institutional governance oversight arrangements – a responsibility over which you as HR Directors have a direct contribution. As you deliberate on the important factors driving central banks in the 21st century, therefore, please pay attention to the need to distinguish between the external aspects of governance (mandate and accountability) and the internal ones (structure, management and staffing). Staff, at all levels must understand the business of central banks and understand the environment in which banks operate for effective performance and service delivery in the fulfillment of central bank’s core mandate. Ladies and Gentlemen, one main issue that may BIS central bankers’ speeches need to remain under closer focus throughout this three day Symposium is the daunting task Central banks face as they prepare to enter an era of institutional and modernization reforms arising from changes in government policies and changes in the global financial markets. For those of you who manage human resource, you may need to seek answers to the following questions: How will duties of central banks change with anticipated global development and global responsibilities? How have demands on central banks changed – nationally and expectation? What capabilities need to be built? What can Human Resource do to facilitate the desired changes and ensure Central Bank executives have the right set of skills at all levels? Central banks’ modernization to conform to the ever-changing business environment and benchmarking against best practice is no longer an option. These changes will continuously take central banks into new horizons that bring forth both opportunities and threats that we need to mitigate against. Ladies and Gentlemen: In April 2011, I presided over a similar conference organized by the Indian Institute of Banking and Finance. At that event, I acknowledged the importance of such platforms for enabling banks to not only share experiences, but also to exchange ideas on innovations and other emerging issues that require the preparation of bank staff to cope with the ever evolving trends in the global financial scene. I therefore challenged institutions with similar mandate to embrace such platforms as an avenue for bringing together HR practitioners and policy makers in the banking sector to share ideas on innovations that require proactive HR training and development. I am therefore very pleased that KSMS together with the CMI took up the challenge to organize this Symposium as a forum for participants to reflect and debate current and emerging HR challenges that are likely to impact on the performance and service delivery of central banks in the region. Ladies and Gentlemen: There are a number of salient HR issues that are of concern to central bank operations and performance in the 21st century. Let me list them: 1. Regional Integration and Capacity Development – As you are aware, the Common Market for Eastern and Southern Africa (COMESA) regional integration process is progressing well. Milestones achieved so far include the establishment of the COMESA Monetary Institute, currently hosted here at the Kenya School of Monetary Studies in recognition of capacity building as one of the key pillars necessary for achieving successful integration. Partner central banks have identified the need to revise the frameworks governing HR policies and strategies in line with international best practice. The call for the establishment of an integrated framework for a holistic approach to capacity building among central banks in COMESA is therefore a pertinent one. Implementation of such an approach will enable regional banks to realize greater economies of scale by taking advantage of regional institutional and human resources. Capacity building must, therefore, take a unified approach, with regional central banks coming together to pool resources and take advantage of regional diversity to achieve greater efficiency in organizational performance. 2. Performance Management and Talent Development – Traditionally, central banks have had a multi-generational workforce with the older segment forming the majority of the workforce. HR managers are therefore faced with the challenge of balancing the demands of the older workforce with that of the younger workforce using recognized management principles. The younger workforce comes ready to take up responsibilities at a lesser age and experience, but with high bargaining power due to their knowledge and skills at hand and techno-savvyness. A clear shift is thus BIS central bankers’ speeches seen in terms of organizational career commitment to individualized career management. Managing this set of people is essential for the growth of any industry but especially for central banks where the composition of the workforce is rapidly changing. The challenge therefore is on the need to develop individuals who have performance potential on the basis of past record and knowledge-based expertise while at the same time tapping into the expertise of the younger generation without compromising staff morale. Furthermore, the hired for life mentality of the past is fast becoming obsolete as workers increasingly change employers. HR must therefore place emphasis on proper work-life balance, while at the same time motivating staff through continuous learning opportunities and positive feedback. 3. Managing Change – Organizations are getting more and more technologically oriented. The banking sector particularly, has undergone revolutionary changes enabled by technology. In the Central Bank of Kenya, for example, a number of technological innovations have been implemented. The success of these interventions is no doubt heavily dependent on managing the people issues surrounding the process. In order to realize acceptance at all levels in the organization, HR has a major role in preparing the workforce to understand and endogenize the technological changes. 4. Human Resource – The success of any organization depends on the resources it has, one of them being human capital. This boils down to recruiting the best, developing, managing the best and devising an incentive mechanism for retention and career progression. The success of central banks in terms of service delivery and achievement of core mandate to the expectations of governments, the market and other stakeholders, is hinged on appropriate governance structures and practices that guarantee professionalism in policy decision-making. A quick look at the Symposium programme, Ladies and Gentlemen, confirms that the organizers have identified some of these critical elements that are required to drive regional central banks through the next decade and beyond. Adequately themed “Driving Central Banks Through the 21st Century”, the Symposium brings together knowledgeable speakers from across different sectors including central banks, corporate entities and academic institutions from the continent and beyond. I therefore have no doubt that this Symposium will offer cutting edge or frontier experiences and lessons learnt on strategies for confronting the challenges now facing several HR Departments in Central Banks. Ladies and Gentlemen: In the course of your deliberations, please take time to look into some of the following issues and come up with appropriate recommendations: Identify gaps in core competency areas of human resource development and management in the financial sector in general and in regional central banks in particular. Propose areas of regional cooperation and strategies for forging partnerships with our development partners which will allow for effective coordination of interventions in capacity building. Establish, preferably an annual, forum for discussing issues and processes, sharing experiences, ideas and best practices related to capacity building, creating awareness and mobilizing resources for further improvements on capacity for growth in the region. BIS central bankers’ speeches Establish an integrated framework for a holistic approach to capacity building for central banks within COMESA. This will support the financial markets in the COMESA Region with HR capacity building blueprint. With these few remarks, Ladies and Gentlemen, it is now my pleasure to declare this Symposium officially open and wish you fruitful deliberations. Thank you. BIS central bankers’ speeches
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Opening remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, at a convening co-hosted by the Bill & Melinda Gates Foundation, the Central Bank of Kenya, and the Financial Services Volunteer Corps, Nairobi, 30 January 2012.
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Njuguna Ndung’u: Promoting financial integrity and financial inclusion – lessons from the Kenyan experience Opening remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, at a convening co-hosted by the Bill & Melinda Gates Foundation, the Central Bank of Kenya, and the Financial Services Volunteer Corps, Nairobi, 30 January 2012. * * * Mr. Joseph Kinyua, CBS, Permanent Secretary, Ministry of Finance; Mr. Andrew Spindler, President and CEO, Financial Services Volunteer Corps; Ms. Claire Alexandre, Senior Program Officer, Bill & Melinda Gates Foundation; Distinguished Guests and Colleagues; Ladies and Gentlemen; 1. I am happy to participate at this important conference, as one of the organizers, jointly with Financial Services Volunteer Corps (FSVC) and the Bill and Melinda Gates Foundation. 2. But this morning I have a simple task, to welcome our Chief Guest, the Permanent Secretary, Ministry of Finance to make the keynote address and to officially open the conference. But before I ask him to come to the podium, let me make a few remarks. 3. Let me begin by extending a very warm welcome to all the conference participants. To the participants who are drawn from beyond our borders, it is my sincere hope that your stay with us shall be enjoyable and that you will carry with you pleasant memories of Kenya when you return to your respective countries. 4. Ladies and Gentlemen, The theme of this conference; “Promoting Financial Integrity and Financial Inclusion: Lessons from the Kenyan Experience” is quite timely. It touches upon issues that are key to the mandate of the Central Bank of Kenya of ensuring financial access, and the stability and integrity of the financial system. 5. This conference has been organized to further the FSVC’s objective of developing sound financial systems in emerging economies. The FSVC recently launched a program to support the development of an Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime in Kenya that is both effective and compatible with the objectives of financial inclusion. Under this program, it is envisaged that the FSVC will undertake AML/CFT training and capacity building programs in consultation with the Central Bank, Ministry of Finance and other players in the financial sector. Financial inclusion 6. Ladies and Gentlemen; The Central Bank of Kenya, in recognition of the critical role that financial inclusion plays in fighting poverty, promoting savings-investment cycles and economic development, has been at the fore-front of pushing the financial inclusion agenda. The support we have received from the Bill and Melinda Gates Foundation and AFI has been enormous on these initiatives. 7. The critical mandate of the Central Bank is to ensure that the financial sector is stable, efficient and accessible. In this regard, the Central Bank of Kenya, jointly with other players, has undertaken several initiatives and reforms aimed at boosting BIS central bankers’ speeches financial inclusion through an appropriate financial infrastructure that includes: licensing of deposit taking microfinance institutions (DTMs) and credit reference bureaus (CRBs); mobile phone financial services and the agency banking model. 8. Ladies and Gentlemen; these initiatives and reforms have led to notable improvements in the levels, reach and depth of access to financial services especially among the lower population segments. The results in terms of numbers are astounding with deposit accounts growing tremendously over the years. But such a vibrant sector requires to be safeguarded; that is why financial integrity becomes important. Financial integrity 9. Ladies and Gentlemen; success in financial inclusion has to go hand in hand with financial integrity. The Central Bank of Kenya continually seeks to enhance the regulation and supervision of the financial system in order to improve its integrity. As part of our efforts in ensuring appropriate and effective oversight, we first issued AML Guidelines in 2000. These Guidelines were revised in 2006 and are currently in the process of being reviewed to reflect the prevailing international best practice and to align them with the Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCAMLA). 10. Over the last 2 years, the Central Bank has issued regular AML/CFT guidelines to financial institutions to further support and enhance the implementation of the Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCAMLA). The guidelines have covered the operationalization of the AML Act, Suspicious Transaction Reporting, and measures to be adopted by financial institutions to combat the financing of terrorism. The Central Bank has also revised the Forex Bureau Guidelines so as to align these guidelines to the AML Act. We are also working on Hawala system to formalize and issued guidelines. On the microfinance front, the Microfinance Regulations and the Agency Guidelines require Deposit Taking Microfinance Institutions and their agents to implement AML/CFT measures. 11. These measures demonstrate that as we push the frontiers of financial inclusion, we are also taking the requisite steps to ensure that the measures put in place take into account the need to safeguard the integrity of the financial system. 12. In November 2011, Parliament enacted the National Payments System Act. This Act provides CBK with oversight of the national payments system. It aims to bring all payment service providers including mobile phone service providers offering money transfer services, within one regulatory framework. Going forward, the inclusion of these mobile phone service providers within the supervisory and regulatory scope of CBK will no doubt enhance the country’s AML/CFT measures. 13. It is my hope therefore, that this conference and the initiative being launched by the Financial Services Volunteer Corps will contribute to a greater understanding of the subject and will generate frontier ideas of enforcing and enhancing AML/CFT measures. 14. It is now my pleasure to invite the Permanent Secretary, Ministry of Finance, Bw. Joseph Kinyua, to officially open this conference. THANK YOU BIS central bankers’ speeches
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Remarks by Prof Njuguna Ndung'u, Governor of the Central Bank of Kenya, during the executives dinner to launch the second phase of the Credit Information Sharing Project, Nairobi, 16 February 2012.
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Njuguna Ndung’u: Update on the Credit Information Sharing Project Remarks by Prof Njuguna Ndung’u, Governor of the Central Bank of Kenya, during the executives dinner to launch the second phase of the Credit Information Sharing Project, Nairobi, 16 February 2012. * * * Dr. Geoffrey Mwau, Economic Secretary, Ministry of Finance; Dr. Yira Mascaro and Mr. Ulrich Matthias Zeisluft, Representatives of the International Finance Corporation and World Bank; Mr. Richard Etemesi, Chairman, Kenya Bankers Association; Mr. Habil Olaka, CEO, Kenya Bankers Association; Chief Executives of Utility and Telecommunications Service Providers; Chief Executives of various Development Finance Institutions; Mr. Carilus Ademba, CEO SACCO Societies Regulatory Authority; Mr. Ben Nkungi, CEO, Association of Microfinance Institutions of Kenya; Chief Executives of Licensed Credit Reference Bureaus in Kenya; Distinguished Guests; Ladies and Gentlemen: I am delighted to be here today to make some brief remarks at this very auspicious occasion of ushering in a new phase of the Credit Information Sharing (CIS) Project. On behalf of the Central Bank of Kenya which is co-hosting this event with the Kenya Bankers Association, let me extend a very warm welcome to all credit providers represented here today. We look forward to an interactive evening of sharing our past successes and identifying the opportunities for a broader collaboration between various market players. Before I proceed; let me thank our partners FSD Kenya for sponsoring this dinner event and for their continued support towards the development and rollout of the CIS mechanism in Kenya. In addition, we are extremely grateful to the Financial and Legal Sector Technical Assistance Project (FLSTAP), International Finance Corporation (IFC), and United States Agency for International Development (USAID) for their key contributions towards the early stages of the development and rollout of credit information sharing in the banking industry in Kenya. Ladies and Gentlemen: The Central Bank of Kenya has championed the cause for sharing of credit information because of our recognition that this tool creates significant impact on efficiency and expansion of the credit markets. Much empirical work has been conducted on the economic impact of information sharing in consumer credit markets. The broad and consistent conclusions point towards (1) greater financial inclusion, (2) access to credit and (3) improved lending performance. Enhanced financial access arises whenever information collateral is built into credit decisions. The outcome is: fewer mistakes by lenders; less default by borrowers and appropriate pricing of credit. Our partnership with the Kenya Bankers Association in this project has yielded considerable results. Two credit reference bureaus have been licensed and there is active engagement with all commercial banks and the Deposit Protection Fund in exchange of information on Non-Performing Loans. A total of 1,306,439 and 6,041 credit reports have so far been accessed by banks and bank customers respectively from the two licensed credit reference bureaus. This translates to a monthly average of 76,849 and 355 credit reports for banks and BIS central bankers’ speeches bank customers respectively. This uptake of credit referencing is quite encouraging and this will be a pillar of growth in the Kenyan financial sector. Having said that, Ladies and Gentlemen, we are alive to the fact that the current CIS mechanism has a number of challenges. These challenges may be categorised into four broad areas. First and most critical is that the current system is limited to commercial banks and, very soon, to Deposit Taking Microfinance Institutions. If this is allowed to continue, various credit providers may create “silo” databases, often referred to as “segmented” information sharing. Credit reports generated by such systems give an incomplete and often misleading picture. “Comprehensive” systems, by contrast, allow a more complete credit profile of a consumer to be drawn. For small businesses, it also includes trade credit data and leasing arrangements. These non-financial services, such as utility and telephone services, are usually more common than are financial payment data, particularly in less developed markets, where, for example, the number of cell phone users may far outstrip the number of credit card users. The use of non-financial data in credit files offers the promise of a diversified information capital that will facilitate extension of reasonably-priced credit to those who have not previously accessed formal credit. The second challenge is the need to move towards achieving full file reporting by participating institutions. Full file reporting, that is, sharing of both negative and positive information on customers is important as it enables risk based pricing through credit scoring. It is important to have full file reporting to facilitate credit scoring mechanism and enhance the information capital. Further, full file comprehensive credit reporting systems are more successful at expanding access to credit, improving loan performance and preventing over indebtedness. We therefore appeal to the credit providers on the need to consider sharing full file information, in order for our market to enjoy the full benefits of the CIS mechanism. Thirdly: we face the challenge of ensuring that both lenders and borrowers are sufficiently sensitised on the merits of a robust credit information sharing mechanism and are able to use it to their advantage. This calls for well thought out awareness campaigns and capacity building programs. It is particularly important that lenders develop skills that enable them apply credit management tools as effectively as possible so that low-risk customers are rewarded appropriately. Finally, the success of this process hinges on a robust legal framework that supports a full-file comprehensive data sharing mechanism. We need to develop an effective legislation that addresses all aspects of credit bureau operations, data management and consumer protection. The challenges in the current system call for collective efforts by all stakeholders. I am pleased to report that CBK and KBA through the Kenya Credit Information Sharing Initiative (KCISI) is keen to establish modalities that make the CIS mechanism more comprehensive. Indeed, we continue to receive requests from non-bank lenders to be allowed to participate in the mechanism. Further, the presence of key players in the credit market in this room today is a testimony to the high interest this mechanism has generated. Ladies and Gentlemen: As I conclude, let me take this opportunity to thank FSD Kenya, our development partner in several projects aimed at inclusive financial markets in Kenya; World Bank; Kenya Bankers Association who have been partnering with us in this initiative; and all market players who have played key roles in this process, but more importantly those who came here today to take part in the launch of the second phase of the Kenya Credit Information Sharing Mechanism. I do believe that with your support we can achieve the desired results of the second phase and that the ambition of developing a fully-fledged financial infrastructure will become a reality soon in Kenya. With these few remarks, I wish to declare the second phase of the Credit Information Sharing Project officially launched. Thank you all and enjoy the evening! BIS central bankers’ speeches
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central bank of kenya
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