Event: Kenya Bankers 50th Anniversary Celebrations
The Kenyan financial sector, both bank and non-bank, has built a track record which makes it one of Africa’s largest and deepest. I am told the total assets of the banking sector stands now at 25 billion dollars, making it Africa’s fifth largest. A financial sector which has also been a leader in Africa on: financial Innovation; banking the unbanked; financial inclusion; and regional financial integration.
Since the 2008 global financial crisis, much has been said about the negative impact of financial innovation. You have demonstrated that responsible innovation is possible. The Kenyan financial sector has proven that innovation in financial inclusion – “banking the unbanked” – can bring lasting benefits to the economy in ways previously unimagined. I want to commend what has been done in this country to ensure a healthy, competitive banking sector. You have done so by insisting on the basics, the key elements for a sound financial system:
- Sound macroeconomic management;
- Responsible regulation;
- Robust supervision;
- Sanctions for those who violate rules; and, finally,
- Resolution mechanisms when things go wrong that limit social costs, as evidenced in the global financial crisis.
I want to take advantage of this opportunity you have offered me to think aloud on what we can do together to unlock Africa’s financial muscle. As we meet here today, the global crisis has not abated. It has only metamorphosed initially from a banking crisis to a financial crisis and now to sovereign debt crisis with unemployment and anaemic growth, if not a downright global slowdown. While commodities, which have driven many African economies in the past decade, are still historically high, the super-cycle of 2002-2012 seems to have levelled off. For example, the key commodity, iron ore, which was trading at 200 dollars in 2008, is now at 135 dollars, certainly higher than the 20 dollars of the 1990s, but an indication of the impact of the global slowdown.
So, in short, as the Financial Times puts it quite aptly, the world is still “cleaning up the wreckage and the debris of 2008”.
Multilateral cooperation to resolve key issues has become difficult, the solutions more complex – even overseas development assistance has declined in real terms for the first time in 20 years. And it is not evident that solutions now being proposed can deliver growth recovery soon enough.
While it is true that fiscal consolidation and austerity can, indeed, guarantee growth in the future, front loaded, synchronized austerity, at a time of weak global growth pulses, cannot be a solution. Emerging markets are still growing strongly, but they have slowed down under weak external demand and, perhaps much more significantly, show signs of middle income country traps.
In addition, the process of repairing the balance sheets of the banks, strengthening regulatory reform on capital and liquidity risks could end up discriminating and reducing capital flows to low income countries.
Let me not be misunderstood. The ongoing work to repair the global financial systems to avoid future systemic risks is significant: from shadow banks, to “too big to fail”, to hedge funds and corporate governance issues that exercise is not only commendable, but it is absolutely necessary.
The only point I am emphasizing is that the sclerotic global economy could be worsened by some of the measures on the table. That has a number of implications.
First, Africa must do everything to minimize or avoid the negative impact of the prolonged global recession. The cushions that relatively minimized the impact in 2008 are weaker, deficits are higher, debt levels creeping up, the level of reserves lower and fiscal space smaller. This means, among others, there is strong need for closer cooperation and coordination between fiscal and monetary authorities.
The recent bouts of inflation in this region, which had crept back to double digits, are an example. I want to commend both the Central Bank of Kenya and the Government for coordinating efforts to gradually tame the high inflation and currency depreciation of recent months. Ever greater fiscal/monetary coordination will still be needed to ensure that, as inflation and currency are brought back under control, the stress on borrowers is managed in time.
Second, we must deepen and continue to make progress on banking the unbanked. Financial inclusion is not only good socially, but is very sound economics. It essentially unlocks resources tied up in “non-financial assets” for intermediation by the banking sector, thus driving the wider economy faster.
I was told by a former Bank staff and Deputy Governor of a Central Bank, that banking the unbanked has the potential to bring into the banking sector three to five times what is available at this time. Just think of that! With more than two out of three people in Africa unbanked, this in itself could be a revolution.
In the past, banks would have been happy to make easy profits by buying government paper which is lucrative and low risk. But those days of macroeconomic instability are over. You have been a model here in Kenya in innovation and leveraging mobile telephony and IT in general. I salute you! But this must continue and be deepened so that our economies can tap unto our own savings which, in due course, also increases the tax base and government revenue investment.
I know Kenya has made huge strides. Institutions like K-Rep and Equity Bank have revolutionized banking by providing simple innovative products – mobile phone banking, credit sharing and agency banking have been instrumental. Banking penetration has increased from 25% of the population in 2006 to over 40%, twice the African average.
There is still more to be done to:
- Lower interest rate lending margins that are still high;
- Raise the level of public financial literacy;
- Build credit reference bureaus;
- Improve debt recovery proceedings;
- Strengthen regulations in respect to collateral management, land registration, titling and mortgaging regimes;
- Diversify providers: for instance, allow banks to utilize non-financial intermediaries; and
- Improve consumer protection to reduce predatory lending and increase transparency.
An issue of priority we must address as Africans is how to finance our development, such as infrastructure. We all fully appreciate the challenge of our financial institutions embracing long-term asset classes with 80% of deposits having a maturity of less than a year.
All of us, therefore – international financial institutions, regulators, governments, financial institutions – have work to do to improve the price visibility, regulation and liquidity of our capital markets.
Diagnostic work has been conducted to identify gaps at national, regional and even at continental levels. We know the priorities from energy to connectivity, transport, maritime ports, rails, airports and urbanization.
It is very encouraging to note that some countries have made forays into international capital markets, although lately, some have had to delay the process. I hope this interruption is temporary and that the exercise can be resumed. This is the way to go. When Ghana pioneered this in 2007, people were sceptical. A recent HIPC country into the capital market? Yet the country, which was looking for only EUR 750 million, ended up with a deal oversubscribed to the tune of EUR 3.2 billion, with a highly diversified order book and high quality investors.
Needless to say, they paid a rather high risk premium price I am told: coupon rate of 8.5%, 387 basis points spread over US Treasury. But you may also conclude that, for a B+ rate first time issuer, maybe it was the price to pay.
The staff of the African Development Bank have been looking into all these issues. For example, our partial risk guarantee instrument enables the AfDB to stand behind government and parastatal off-takers in IPP-type projects, especially energy. So are our A/B loans and guarantee products, which look like effective risk mitigation instruments. We were pleased to work with Equity Bank as a co-lender to restructure the Rift Valley Rail.
However, there is much more potential in our capital markets, especially, the corporate bond market. We are happy to explore these issues further with you on the basis of the know-how that we have accrued over the years.
There is a lot of work going on at the Bank in all these areas. The feasibility of infrastructure bonds linked to projects identified as African Union priorities. As some of you may know, there is the African Domestic Bond Fund – an index tracker fund exclusively dedicated to African local currency assets.
.I was in Mombasa yesterday at the Kenya Institute of Management’s Africa Leadership Forum. There, we were discussing issues related to sustainable development, wealth creation and job creation in Africa. I expressed my belief that, despite the turbulence around us, Africa could be on the verge of a transformational journey as China was 30 years ago, South Korea 50 years and India, Vietnam and Brazil 20 years ago. Four factors are in our favour:
- Favourable demographic dynamics;
- A second-generation national resource boom;
- A rising Asia wage, with Africa, or most of it at 20% of the China wage; and
- Africa’s profiled risk.
But, of course, nothing is preordained. We will have to do the right thing as other elements are not in our favour:
- Sudden and often unpredictable political and even economic reversals;
- Exogenous shocks in the global economy;
- Natural disasters;
- Idiosyncratic events; and
- The infrastructure gap.
As one can see in Mali, the light at the end of the tunnel is still a long way. We are not yet out of the woods on issues of instability that reverses gains, sometimes for generations.
As for the global economy and the shocks emanating thereof, the right response can only be one of strengthening resilience especially, deepening Africa’s economic integration and the internal market of the 54 countries. Time has come to end the zero-sum calculus on economic integration, especially at a time when multilateral solutions seem to be on the wane. We missed the bus of closer integration in 1964. But we have come a long way since. A little more effort is needed on policy harmonization, common services, talent, mobility and, of course, goods and capital.
It is on the infrastructure gap, where a paradigm shift is now needed. The African Development Bank commits 60% of all its resources to infrastructure; that is about five billion US dollars per year. But that is a drop in the ocean for a gap identified as 94 billion dollars per annum and unlikely to be closed by traditional funding. The Bank, in the context of the G20 Working Group on Infrastructure, put forward some proposals on tapping into surpluses of 20 emerging markets for high return infrastructure in Africa.
No African country can resolve its challenges individually. Time has come for Africa’s financial sector to mobilize its resources to support economic transformation in countries. Charity should begin at home! Together, we have a good starting point for financing our own infrastructure development.
Collectively, Africa’s foreign reserves in 2012 total 450 billion dollars. Those reserves are mostly invested abroad, presumably for good security and return. In reality, the security is relative as we saw in 2008 and at this moment the return is a meagre one.
The African Development Bank is a triple-A rated institution. We provide the security, the track record and experience. Our Bank staff are working on a package of instruments that can certainly yield a good return – in any case, higher than what is obtainable at the moment.
I am glad that, increasingly, African Central Banks are investing in our bonds, as have Central Banks of OECD countries for years. Bank staff have been working hard on a proposal for an “African Infrastructure Bond” by the African Development Bank reserved solely for Africa’s infrastructure.
A safe, secure, high return “Emergent Africa Bond” or “Emergeafrica” as they propose to call it. Suppose we begin with only 5% of each country’s reserves; that would be at least 22 billion dollars. That is easily equal to three times what both the World Bank and African Development Bank commit to Sub-Saharan Africa each year.
Now imagine if we bring along the non-bank financial institutions, pension funds, insurance and other providers of long-term capital.
As the famous Chinese philosopher, Lao Tzu said, “a journey of a thousand miles begins with a single step”.
At the Annual Meetings of the IMF/World Bank in Tokyo in October, we will explore 23 of these proposals further with the African Finance Ministers and Central Bank Governors. I am not underestimating the political, operational and especially, the psychological obstacles that we may have to overcome – even those of common perception – to get to this apparently logical outcome.
Can Africa do this for itself? Is our money safe? I have no doubt in my mind: the time is now for a 22 billion dollars Emerging Africa Fund.
Let me congratulate you once again on your jubilee, commend your achievements and wish you the best as you move forward. We are not naïve: we fully understand the nature of the road and the direction of travel. However, on that road you can always count on the African Development Bank as a reliable partner.