Kenya’s underground economy emerges into the open

Sunday April 04 2010

Increased penetration of banks in rural and low income areas has led to a 50 per cent drop in cash circulating in the informal sector in the past two years. Photo/FILE

The Central Bank of Kenya (CBK) says cash circulating in the informal sector has dropped by over 50 per cent, from Ksh9 billion ($120 million) in 2008 to Ksh4.9 billion ($65 million) this March.

CBK governor Njuguna Ndung’u told The EastAfrican that the drop resulted from increased penetration of banks in rural and low income areas as well as the ongoing reforms in the sector, which have enhanced competition.

“Sound policies and strict regulations have enhanced the system in terms of deposits, credit growth and competition,” said Prof Ndung’u.

He said deposit accounts had appreciated from 2.6 million in 2005 to 4.4 million last year, while deposits had increased from Ksh545 billion ($7.3 billion) to Ksh1,065 billion ($14.2 billion) in the same period.

However, despite the positive prospects in the industry, critics argue that deeper reforms need to be undertaken to arrest the ever widening spreads between interest rates and credit rates which currently stand at 10 per cent in Kenya.

CBK argues that this has been one of the major challenges facing it due to the market segmentation that characterises the banking system in the country.


“The spread is an impediment to the expansion of credit and development of financial intermediation. Given the changing dynamics of the economy and its growing complexities, the financial industry has to remain responsive and supportive of the broader economic ambience,” Prof Ndung’u said.

Last week, the Monetary Policy Committee said the continual cut in CBK rates had yielded fruits as the private sector credit has started growing both in volume and the number of loan accounts.

According to Prof Ndung’u, despite signalling efforts by the monetary policy committee to bring the rates down, banks had not responded.

As a result, he says the bank will 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.”

“The committee reviewed the banking sector’s responses to its policies over the past one year. The cost of credit was still seen to be dampening the expansion of the Bank’s critically important private sector loans,” said the governor, who also chairs the Monetary Policy Committee.

Last week, the bank cut by 25 basis points from seven per cent to 6.75 per cent in a bid to send appropriate signals to the market.

Despite this, statistics show that public access to financial services has increased with the number of loan accounts growing from 1,672,964 in December last year to 1,832,085 last month.

MPC says inflation was no longer a significant determinant of the interest rate structure but that the cost of funds and credit risk were major constraints to credit supply.

As part of the reforms being undertaken in Kenya to reduce credit risk, CBK has operationalised credit reference bureaus, modernised payments system, opened new currency centres, automated trading systems for treasury bonds and activated horizontal repurchase orders.