THE KENYA FINANCIAL STABILITY REPORT

ABOUT THE FINANCIAL STABILITY REPORT The Financial Stability Report is published once a year and contains the Regulators’ assessment of the financial system stability in compliance with the Central Bank of Kenya Act, Section 4(2) and the Financial Sector Regulators Memorandum of Understanding (MOU). Financial stability fosters the development of a vibrant and inclusive financial system that enable Kenya to meet the national development aspirations . The MOU establishes a Forum comprising of the Capital Markets Authority (CMA), Central Bank of Kenya (CBK), Insurance Regulatory Authority (IRA), Retirement Benefits Authority (RBA) and Sacco Societies Regulatory Authority (SASRA). The National Treasury and Planning, Ministry of Trade, Industry and Cooperatives, and the Kenya Deposit Insurance Corporation (KDIC) have observer or associate membership status. The MOU provides a framework for collaboration and cooperation in information sharing, prudential supervision, financial stability and other areas of mutual interest. This report is published in uncertain conditions as a result of the evolving Coronavirus disease (Covid-19) pandemic

SUMMARY OF THE FINANCIAL STABILITY ASSESSMENT The outbreak of the COVID-19 in Wuhan Province in China in December 2019 and subsequent declaration as a global pandemic by the World Health Organization (WHO) in January 2020, changed the course of global economy and financial system. In Kenya, confirmation of the first COVID-19 case on March 13, 2020, led to immediate imposition of containment measures, which affected both the economy and financial sector significantly. Travel restrictions and lockdowns led to supply chain disruptions, business closures and staff furloughs, with negative implications on households’ livelihoods and firms’ incomes. This had spiral effects not only to the economy, but also to all facets of the financial sector. Kenya’s pre-COVID real GDP growth projection of 6.2 percent in 2020 was revised to 1.3 percent growth as a result of the impact of the pandemic, which affected all sectors of the economy, except Information and Telecommunications sector. The 1.3 percent projected growth in 2020 against -4.9 percent global growth projection, is underpinned by the recovery in Agriculture, Services and Manufacturing sectors. The government and private sector deployed mitigation measures to reduce the impact of COVID-19 on firms and households. Government measures included reduction in taxes, payments of pending bills to suppliers, payments of tax refunds, and disbursements of funds to vulnerable members of the society. There was also a stimulus package to release funds to the public. Further, the CBK also took measures to cushion households, Micro Small and Medium Size Enterprises (MSMEs), and banks. Measures included; reduction in key policy rate (CBR), reduction in the Cash Reserves Requirements by 100 basis points, releasing KSh 35 billion for lending to businesses, disbursements of KSh 7.4 billion to Government as proceeds of demonetization of the KSh 1,000 note, lengthening the repurchase agreements (Repos) maturity to provide liquidity for banks, and asking the Telecommunications Companies and banks to waive charges on the mobile money transactions of below KSh 1,000. Other measures included requirement for banks to renegotiate terms and restructure outstanding loans for customers that were previously performing as at March 2, 2020, suspension of blacklisting defaulters in the Credit Information Sharing (CIS), suspension of loans classification, among other measures. Other regulators in the financial sector and private sector players have taken measures to mitigate the impact of COVID-19 to the financial sector. The impact has been positive. Overall assessment indicates that Kenya’s financial system is stable and resilient to shocks emanating from COVID-19 pandemic. Banks and Saccos have adequate capital and liquidity buffers to absorb shocks. Ample liquidity and robust regulatory oversight have supported a stable, efficient and well-functioning financial markets infrastructure. Insurance companies, capital markets and pension funds have taken measures to mitigate the likely impact and stands ready to use their regulatory powers to ensure stability. In the outlook, we expect the regulators and sector players to remain vigilant on the rising credit risk for Saccos and banks; decline in profitability and therefore jeopardising viability of insurers and pensions schemes; and concentration and liquidity risks for capital markets. The regulators are also dealing with corporate governance challenges among the regulatees, increase in cyber crime due to increasing role of information technology in undertaking operations, Money Laundering Financing of Terrorism issues and consumer protection concerns to ensure a stable, sound and customer-centric financial services sector that supports the national development aspirations.

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