CBK Newsletter Keeping you Informed No. 6 A of Publication Issue 2/ November 2013

• East African Payments System “Goes Live” • Cheque Clearing Cycle Reduced to One Day CENTRAL BANK OF KENYA

VISION A World Class Modern Central Bank

PRINCIPAL OBJECTIVES

The Principal objectives of the Central Bank of Kenya (CBK) are: 1. To formulate and implement directed to achieving and maintaining stability in the general level of prices; 2. To foster the liquidity, solvency and proper functioning of a stable, market- based, fi nancial system; 3. Subject to (1) and (2) above, to support the economic policy of the Government, including its objectives for growth, and employment.

Without prejudice to the generality of the above, the Bank shall: y Formulate and implement foreign exchange policy; y Hold and manage its foreign exchange reserves; y License and supervise authorized foreign exchange dealers; y Formulate and implement such policies as best to promote the establishment, regulation and supervision of effi cient and eff ective payment, clearing and settlement systems; y Act as banker and adviser to, and as fi scal agent of, the Government; and y Issue currency notes and coins.

CBK Newsletter Issue 2/November2013 CBKCBK NEWSNEWS 1 In this Issue

3 KenyaKenya ‒ rreadyeady fforor ttake-offake-off !

5 AKCP holds fi rst AGM

10 Central Bank and Government Securities 15 Role of the Market Leaders Forum 20 Sovereign Bond Issuance

Editorial Board Reviewers Matu Mugo, Dr.Dulacha Barako, Patron Chris Gacicio, Isaya Maana Governor Photography Deputy Patron Deputy Governor Nathan Kiawa Chairman, Editorial Board Kimani Ndune Stephen Mwaura Design & Layout Editor Outbox Communications Samson Burgei The Editor welcomes comments and articles from Assistant Editor readers and stakeholders. Nancy Sang Contact us through: [email protected] Members The CBK Newsletter is published by the Communications Peter Gatere, Joyce Yego, Cappitus Chironga, Daniel Offi ce, Central Bank of Kenya, Haile Selassie Ave., . CBK NEWSLETTER Ndolo, Kate Kittur, Dr. Roseline Misati, Evans Muttai, www.centralbank.go.ke Keeping you informed Samuel Tiriongo. CBK NEWS 2 Governor's Message Second, given that the effectiveness programmes to modernise the NPS. and efficiency of monetary policy These include cheque truncation, value transmission to the real sector is capping, and the GPay Project. These predicated on the level of financial initiatives have mitigated the risks development and stability, the CBK uses and increased the system’s efficiency its supervisory and regulatory policy with and effectiveness. The payments respect to the banking sector to achieve system infrastructure has been further this objective. A developed, strong and expanded to include the East African vibrant banking sector will support Payment System (EAPS) that went an effective and efficient monetary live on 25th November, 2013. This new policy transmission mechanism. system will facilitate trade in the region Specifically, the CBK uses its licensing using local currencies. and supervision tools, while creating Finally, as a fiscal agent of the new initiatives as an agent of financial Government, the CBK contracts development to ensure that the banking domestic debt in the market on system is solvent and efficient. The behalf of The National Treasury to adoption of risk-based supervision, in cover the financing requirements of line with international best practice, the Government’s budget. Since a has also been core to financial sector well developed financial market is stability. Continued reforms in the critical to achieving and maintaining financial sector have seen the sector stability in the debt market, the CBK expand to become more inclusive has been working closely with The Economic while maintaining stability, efficiency National Treasury and other players and integrity. In particular financial in the financial sector to deepen Management inclusion, supported by the mobile the financial market via the bond phone platforms as market and the development of a yield Tools for well as the agency banking model, are curve. This has resulted in a notable now driving the growth of the banking increase in the average maturity of the Macroeconomic sector through increased mobilisation government’s outstanding securities of deposits by financial intermediaries, since 2003, when it was about four thus increasing access to financial Stability years, to stand currently at about services. The regular interaction onetary and fiscal policies are eight years. Furthermore, the market between the CBK and commercial the main drivers of economic is well diversified with benchmark and banks has also supported the stability Mmanagement in any economy. infrastructure bonds. A key outcome of the banking sector as it has provided In Kenya, the Central Bank of Kenya of all these is that the Government’s a platform for obtaining feedback from (CBK) has a variety of tools with which domestic borrowing programme has it implements policy. First, since the the sector as well as a forum for moral supported the deepening of the financial core policy mandate of the CBK is price suasion. The CBK is also working with sector with a variety of instruments. stability, there is a combination of direct the Kenya Bankers Association (KBA) It has also enhanced monetary policy and indirect tools to deliver the Central on coordinated initiatives to complete transmission and the coordination of Bank objectives that are consistent ongoing financial infrastructure monetary and fiscal policies. with the Government’s price stability developments and lower the cost of target and growth objectives. Price financial services. These drivers of economic management stability is a cornerstone for growth and have provided the base for the resilient enterprise development. A stable price Third, the CBK has been working closely economic performance witnessed in environment (or low and predictable with stakeholders in the financial sector the country in recent years through inflation) allows firms to plan their to develop a well functioning and stable sustained macroeconomic stability that production and commercial activities National Payments System (NPS). This presents a strong foundation for future with certainty. The current price stability is critical to the stability of the financial target requires that the 12-month overall growth. sector and macro economy. Since 2008, inflation rate should be 5 percent with a the CBK, in conjunction with KBA, fluctuating band of 2.5 percent on either side. has initiated and implemented various Prof. Njuguna Ndung'u, CBS CBK Newsletter Issue 2 /2013 CBK NEWS News 3 high level conference showcasing Kenya’s economic achievements Aand highlighting the country’s future economic potential was held at Kenya ‒ ready for Fairmont Norfolk Hotel, Nairobi from 17- 18th September, 2013. This conference , on “Kenya’s Economic Successes, Prospects and Challenges” focused on policy priorities that would enable Kenya achieve sustained and inclusive growth as part of its quest to take-off ! reach emerging market status over the next decade. The Conference, was themed ‘Kenya - Ready for Take-Off’ and was co-hosted by the National Treasury, the Central Bank of Kenya, and the International Monetary Fund and brought together about 200 participants from the Kenyan private sector, the international business community, civil society, the government and international institutions. “Kenya has a strong economy, which is modern in many aspects, but with even greater potential for expansion. We aim to strengthen and re-balance the economy by building all our strengths in traditional sectors while growing new sectors”, his Excellency, Hon. Uhuru Kenyatta told participants as he officially opened the conference.

On her part, the Director of the African His Excellency, President Uhuru Kenyatta (centre) arrives at the Fairmont Norfolk Hotel, to open Department at the IMF, Ms Antoinette Sayeh the High Level Conference, accompanied by National Treasury Cabinet Secretary, Henry Rotich in her opening remarks, lauded Kenya on (left) and Principal Secretary, National Treasury, Dr. Kamau Thugge. her economic gains over the past few years, particularly coming as they have in a context in the ICT sector was acknowledged. The clearly demonstrated that monetary policy of global weakness and uncertainty. “Africa theme on “Harnessing Natural Resources for in Kenya works. However, it was noted that is moving forward, and the world is taking Growth” underscored the great potential and supply side shocks remain a challenge and note of its dynamism. Kenya is one of the challenges presented by recent discoveries in necessary measures including enhanced countries where Africa’s recent progress natural resources. It was agreed that there is buffers of food are critical, including the need is evident and where the opportunities for need for Kenya to choose appropriate fiscal for institutional reforms to ensure a smooth economic transformation and growth are regimes for mining and the petroleum sector. transition towards inflation targeting. manifest”, she said. The sub-theme on “Fiscal Priorities to Under the theme “The Financial Sector: Others who addressed the conference Support Growth” observed that Kenya has Shifting Gears” It was noted that financial were Cabinet Secretary, National Treasury, successfully managed its public debt in line innovation has increased inclusion and Henry Rotich; Cabinet Secretary, Energy and with international best practices. However, sustainable poverty reduction. There is Petroleum, Davis Chirchir; CBK Governor, the critical issue will be to ensure that need to build on this through consumer Prof. Njuguna Ndung’u; CEO, the efficiency of public expenditure was protection and financial education as well Bob Collymore; CBK Deputy Governor, Dr. increased and expenditure priorities remain as expediting the development of Nairobi Haron Sirima; Director, International Mining pro-growth and pro-poor. as an International Financial Centre. There Centre, Ian Satchwell among others. Mr was consensus that Kenya is ready to issue Rotich noted that Kenya has implemented The sub-theme on “Anchoring a Stable a Sovereign Euro Bond in the international sound economic reforms that had delivered Monetary and Financial Outlook”, discussed markets but it is important to keep an eye huge pay-offs. On his part Prof. Ndung’u the monetary policy framework in Kenya on movements in yields in the international emphasized the need to match policy which had changed from targets on monetary markets and ensure the timing and the size of transformations and reforms with dynamics aggregates to those based on Net Domestic the issue is right. of the market. Assets and Net International Reserves as an intermediate step to inflation targeting. In sum, the discussions emphasized The conference was embedded on several It was also acknowledged that the current that Kenya was a shining example of sub- themes among them “The Private Sector monetary policy framework had achieved the the continent’s market-driven economic Poised to Lead the Way” in which Kenya’s desired results of maintaining price stability dynamism and that it is ready to take off remarkable progress and regional leadership within the Government target band. It was toward a middle income status by the year 2030. CBK Newsletter Issue 2 /2013 CBK NEWS 4 News EA Payments System "Goes Live"

he East African Payment System (EAPS), a Tproject that is part of the East Africa’s payments modernization efforts spearheaded by the EAC central bank Governors to enhance cross border payments across the EAC region, went live on 25th November, 2013. EAPS will enable the public to pay as well as receive Representatives from Burundi, Kenya, Rwanda, Tanzania and Uganda during one of payments on real time basis. the Technical Sub-committee meetings to prepare for the EAPS Go-Live. The implementation of EAPS addresses deficiencies in EAPS is an EAC project which the current cross-border payment methods, through integrates the partner states’ Real enhanced efficiency and risk controls. EAPS integrates Time Gross Settlement Systems the partner states’ Real Time participants in the systems. include; real time transfer Gross Settlement Systems to Commercial banks in Rwanda of funds across the EAC facilitate real time settlement and Burundi are expected to borders; transfer of large for intra-EAC payments for join later. value transfers in the region; enhanced safety through use goods and services in EAC The launch follows several of the SWIFT infrastructure; currencies. It is therefore months of pre-go-live UAT increased accessibility as it is integrated with RTGS systems (User Acceptance Tests) available in all the commercial of Kenya, Uganda and Tanzania in order to ensure that banks; same day settlement; that utilize internationally systems were working in the increased reliability through recognized SWIFT messaging respective countries prior integration with RTGS; network for safe and secure to the go-live. EAPS go-live and improved risk control delivery of payment and brings many benefits to the mechanisms. Transactions settlement messages. All the payments ecosystem within can also be carried out in any commercial banks in Kenya, the region. These benefits Tanzania and Uganda are of the EAC local currencies.

CBK Newsletter Issue 2 /2013 CBK NEWS News 5 AKCP holds fi rst AGM

he evolution of the Credit Information Sharing (CIS) Tmechanism is rapidly gaining momentum in Kenya. The number of credit providers sharing information is now expanding from the traditional lenders, mainly banks, to include non-banks and later to introduce utility service providers and telcos. The expansion of this mechanism has resulted in the establishment of the Association of Credit Providers (AKCP). On 19th November, 2013 AKCP held its first annual general CBK Governor, Prof. Ndung'u unveiling a plaque for the new AKCP offi ces at Kenya meeting to elect the Governing School of Monetary Studies. With him are Acting CEO, IDB, Timothy Tiampati and CEO, Council, Executive Committee KBA, Habil Olaka. and Trustees. This meeting data will guarantee that the risk financial sector characterized brought together the members management tools and models by increased access to credit of AKCP, including Kenya developed from the shared particularly by market segments Bankers Association (KBA), the information are robust and that have previously experienced Association of Microfinance reliable”, he said. constraints in accessing funding, Institutions (AMFI), Higher The interim CEO of AKCP, Jared such as SMEs. Education Loans Board (HELB), Getenga expressed appreciation Going forward, AKCP will work several Development Finance at the high turnout of credit towards transforming CIS from Institutions, the two Unions that providers to the first AGM, which merely sharing information on represent the SACCO movement signals the intention of the credit non-performing loans to full-file (KUSCCO and KERUSSU), two market to embrace reforms that sharing i.e sharing information regulators (SASRA and CBK), the will enhance market efficiency, on all loans. The current bank- two licensed CRBs (Transunion stability and access. only negative system cannot and Metropol),Nairobi Water and be used by good borrowers to Sewerage Company and the two AKCP is a non-profit negotiate better credit terms. funding agencies (FSD Kenya Association whose objective is to Further, the Association will and USAID FIRM). promote the growth of CIS under a self-regulatory framework that soon set up a dispute resolution In his keynote speech CBK ensure fair practices in the use mechanism for customer Governor, Prof. Njuguna of credit information for risk complaint redress and champion Ndung’u urged AKCP to focus management. The outcome of other functions such as public on observing best practices in AKCP’s efforts will therefore be awareness, capacity building and Credit Reporting. “Good quality seen through a more inclusive research. CBK Newsletter Issue 2 /2013 CBK NEWS 6 News Annual Mobile Financial Services Forum

he Central Bank of Kenya the positive progress made coordinated approach between in partnership with GSMA by the Kenyan government the financial sector authority T(Groupe Speciale Mobile in implementing solid and and the telecommunications Association) hosted The Mobile sustainable financial sector regulator to enable providers to Money for the Unbanked (MMU) reforms, coupled with offer convenient and safe digital Leadership Forum from 10th - macroeconomic stability and financial products and services. 11th July, 2013 in Nairobi. The a favourable business and The two-day forum also had a forum is an annual event aimed investment environment had leadership forum session where at promoting dialogue between created opportunities for the matters on policy development for financial regulators and the private sector to innovate, pilot mobile money were discussed. mobile telecommunication ideas and contribute to the This session, titled ‘The Roadmap industry in order to stimulate country’s economic prosperity. to Digital Financial Inclusion,’ greater understanding, “Kenya is in the process of provided participants with the collaboration as well as provide finalizing ideas and commitments opportunity to engage on technical participants with an environment for the next five years, in the form discussions around different to forge relationships, expand of the Medium Term Plan for the aspects of mobile phone money ideas and foster the growth of Financial Services Sector of our and the policies that could enable mobile money globally. It targets a Vision 2030. These reforms seek the creation of a digital financial global audience of GSMA member to solidify access, efficiency, ecosystem. networks and key players in the transparency and stability of the mobile financial services (MFS) financial services sector,” he Outlining the progress of eco-system. added. Mobile phone financial services in Kenya, Mr. Rotich informed Mobile Financial Services (MFS) The centre stage of the the group that in 2007, the first has with time become the leading discussions during the forum was service provider was authorized medium towards digital financial Kenya’s journey to digital financial and registered 20,000 subscribers inclusion in Kenya. Cognizant of inclusion. CBK senior officials within the first year. This has the great potential and critical role shared their approach and insights grown to the current base of over of MFS, the Central Bank of Kenya on enabling the development of 17 million subscribers. He cited (CBK) has been at the forefront mobile phone money and digital interoperability as a challenge in embracing the technology and financial services in Kenya and experienced by the various service creating an enabling environment how they simultaneously managed providers. However, it should not for MFS to flourish. the risks associated with the curtail agency network expansion, protection of customer funds, In his opening remarks, the but should instead support customer due diligence, agent Cabinet Secretary, National network expansion to enhance management, and others. They Treasury, Mr. Henry Rotich financial inclusion, through reiterated the need for a strategic informed participants that increasesd reach and reduced

CBK Newsletter Issue 2 /2013 Cognizant of the great potential and costs. He said expansion would The Governor also emphasized also generate employment . the need to have better regulations critical role of MFS, for financial services. This would The Governor, Prof. Njuguna not constrain the market from Ndung’u told the participants the Central Bank of development but bring down that his vision for Africa is to the unit cost of transactions as be cash-lite. “While cash has Kenya (CBK) has well as protect the markets and been viewed as the traditionally transforming people’s lives. appropriate mode of payment, the been at the forefront security, privacy, convenience and It was the first such meeting to lower cost of electronic payments be held in Africa and coincided in embracing the are more desirable. Therefore, with the opening of the GSMA a cash-lite economy is critical Africa office in Nairobi. The forum technology and in unlocking access to financial brought together senior executives services for millions of Kenyans, from financial services institutions, creating an enabling increasing savings and enhancing mobile phone network operators, financial inclusion, economic development organizations and environment for growth and development,” he said. solutions vendors, as well as He challenged the participants regulatory and policy makers from MFS to flourish. to aggressively explore new across the world. opportunities and enthusiastically support innovations in MFS.

CBK Newsletter Issue 2 /2013 CBK NEWS 8 News Governors Promote Monetary and Financial

Governors reviewed the status of implementation of Integration previous MAC decisions. The deliberations focused on a range of issues, including; enhancing currency convertibility in the region, progress in implementation of the East African Payment Systems (EAPS), legal and regulatory frameworks particularly with regard to the he (EAC) Monetary banking and microfinance sub-sectors, information Affairs Committee (MAC) held technology, and building of Tits 16th Ordinary Meeting at the Governors requisite technical capacity to Common Wealth Speke Resort, Munyonyo facilitate effective conduct of in Kampala in May 2013. The meeting was acknowledged monetary policy and support hosted by the Bank of Uganda (BOU) and for the East African Monetary was attended by Prof. Tumusiime Mutebile, the completion Union (EAMU) integration. Governor, BOU and the current chair of Governors acknowledged the MAC; Prof. Njuguna Ndungu, Governor, of the studies completion of the studies they Central Bank of Kenya; Mr. Jean Ciza, had commissioned to inform Governor National Bank of the republic of they had the EAMU negotiation process. Burundi; Mr. John Rwangombwa, Governor These studies were forwarded , National Bank of Rwanda; and Prof. commissioned to the High Level Task Force Benno Ndulu, Governor Bank of Tanzania. to inform (HLTF) in charge of negotiating The meeting was also attended by Dr. the EAMU Protocol. In Louis Kasekende, Deputy Governor Bank the EAMU particular, the studies on of Uganda and Mr. Tharcisse Kadede, “Exchange Rate arrangements Director of Planning, EAC Secretariat. negotiation in the Transition to the East Ms. Mary Zephirin from the IMF and African Monetary Union ” and Mr. Micheal Fuchs from the World Bank process. “Harmonization of Monetary provided updates on national and regional Policy Frameworks in the EAC”, financial sector assessment initiatives in contributed to the drafting and the EAC. negotiation of articles on transitional arrangements,

CBK Newsletter Issue 2 /2013 CBK NEWS News 9

The deliberations focused on a range of issues, including; enhancing currency convertibility in the region

exchange rate arrangements and will have to become progressively strengthening banking efficiency, monetary policy frameworks in the more closely aligned as the EAC deepening banking integration, and draft EAMU protocol. economies move towards the extending the scope for regional implementation of the EAMU. The payment integration. The report has Governors underscored the need macro economic convergence recommended deeper engagement for ‘quick wins’ in the areas of East criteria to be enshrined in the with member central banks in African Payments System (EAPS) EAMU Protocol will provide the three key areas: macro-prudential and currency convertibility. The framework for macroeconomic statistics to help identify and fill EAPS project aims to interlink all policy harmonisation. the information gaps that currently the Real Time Gross Settlement hinder financial stability analysis; Systems in the region to enable To tap workers’ remittances into macro-prudential analysis and stress efficient processing of cross the region, EAC central banks testing to assist in the identification border transactions , which have developed a strategy for of threats and vulnerabilities and is essential for boosting intra- mobilizing Diaspora resources and to enhance the stress testing regional trade. They undertook addressing the related challenges. methodologies used by central banks to expedite the integration of The strategy includes a phased and crisis management to identify payment systems by among others approach by facilitating the the key attributes of a recovery and actions, identifying initiatives to issuance of Government bonds resolution framework, including enhance currency convertibility with a Diaspora component, then deposit insurance arrangements best and thereby facilitate intra-regional eventually facilitating the issuance suited to member countries. trade in the EAC. of explicit Diaspora bonds to the international markets in the Governors expressed optimism that In addition, Governors medium- to- long term. the EAC region growth prospects underscored the need to remain resilient on the backdrop strengthen coordination of Governors also considered of strong macroeconomic and macroeconomic policies among the World Bank/IMF EAC structural policies which have been the partner states during the Financial Sector Assessment implemented by individual economies transition to EAMU. This is Programme (FSAP) findings in the recent past. especially important for monetary related to financial sector stability and exchange rate policies, which and underscored the need for

CBK Newsletter Issue 2 /2013 CBK NEWS 10 CBK Fiscal Agency Role

Government Borrowing hen the annual expenditure of government is more than Wgeneral revenues, government is spending more than the available resources. In the national budgets, the difference between the general revenues and expenditures is generally referred to as a fiscal deficit. ‘Fiscal’ denotes activities related to government tax revenues and expenditure. Thus through fiscal operations/activities, government manages to commit to a level of expenditure that is Kenya supported by general revenues and borrowing. Borrowing may be either from domestic (local) economy or from Government external sources. Government borrowing from domestic market is usually sourced from institutions such as the central bank and the financial markets. External sources of funds include other Securities governments, international banks and financial institutions. The government initiates the domestic borrowing by selling instruments such as bonds and bills, also known as Treasury Securities. A Market and Treasury Bill has a maturity period of less than one year (90 days, 180 days, or 364 days), while a Treasury bond is a security whose maturity is at least one year or more. A sale of a Government Security to a holder binds the Government to pay back the instrument value the Role (principal amount) plus an agreed return (interest) to the buyer/ holder of that Security on specified dates. The main difference between Treasury bonds and Corporate of the bonds is that Treasury bonds are solely issued by the Government while corporate bonds are issued by private companies. As a result, Treasury bonds are regarded as risk free as they are backed by Central Government guarantee. Bank of Treasury securities are issued for a specified period of time by the Kenya through the Central Bank of Kenya, as a way of borrowing funds to finance government budget deficit (shortfall in the annual government revenue). A Treasury Bill is a paperless short-term borrowing instrument issued by the Government through the Central Bank of Kenya (as the fiscal agent) to raise money on short

CBK Newsletter Issue 2 /2013 CBK NEWS CBK Fiscal Agency Role 11 term basis – for a period of up to one year. Treasury bills normally have maturity length (tenors) of 91-days, 182-days and 364-days. Treasury bills are sold at a discounted price The Role of Central Bank in to reflect investor’s expected return and redeemed at face issuing Government Securities (par) value. The Central Bank of Kenya manages A Treasury Bond on the other hand, is a paperless long the government’s domestic debt through term borrowing instrument issued by the Government issuance and redemption of Treasury through the Central Bank of Kenya (as the fiscal agent) to Securities. raise money on a longer term basis – at least one year. The current tenors on Kenyan government bonds range from Both Treasury Bills and Treasury Bonds are 1-year to 30-year bonds. The common ones have tenors of sold by the Central Bank through an auction 2, 5, 10, 15, 20 and even 25 years. In all cases, the coupon process on behalf of the National Treasury (interest) will be paid semi-annually based on the face as provided for in Section 4(A) (1) of the value of the bond. CBK Act Cap 491 which provides that: The Treasury bonds of the tenors indicated above have been Bank shall act as banker and advisor to and referred to as ‘Benchmark’ Bonds. This means they are as fiscal agent of the Government of Kenya. issued in high volumes and are commonly traded at the Further, the provisions of the Internal Loans Nairobi Securities Exchange. Other types of Government Act (CAP 420) appointed the Central Bank of Kenya securities include infrastructure bonds and as an agent of the government. The Central special bonds. Bank maintains the Domestic Debt Register, An Infrastructure bond (IFB) is a bond that is issued to issues and redeems government securities finance specified infrastructure projects in different sectors on maturity and pays interest on those of the economy. The infrastructure bonds programme has securities. This is referred to as Domestic been very popular among the investing public with CBK Debt management, and constitutes the having issued five such bonds since 2009 which were highly fiscal agency role of the Central Bank. oversubscribed. The proceeds were specifically targeted at projects in transport sector, mainly construction of road Government bonds were first issued in 1985 networks, energy sector mainly generation of geothermal but it was not until 2001 that the Government and wind power, and water and irrigation sector involving bonds programme peaked following a construction of dams, boreholes and water systems. Government policy to restructure domestic Interest and discount returns from infrastructure bonds debt portfolio from short-term debt (Treasury are exempt from taxation for all investors. The incentive bills) to Medium & long term debt (Treasury package of the IFBs issued so far include an attractive bonds). Since then, the government bond feature of amortization where the life of the bond is programme has witnessed tremendous structured in a way that short term investors benefit from growth in the recent past with key milestones gains associated with a long term bond investment. being the introduction of the bench mark The proceeds from sale of government securities are bond programme in 2007, the introduction used for budgetary support in development projects and of Infrastructure Bonds and adoption of other expenditures. For some bonds like the Infrastructure the Automated Trading System (ATS) in bonds, the proceeds are meant for specific projects for 2009. Currently there are more outstanding instance in roads, water, irrigation and energy sectors of Treasury bonds than the volume of the the economy. Treasury bills.

CBK Newsletter Issue 2 /2013 Proceeds from Bond issuance are used for construction of infrastructure such as roads

INVESTING IN different requirements for opening banks or financial advisers licensed CBK CDS accounts for these by the Capital Markets Authority. GOVERNMENT different categories. Opening and SECURITIES maintaining a CBK CDS account is free of charge. Interested investors can invest in government securities by bidding Investors can also participate Tax on Returns for the amount of securities and in buying government securities interest rates they prefer. These through approved (authorised) Returns on long term bonds with bids are evaluated and those who financial institutions comprising a maturity of 10-years and above are bid their amount at reasonable or of commercial banks, investment subject to a 10% withholding tax as acceptable interest rates succeed in banks and stock brokers, which opposed to 15% withholding tax for purchasing the securities. will open a CBK CDS nominee bonds with a maturity of less than (client) account on their behalf. 10-years. To invest in Treasury Bills/Bonds, Non-residents and foreigners can one must open a CBK Central invest in Treasury Bills/Bonds either Depository System (CDS) Account. through these authorised agents A CBK CDS account is an account or directly at the Central Bank. The Auction System for investors holding government However, foreigners must operate a securities only. Note that this is a local account. different CDS account from that Advertisements for securities operated at the Central Depository Resident or non-resident on offer are made in the print and Settlement Corporation by individuals, institutional or corporate media and at www.centralbank. investors for trading shares and bodies must hold an account with go.ke. Auctions for Treasury bills corporate bonds. The CBK CDS a Kenyan commercial bank. Non- of 91-days and 182-days are issued account can be opened at the CBK residents can invest in government on weekly basis; while the 364-day headquarters, any of its branches, securities as a nominee through Treasury bill is auctioned twice currency centres or through any of commercial bank, stock broker or monthly. Treasury bonds are issued the appointed agent banks (National investment bank in Kenya. Equally, once every month. investors, individuals, institutional or Bank of Kenya, Post Bank, Kenya To participate in these auctions, Commercial Bank, Cooperative corporate bodies who may not have an account with a local commercial investors should correctly and Bank or Equity Bank). Investors completely fill the respective can open CBK CDS accounts bank can participate in securities auction by opening nominees application forms for Treasury bills as individuals, joint individuals and bonds. Application forms are and institutions (corporates, CDS accounts through Kenyan commercial banks, investment available at http://www.centralbank. registered societies etc.). There are go.ke/securities/ApplicationForms. CBK Newsletter Issue 2 /2013 CBK NEWS CBK Fiscal Agency Role 13

aspx. auction. For a non-competitive bid, an investor agrees to purchase Treasury securities are issued securities at the average interest through multi-price auctions where ADVANTAGES rate or price of the successful investors bid either competitively competitive bids at that particular OF INVESTING IN by quoting a specific price/yield auction and therefore does not on their investment; or non- GOVERNMENT have to specify a particular interest competitively by quoting ‘average SECURITIES rate (or price) bid. The average price’ subject to a limit of Ksh. 20 or price is determined million. Non-competitive bids are as the weighted average of the accepted at the average price/yield Government securities present successful competitive bids. The of the successful competitive bids a risk free investment opportunity Auction Committee accepts all non- for the auction. with guaranteed returns. All competitive bids at that average Kenyan Treasury and infrastructure Interested investors quote interest rate. This way the investor bonds have a fixed interest rate their desired yield/rate of return is guaranteed success in investing (coupon) payable semi-annually. and amount of investment (the Investors in government bonds his/her entire bid amount applied earn a guaranteed annual fixed minimum acceptable value is Ksh for, subject to a maximum of Ksh.20 interest paid semi-annually on the 50,000 for bonds and Ksh.100,000 million per CDS account in any face value of the amount invested. for Treasury bills). Any additional particular auction. Treasury bonds can also be traded amount above the minimum After the deadline for submission at the Nairobi Securities Exchange investment MUST be in multiples (NSE) thereby offering investors of bids, auctions are conducted of Ksh 50,000. Competitive bidders a chance of liquidating the and general results published in may be successful or rejected at investment before maturity and also the print media and on the Central possible capital gains. Alternatively, the auction depending on the level Bank website. Investors may also an investor may get back his/her of their bid price or bid yield unlike call the Central Bank to receive money by rediscounting (selling the non-competitive pool which is at a discount) at the Central their individual auction results. always successful. Bank, subject to a higher punitive Payment for successful bids must discounting factor, meaning they At the time of bidding, it is be done by the payments deadline would receive less money than the difficult to tell upfront what the (value date); usually the following prevailing market value. interest rate will be in any auction. Monday after the auction date. Additionally, investors can pledge Investors may increase the chances Treasury bills and bonds and of success of their competitive bids infrastructure bonds as collateral in an auction by closely monitoring (or for lien creation) against Trading in Treasury credit facilities such as loans. trends of the relevant interest Withholding tax of 15% applies rates including those of previous Bill or Bonds to discount incomes earned from auctions of similar instruments Investors who do not wish to hold Treasury bills as well as interest and and related products, prevailing discount incomes from Treasury their securities to the maturity market conditions and other events bonds of maturity up to 9 years at date can sell their Treasury Bills issue. Withholding tax on discount in the market, or making use or Bonds before maturity date. and interest incomes earned from of information from investment Currently, only Treasury Bonds can bonds with tenors of 10 years or advisors. If an investor does not be traded at the Nairobi Securities more at issue is 10%. wish to risk rejection of his/her bid Exchange (NSE). Treasury bills Government securities offer an at the auction, he/she may put in are not tradable at the NSE but the opportunity to investors to play a a non-competitive bid subject to a role in national development as 364-day Treasury bill may be traded maximum of Ksh. 20 million per bid the proceeds of these securities are Over-The-Counter (OTC), that is, per CDS account, in a particular channelled towards development between two parties. An investor projects in the country.

CBK Newsletter Issue 2 /2013 CBK NEWS 14 CBK Fiscal Agency Role

can sell his/her Treasury bond to interest rates are lower on bonds for every Ksh.100 bond value. If other parties through licensed with shorter maturity and higher the investor quotes an interest rate stock brokers at the Nairobi on bonds with longer maturity. The (yield) that is higher than the fixed Securities Exchange (NSE). longer the tenor of a bond, say 20 coupon i.e. 12%, the price will be at a years, the higher the interest rate discount corresponding to the level To trade in bonds, a holder simply and vice versa. This might indicate of yield i.e. below Ksh.100 for every walks into his/her stockbroker that investors are uncertain about Ksh.100 worth of the bond. However, or investment bank’s offices and the future economic situation of if the quoted interest rate (yield) is instructs the brokers to place a the country and would rather buy lower than the fixed coupon, then sell or buy order for the bond. The bonds that mature in the near the investor will pay at a premium dealer at the broker’s offices will, future rather than those that will price i.e. more than Ksh. 100 for after the necessary paper work, mature much later. By looking at a every Ksh.100 worth of the bond. place the order on the Automated yield curve, an investor has an idea Trading System where matching Bonds have more than one type of the yields (interest rate or rate will be done with a prospective of return, that is, they can have a of return) offered by instruments buyer/seller. Once the matching discounted return at purchase from (financial investments) whose has occurred, the bond will be Central Bank, a fixed return (coupon contract time or time to maturity is moved from the seller’s CDS income) throughout its life and can represented on the yield curve. account to the buyer’s CDS also be sold at the NSE at any time account and at the same time A yield curve is useful in providing before maturity, earning a capital funds will be moved from the a basis for pricing of corporate gain. The increase or decrease of buyer’s account to the seller's (private sector) securities of the price of a bond is dependent account, in a process referred to as similar or related characteristics on the prevailing market interest Delivery versus Payment. (features). It is also used to rate and on the forces of demand understand conditions in the and supply. The price of a bond is financial markets with an aim to determined by the time remaining to seeking trading opportunities, be maturity or coupon rate and quoted Government able to calculate expected income/ yield. returns on bonds and acting as Securities Yield Curve Usually, when the quoted yield is an indicator for the direction that A yield curve is simply a higher than the coupon rate, the interest rates and inflation will take. relationship between the yields resulting bond price is lower than For the government (issuers), the (interest rates) or prices of treasury the par value of the unit of the bond yield curve acts as a benchmark securities against the time (i.e. Ksh.100). for pricing other financial remaining to maturity of those instruments in the market as well Currently, there are more securities. It is basically a graphic as predicting the yield/prices of outstanding Treasury bonds than the representation of the prevailing future government Treasury bond volume of Treasury bills. price (or interest rate) of different issuances. maturities of bonds. The most With the Introduction of the recent prices of the 2 year, 5 year, Automated Trading System (ATS) 10 year, 15 year, 20 year, 25 year in 2009, the settlement cycle has and 30 year bonds are used to Pricing of Government been reduced to T+3 (transaction construct the market yield curve for Securities day plus 3 days). As a result of government securities in Kenya. these initiatives, the Treasury Treasury bonds are sold either bonds market has seen the annual Under normal circumstances, at Face Value, Discount or at a secondary trading turnover increase the shape of the yield curve is such Premium. When sold at par, it from Ksh. 14 billion in 2001 to more that it trends upwards gradually means the investor will pay Ksh.100 than Ksh. 523 billion in 2012. from left to right, meaning that the

CBK Newsletter Issue 2 /2013 CBK NEWS CBK Fiscal Agency Role 15 Role of the Market Leaders Forum

The Market Leaders Forum (MLF) comprises issues relating to the Financial Markets, and more the representatives from various financial specifically Government Securities Market. sector stakeholder institutions such as: Other specific pursuits of the MLF are: Commercial Banks represented through Kenya Bankers Association (KBA); • Advice on issuance of Government Securities. Association of Kenya Insurers (AKI); Kenya • Issues relating to trading of Government Association of Stockbrokers and Investment Securities in the secondary market. Bankers(KASIB) – Investment Bank or Stockbroker; Fund Managers Association • Development of efficient financial markets (FMA); Ministry of Finance; Capital Markets through dissemination of market information. Authority (CMA); Nairobi Securities Exchange • Peer influence among stakeholders on policy (NSE); Retirement Benefits Authority reforms in their sectors. (RBA); Central Depository and Settlement • Promote development and harmonization of Corporation (CDSC); Investment Secretary; financial markets and practices in the region. Insurance Regulatory Authority (IRA); Association of Micro Finance Institutions • Assist in marketing of Government securities (AMFI); Central Bank (Directors from and investor education. Financial Markets, Research, Banking and • Promote deepening of money and capital MPC Member); Individual Membership. markets and efficient functioning of the The role of the MLF is to advise the Central financial markets. Bank of Kenya on government domestic The government bond programme has benefited debt market developments with a view to a lot from the collaborative efforts of the Central developing a vibrant domestic bond market. Bank, the MLF, and other financial sector This role of MLF is purely advisory and regulators and has witnessed tremendous growth meetings shall be deemed to be consultative in the recent past. Key milestones include the so that decisions made during the meetings introduction of the bench mark bond programme in shall not be binding on the National 2007, the introduction of Infrastructure Bonds and Treasury and Central Bank of Kenya. The adoption of the Automated Trading System (ATS) in Central Bank, however, takes into account November 2009. recommendations made by the Forum in making decisions on policy and other

CBK Newsletter Issue 2 /2013 CBK NEWS 16 Gallery from the gallery

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CBK Newsletter Issue 2 /2013 CBK NEWS fromfrom thethe gallerygallery 17 L-R:

CBK Newsletter Issue 2 /2013 CBK NEWS 18 CBK Fiscal Agency Role

and announced by the Monetary Policy Committee, is used to signal the CBK’s monetary policy stance. Relationship On the other hand, fiscal policy is undertaken by the National between Monetary Treasury (Ministry of Finance) and involves use of public expenditure The Central Bank is also and taxes to manage or stabilise Policy and the the banker, adviser and fiscal the economy. agent of the Government. Fiscal policy relates to As the Government’s Government services and Fiscal Agency fiscal agent, the Central investments in key sectors of the Bank issues and manages economy including infrastructure, domestic debt on the health and education. Public Role of the Government's behalf. The expenditure is funded mainly question is how the Bank through taxation. However, balances its price stability borrowing from domestic and/or Central Bank objective with the fiscal external sources, sale of public agency role . This article assets through privatisation, seeks to clarify how it plays overdrafts in banks, or use of fiscal of Kenya these roles. reserves could be required to fund First, the difference any deficit which may occur. Both he main objective of the between monetary and fiscal monetary and fiscal policies are policies and their objectives. therefore important in a country’s TCentral Bank of Kenya Monetary policy refers to a economic management. set of actions undertaken (CBK) is to formulate and Fiscal policy is formulated and by the monetary authority implemented through the annual implement monetary policy (Central Bank) to influence Budget Statement which outlines the supply and cost of aimed at achieving and how the Government intends to money. Through monetary finance its planned expenditures maintaining price stability. policy, interest rates are tied to attain its policy objectives for to the amount of money The CBK conducts monetary the year. The annual Budget is supplied and hence the cost policy with the aim of formulated within the framework and availability of credit. In of the Government’s development sustaining overall infl ation at this way, monetary policy plan – – which influences inflation, exchange the Government’s medium- outlines the required policy and rates, and economic growth institutional reforms, economic term target that is currently in a country. The main growth targets, and timelines for instruments of monetary 5 percent. Furthermore, the country to attain a middle- policy used by the CBK are income economy status. The monetary policy is designed Open Market Operations, Budget is also formulated within reserve requirements, foreign to support the Government’s a fiscal framework which ensures exchange operations, and consistency between fiscal and desired growth in the standing facilities through monetary policy objectives. In this the lender of last resort production of goods and regard, the domestic borrowing “Window” to commercial target set in the Budget is services and employment banks. In addition, the consistent with the economic magnitude and direction of creation through achieving growth and inflation targets for the movements in the Central and maintaining low and year. Bank Rate (CBR), which is stable infl ation. the policy rate determined

CBK Newsletter Issue 2 /2013 CBK NEWS CBKCBK FiscalFiscal AgencyAgency Role Role 19 Government domestic years through issuance of borrowing is mainly undertaken longer dated Treasury bonds. through sale of Treasury bills and The CBK Act provides for bonds in the market. Using the a limited overdraft facility by domestic borrowing target, the the Bank for the Government CBK develops and implements a during periods of mismatches domestic borrowing plan which between receipts from ensures Government’s cash budgeted revenues and its flow requirements and also that payments. Given the adverse interest rates on Government implications of excessive securities remain stable. use of this form of domestic In this way, private sector borrowing, the CBK charges borrowing from banks will not the Government an interest be crowded-out by Government rate equivalent to the CBR. borrowing. The Medium-Term Financing of the deficit through Debt Management Strategy of the overdraft at CBK is what the Government ensures that is conventionally referred to the risks associated with public as “printing money”. Since debt, including domestic debt, monetisation of the budget remain low. This is supported by a deficit can cause or increase diverse investor base comprising inflation, the CBK Act of institutional investors such stipulates a cap on the total as pension funds and insurance advances which the CBK can companies, banks and other allow the Government at any non-bank investors. The average time through the overdraft maturity of domestic debt has facility. The cap currently also been lengthened over the stands at 5 percent of the total ordinary revenue as published in the Appropriation Accounts for the most recent Through year that have been audited monetary by the Auditor-General. This measure ensures that the policy, Government does not default on its scheduled payments due interest rates to temporary revenue shortfalls whilst ensuring that domestic are tied to borrowing does not cause the amount macroeconomic instability. Monetary and fiscal policies of money play complementary roles in ensuring sound economic supplied management for any country. The existing close cooperation and hence between the CBK and National the cost and Treasury is therefore necessary to ensure that both fiscal and availability monetary policies continue to play their respective roles while of credit. ensuring macroeconomic stability.

CBK Newsletter Issue 2 /2013 CBK NEWS 20 CBK Fiscal Agency Role Sovereign Bond Issuance CBK Fiscal Agency Role borrowers in the domestic he African continent has of smaller amounts, include market. This will support long been neglected by Senegal, Ghana, Rwanda and domestic investment and global financial markets, Zambia. T growth, and help develop the largely due to perceived political local capital market. risk, and weak economic What is a Sovereign Bond? performance. However, Second, raising financing in during the past decade, Africa A 'Sovereign Bond' also international capital markets has made good progress referred to as a ‘Eurobond’ is will reduce Government reliance in improving political and a debt instrument issued in on external commercial loans economic governance. Africa International markets that is and official financing, often now boasts positive economic denominated in a currency associated with conditionality. growth, low debt ratios, different from that of the abundant natural and human country issuing it. The bond Third, issuing a sovereign bond resources, among others. is issued under foreign law can act as an incentive for These factors have led to a for instance, under New York, maintaining macroeconomic reassessment of Africa by global English, or Luxembourg law that discipline. It also increases investors and opinion-makers in applies to any matters related transparency in economic an environment characterized to the bond. This is meant to management. The offering by uncertainty. protect investors by ensuring that the issuing government memorandum of a sovereign bond issue (prospectus) Buoyed by this improved cannot, for example, without requires disclosure of a outlook, In budget for 2013/14, legal consequences, forcibly substantial amount of data, the Cabinet Secretary for the restructure the bond or change allowing investors a close look at National Treasury, Mr. Henry the bond contract without the the current economic situation Rotich, announced plans to consent of the investors. of the issuing country. This issue a Sovereign bond, to provides a better assessment raise about US$ 1.5 Million to Advantages of a Sovereign of the country’s prospects for pay off maturing obligations Bond successfully meeting its debt as well as provide financing service payments. for key Infrastructure projects. As with other forms of external This makes Kenya's bond the borrowing, the sovereign bond Fourth, external issuance may largest ever debut offering in is expected to complement also improve the risk profile of Sub-Saharan Africa, beating the domestic savings by reducing goverment dept and help US$1bn issues by Nigeria and the risk of crowding out Gabon. Other sovereign issuers, domestic private sector

CBK Newsletter Issue 2 /2013 CBK NEWS CBK Fiscal Agency Role 21 corporate issuers and parastatals to access external medium-term outlook. It has maintained robust markets. By issuing abroad, a government may also growth, kept inflation under control, and ensured establish an interest rate benchmark, against which that the external current account deficit is financed corporate issues can be priced. without any difficulty. Kenya has also adopted prudent fiscal stances and serviced existing public In essence, the successful issuance of Kenya’s debt without any difficulty. It has made progress sovereign bond will give a signal of approval of in data dissemination, transparency in the conduct current and planned economic policies, and may of macroeconomic policies, and in carrying out help maintain a steady momentum in maintaining structural reforms. Lastly, Kenya now has a prudent macroeconomic policies. It also encourages constitutional dispensation that is supportive of the prudence when carrying out critical structural pursuit of appropriate economic policies following reforms because markets will subject issuing the passage of the new constitution in 2010. These governments to close scrutiny and monitor are some of the key requirements considered economic developments on a regular basis. necessary to attract investors. This therefore gives the Government confidence that the Sovereign bond Over the past decade Kenya has built a record of issuance will be a success. good economic performance, maintaining a positive

Geothermal project: Sovereign bond proceeds will be used to pay off maturing obligations as well as provide fi nancing for key Infrastructure projects.

CBK Newsletter Issue 2 /2013 CBK NEWS 22 Recent Developments Regional Credit Information Sharing Conference

he 2nd Regional Credit Information Sharing (CIS) Conference was held Tin Nairobi on 24th September 2013 at the Hilton Hotel. The Conference brought together local and international experts to share experiences on credit information sharing and to take stock of developments in other credit markets across Africa. Credit information sharing has gained prominence in the last few years, thanks to the experiences of the late 1980s and 1990s, which saw Kenya witness unprecedented high levels of non-performing loans (NPLs) leading to the collapse of several banks and loss of money from depositors. It is in light of this crisis that the Central Bank, as regulator of the banking system, together with Kenya Bankers Association (KBA) came up with the credit information sharing framework.

Participants noted the potential inherent in credit information sharing mechanism to unlock affordable credit and growth of the industry due to the confidence it would eventually bolster with shared information. The conference was officially opened by Professor Njuguna Ndungu, Governor of the Central Bank of Kenya. In his address, the Governor underscored the importance of CIS mechanisms as fundamental to the delivery of a more enriched form of information capital that would lead to cheaper credit for all. It would also open doors for credit acquisition and credit rating. Professor CBK Governor, Prof. Njuguna Ndungu (second right) poses with participants who Ndungu also emphasized the need to set up attended the Regional Credit Information Sharing Conference, at the Hilton Hotel. sound dispute resolution mechanisms in order to build stronger relationships and put repayment periods, lower bank charges and on-going, most of the non-banking sector in place KYC mechanisms. interest rates. credit players have already entered into arrangements with the licensed credit Positive credit history enables borrowers to Credit information sharing will curtail reference bureaus (CRBs) to submit their build information capital, which addresses the undesired culture of serial credit credit information. This enriches the one of the main barriers to accessing credit defaulting. This will be possible once CRBs databases and credit providers do by individuals and Small Micro Enterprises most of the credit providers are roped not have any reason to continue levying (SMEs), lack of physical collateral. This into the CIS mechanism. In this regard, high risk premiums. being an information and knowledge era, the CIS mechanism inculcates a culture credit providers should be more willing to of financial discipline on the part of the Regulators and credit providers have accept information collateral in place of or borrowing public. Once the public know undertaken financial education initiatives as a complement to physical collateral. This that their credit history is being collated for to enlighten the public on the benefits presents an opportunity for individuals and reference in their future requests for credit, of credit information sharing. With the SMEs to access capital to translate their they are naturally expected to embrace sharing of positive and negative credit ideas to viable economic activities. As a good financial management practices to information expected to be actualised by result, credit information sharing contributes avoid over indebtedness and the resultant end of 2013, it is envisaged that credit to the on-going efforts of increasing the defaulting of credits. providers will soon enjoy the resultant level of the populace which utilises formal risk management benefits by easing financial services. Further, borrowers with As the efforts towards a comprehensive credit terms and conditions. positive credit history are able to negotiate legal framework for the credit market are for better credit terms such as longer

CBK Newsletter Issue 2 /2013 CBK NEWS Recent Developments 23 ISO Standards for Financial Services

The Central Bank has secured of financial messaging and to devote appropriate resources to expert nomination and mobile financial services family of their Standards participation. participation in the International standards. Being part of ISO TC 68 family Standards Organization (ISO) will also provide Kenya the Subcommittees on financial Benefits of ISO Standards opportunity to influence services, one of only two standards developments and African countries serving as for Financial Services. create new standards that a participating member of benefit the country in addition to the International Standards Standards make an enormous gaining competitive advantages Organization (ISO) Technical contribution to the Financial in understanding new ideas, Committee (TC) No 68. The other Services industry. It provides technologies and implementation member is South Africa. The guidance on fundamental guidance long before the technical committee is tasked attributes of payment instruments competition. It will also enable with developing and maintaining such as the size of a paper establishment of valuable international standards covering cheque, protocols for messaging, relationships and exchange ideas the areas of banking, securities, electronic security systems, and among peers in a particular and other financial services. paperless contracts to name technical discipline. but just a few. These allow This places Kenya in a good interoperability and straight The adoption of ISO standards position to influence the global through processing to take place. provides local companies with standards setting process. The International Standards also regional and global interests, Central Bank has previously led bring technological, economic the benefit of dealing with the Kenyan delegation to financial and societal benefits. Standards known processes and technical services related ISO standards aid in harmonizing technical directives. This provides a annual meetings; in the USA specifications of products and strategic advantage to businesses (2008), Japan (2010 ) and more services, making industry more in the financial services arena recently, Guangzhou, China (May efficient and breaking down who might otherwise be dealing 2013). barriers to international trade. with unproven technology Conformity to International developed elsewhere. Kenya has also participated in Standards helps reassure As Technical Standards the development and/or adopted consumers that products are become more essential in the the following Standards among safe, efficient and good for the financial services industry, others; Switching Systems environment. more standardization will be Messaging Protocols, Banking Standards development and required to meet future business Information Security Guidelines, participation allow companies challenges and opportunities. Codes for the Representation to be on the cutting-edge of For TC 68 members, participation of Currencies and Funds, technology and technological in the domestic development Numbering of Securities, and developments. Participation in of Standards also provides the Legal Entity Identifier among Standard development enhances critical access to International others. Recognizing that much of the universality of and global Standards Development through business is currently conducted competitiveness of businesses. Kenya Bureau of Standards, via messaging, Kenya is also keen Organizations therefore need to which is the official Secretariat of on the evolution and development include “Standards Participation” National Mirror Committee of ISO as a part of its strategic goals and TC68. CBK Newsletter Issue 2 /2013 CBK NEWS 24 CBK Fiscal Agency Role Cheque Clearing Cycle Reduced to One Day

he duration of clearing of cheques reduced from Ttwo days to one, effectively allowing customers to access their funds a day earlier than before. The development, announced in August, 2013, marks the final phase of the Cheque Truncation System project. “Today marks another important milestone in the enhancement of the Cheque Clearing Process in the Automated Clearing House", said Central Bank Governor, Prof. Njuguna Ndung’u. The achievement of the one day clearing cycle is a major milestone in the collaborative CBK Governor, Prof. Njuguna Ndung'u (right) with the KBA chairman, Mr. jeremy Awori efforts of the Central Bank and during a press conference to annouce the reduction of the cheque clearing cycle . KBA in facilitating and supporting the modernization of the National Payment System in the country. key deliverables two of which are the Cheque Truncation system The payments modernization and the Reduction of Cheque process started in 1998 with clearing cycle to T+2. the automation of the Clearing “Today marks House, through the introduction The modernization of the of the Magnetic Ink Character payments and settlements another Recognition (MICR) technology systems has contributed and the Electronic Funds Transfer tremendously to the significant important (EFT) payments. These initiatives reduction in cheque-related resulted in the reduction of frauds as well as increasing the milestone in the clearing time from fourteen (14) efficiency of cheque payments. days to the current two (2) days. This in turn has resulted in enhancement In 2008, the Central Bank of the country’s payment system Kenya in conjunction with Kenya attaining international standards of the Cheque Bankers Association (KBA), therefore ensuring that Kenya initiated the modernization of becomes a financial hub in the Clearing Process the cheque clearing payments region as well as the preferred system, which was aimed at investment destination. in the Automated mitigating various risks as well as Clearing House" enhancing efficiency, with three

CBK Newsletter Issue 2 /2013 OPPORTUNITY TO INVEST IN GOVERNMENT BONDS AND BILLS

Did you know you could save and invest in secure high return Kenya Government Bonds and Treasury Bills? WHO CAN INVEST? Any individual,corporate body,groups and non-Kenyans can invest in Government securities by opening a Central Depository System (CDS) Account (for Free) with the Central Bank of Kenya directly or through your commercial bank.

STEPS IN OPENING A CDS ACCOUNT 1. Visit the nearest offi ce of the Central Bank of Kenya (Nairobi,Mombasa, Eldoret, Kisumu, Nakuru, Nyeri or Meru) or Kenya Commercial Bank, Equity Bank, National Bank, Cooperative Bank and Kenya Post Offi ce Savings Bank and obtain a CDS opening /mandate card and fi ll out your details. Note: CDS account application cards for individual and corporate applicants are diff erent. 2. Attach a recently taken coloured passport size photograph and a copy of your National Identity Card(ID) or Passport. 3. Take the fi lled CDS mandate card to your commercial bank for certifi cation. 4. Your bank will certify your particulars in the completed CDS mandate card by way of appending the bank’s stamp and signature of two of their authorized signatories on the space provided. 5. Corporates are required to affi x a company seal on the mandate card. 6. Send the fi lled up mandate card and attachments to the issuing offi ce. 7. Once the CDS account is opened in your name,you will be notifi ed of the CDS account number via the address you have provided on the CDS mandate card. A formal notifi cation letter will also follow. 8. Once you have been allocated and notifi ed of your CDS account number,you can apply(bid)for the Amount of Treasury Bond or Treasury bills you wish to invest in.

GUIDELINES FOR APPLICATION(BID)FOR BONDS AND BILLS 1. Obtain application forms for bonds/bills from any of the Central Bank of Kenya’s offi ce in Nairobi, Mombasa, Eldoret, Kisumu, Nakuru, Nyeri or Meru or Download the form from the CBK website:http://www.centralbank.go.ke/securities/ ApplicationForms.aspx 2. Fill out the following • Bond/Bill Issue Number. • Duration/Tenure as provided for in the respective prospectus/advert. • Value date . • Total face value-Amount you wish to invest(Kenya Shillings). • Interest Rate-This is the investor’s desired yield. • Your details-as per the CDS mandate card. 3. The minimum investible amount in Treasury Bills is Ksh.100,000.00 and 50,000.00 for Treasury bonds. 4. Sign the application form and submit to any CBK offi ce or fi nancial institution specifi ed in 1 above 5. NB.Do not make payments for the Treasury bills and bonds until you confi rm with the central Bank of Kenya of the exact amount you will need to pay.

For further information call Central Bank of Kenya (National Debt Offi ce)on: 2863600 or email [email protected] CBKNewsletter Keeping you Informed www.centralbank.go.ke