The World Bank has approved an International Development Association (IDA) Technical Assistance Credit of 18 million US dollar to help implement a financial and legal sector reform program by the Government of Kenya.
The overall objective of the program is to create a sound financial system and strengthened legal framework and judicial capacity that will ensure broad access to financial and related legal services.
– The Project will address policy, institutional and legal issues affecting the efficient operation of the financial sector and provide support to the Government in its efforts to draw up a financial sector development strategy that will provide the framework for achievement of policy objectives, said Michael Fuchs, the World Banks Task Team Leader for the Project.
The Project will help redefine the role of the state as a facilitator for private sector growth and investment.
Within the framework of its Economic Recovery Strategy for Wealth and Employment Creation, the Government commits to maintaining a stable macroeconomic framework, reforming the financial sector and strengthening its regulation to increase savings and investment, implementing mechanisms for private sector participation in provision of infrastructure services, and establishing the enabling environment for private sector growth and investment in productive sectors such as tourism, trade, and industry.
The Project objectives are consistent with the commitments of the Kenyan government to improve public sector management, eliminate corruption and restore the rule of law.
They are set on the understanding that sustainable economic recovery and broad-based growth depend on a vibrant and integrated financial sector that supports not only extensive mobilization but also the optimal allocation of resources across the economy.
In addition, it was recognized that good clear laws backed by a strong and credible judiciary are an essential element in creating an environment that is conducive to business and financial activity.
The Government has developed a Governance, Justice, and Law and Order Sector (GJLOS) Reform Program aimed at addressing key weaknesses in the sector. The activities to be supported in this Project fall within the Key Results Areas of the GJLOS that will most support the strengthening of the financial sector.
The Project will provide support for review, amendment and/or drafting of laws that impact on the efficient operation of the financial sector with a view to ensuring that the Government fully assumes its legal, regulatory, and supervisory role so indispensable for promoting competition in the sector.
A concrete example will be to ensure that the Banking Supervision Department of the Central Bank of Kenya has the mandate to take decisive corrective action when and as required.
One of the seven components of the Project aims at improving access to financial services to large segments of the population and enterprises, especially micro, small and medium-sized ones.
Among other aspects, this component of the Project will focus on addressing the overly debtor-friendly enforcement mechanisms and the pervasive lack of credit information that have contributed to high lending risks as well as costly and inaccessible credit.
Over the last two decades, access to financial services has been limited and interest rates have stayed high in Kenya, reflecting what were high levels of government borrowing and non-performing loans.
In December 2003, non-performing loans amounted to about 26 percent of the total loan portfolio of the sector. The bulk of the non-performing loans was concentrated in four commercial banks with state interests.
Divesting the Governments stake in these institutions will strengthen the banking system by mobilizing private sector resources, eliminating direct and indirect subsidies, and removing political involvement in credit allocation.
Consistent with the Governments market-based policy for financial sector development, the Project will support the establishment of a specialist Bank Restructuring and Privatization Project within the Ministry of Finance to guide the privatization process.
– The project will provide technical support for setting up a unified and sustainable debt management office within the Kenyan Ministry of Finance, including review of relevant legislation, added Fuchs. It will also support the development of debt markets which are so crucial to the development of long term securities and capital markets.
Kenyas banking sector comprises 43 commercial banks, with the six largest accounting for about two-thirds of all assets, loans and deposits of the banking system.
Kenyas insurance sector comprises 41 licensed companies, two re-insurers, about 200 brokers and 400 active agents under the supervision of the Commission of Insurance. Although diversified, the non-bank financial institutions share many of the structural problems.
The legal system in Kenya currently faces major challenges in supporting effective financial intermediation.
The Project design recognized that the review, drafting, implementation and application of the proposed legislative and regulatory reforms will require strong capacity in the Judiciary and in the legislative and executive offices charged with legislative drafting and law revision.
The Project also includes a legal education sub-component that will ensure that the legal and judicial professions are well placed to implement these reforms.
The credit is provided on standard International Development Association (IDA) terms, with a commitment fee of 0,35 percent, a service charge of 0,75 percent over a 40 year period of maturity which includes a 10-year grace period.
For more information on the World Banks work in sub-Saharan Africa visit: www.worldbank.org/afr
For further information on World Bank programs in Kenya visit: www.worldbank.org/ke
Kilde: www.worldbank.org
