World Bank to support to Kenya’s financial services sector

The World Bank Group will support Kenya to develop a stronger financial system, increase long term financing and reduce the cost of credit to borrowers under a new finance program approved on the 30th of April.

The World Bank Group’s Board of Executive Directors approved an International Development Association (IDA) credit of USD 37m for the Kenya Financial Sector Support Project to strengthen the legal, regulatory, and institutional environment. It will help Kenya to improve financial stability and increase affordable and long term financing. “Kenya’s financial sector is the third largest in SSA and it makes a significant contribution to economic growth and job creation,” said Diarietou Gaye, World Bank Country Director for Kenya. “The opportunity for Kenya now is to transform the financial sector to provide more affordable and longer term credit to contribute effectively to growth and shared prosperity,” he added.

The new program will build on the reforms that were supported by the Financial and Legal Sector Technical Assistance Project, which helped strengthen Kenya’s financial sector in the past decade. Financed by a Bank credit of USD 18m and cofinancing of USD 10m from Britain’s Department for International Development, this project was approved by the Bank in October 2004 and closed in March 2013. Milestones during its implementation period included a more stable financial system and increased financial access and diversity of financial products, said the press release. The critical need now is to consolidate these gains by addressing the remaining gaps and weaknesses in the financial markets, especially as they relate to long term financing needs of Kenya’s development agenda.

“The new facility will also facilitate access to and reduce the cost of finance, which are identified as constraints to business growth and job creation” says Smita Wagh, Senior Financial Sector Specialist and Task Team Leader. “Stronger policy, regulatory environment and market infrastructure are needed to support the development, efficiency and integrity of the financial market.” The program will focus on banks, insurance and pension schemes through a more targeted approach that supports solutions to specific constraints that curtail economic growth and the job creation of the private sector. This will improve investment opportunities for institutional and foreign investors.

Primary beneficiaries of the program will be the National Treasury, and financial sector regulators including the Central Bank of Kenya, Capital Markets Authority, Retirement Benefits Authority, Insurance Regulatory Authority and the Sacco Societies Regulatory Authority. It will also support the Kenya Deposit Insurance Corporation and the Public Debt Management Office. The Bank’s Country Partnership Strategy (CPS) for Kenya and the Government’s Vision 2030 identify access to finance as critical to enhancing the prospects for Kenya’s growth, regional competitiveness, and shared prosperity. The World Bank Group will continue to support efforts to increase financial access to improve the enabling environment for private investment, which plays a critical role in Kenya’s development process.

Already one of Kenya’s more exciting sectors for investment given the levels of innovation that have been observed as banks (and indeed telcos given Safaricom’s success with Mpesa), the above development should give further credence to the investment case as it should help build a stronger/deeper financial services sector. Our current favourites in this space include: KCB (KNCB KN Equity; HOLD) and Equity Bank (EQBNK KN Equity; HOLD). We believe that they offer long term value for money and as such investors should be looking at picking up the shares on any share price dips.