potential investment opportunities

From a Great Past to a Greater Future 1

POTENTIAL POTENTIAL INVESTMENT INVESTMENT

OPPORTUNITIESOPPORTUNITIES

Talking Notes at the KENYA-UK DIASPORA CONFERENCE IN LONDON

Prof. Njuguna Ndung’uGovernor

Central Bank of Kenya

28TH July, 2012.

Central Bank of Kenya

From a Great Past to a Greater Future 2

Outline

• Trends in Diaspora Remittances• Uses of Diaspora Remittances• Opportunities for Investment of Diaspora

Remittances• Barriers to Increase Diaspora

Remittances• What can be done to Incentivise

Diaspora Remittances• Conclusion

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From a Great Past to a Greater Future 3

1. Trends in Diaspora Remittances• Remittances to Kenya have been on an upward trend in the last

few years.• In the last 5 years, remittance inflows have increased by 55%

from US$574m in 2007 to US$891 million in 2011.• The main source markets for remittances to Kenya are North

America and Europe with an average of 51% and 28% of total remittances in the last 5 years.– Surveys by the World Bank on the Future of Africa’s

Remittances (FAR) estimated a $1.9 Billion remittances inflow in 2010, compared to CBK figure of $609 million in the same period. World Bank survey includes informal sources estimate.

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1. Trends in Diaspora Remittances…• The wealth of Diaspora is significant, estimated at 5.4

percent of Kenya’s GDP in 2010 making Kenya among the highest recipients in SSA.

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Source: World Bank

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1. Trends in Diaspora Remittances…• Safaricom (M-Pesa) partnered with Western Union from July

2009 to facilitate remittances from UK to Kenya.• A total of USD18.4 million has been remitted through this

arrangement with the month on month remittances increasing on a monthly basis.

• Over the 3 year period, a total of 136,444 transactions have been executed.

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Source: Central Bank of Kenya

From a Great Past to a Greater Future 6

2. Uses of diaspora remittances

I. Macro level role

• Supports the capital account of the BoP.

• Supports domestic investments.

• Increase flow/buffer  during  crisis/natural disasters.

II. Other Uses

• Smoothing consumption at household levels.

• Finance Development Projects – short & long term.

• Through BoP, supports capacity of importation.

III. However, there is need to be aware of the Dutch  disease

 and  other  externalities - effects of huge inflows.

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• The surveys revealed that households have been making productive investments in land, housing, businesses, farm improvements, agricultural equipment, accounting for 36% 55%, 57%, 15%, and 20% in Burkina Faso, Kenya, Nigeria Senegal and Uganda respectively

• This can be compared to remittances spending on consumption activities in food, clothing, marriage/funerals, rent and cars of 32%, 21%, 15%, 57% and 23% in Burkina Faso, Kenya, Nigeria, Senegal and Uganda respectively.

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2. Uses of diaspora remittances…• However, the proportion of remittances to each use varies

with country

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Use of remittances by recipient households in selected African countries, by source (percent of total

remittances)

Uses Burkina Faso

Kenya Uganda Nigeri

a Senegal

Construction of new house 25.7 11.2 2.5 5.8 7

Food 23.5 12.8 7.6 10.1 52.6Education 12.4 9.6 12.7 22.1 3.6Health 11.3 7.3 6.3 5.1 10.7Business 10.4 3.9 7.6 21.7 1.3Clothing 5 0 0 0 0Marriage/funeral 2.1 0.9 7.6 0.4 2.9Rent (house, land) 1.4 5.7 5.1 4.4 1Rebuilding of house 0.3 5.3 6.3 4.7 4.2Cars/trucks 0.1 1.3 2.5 0 0.2Purchase of land 0 8.4 3.8 24.8 3Improvement of farm 0 2.3 0 0 0Investment 0 24.2 0 0 0Other 7.7 7.2 38 0.8 13.5

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3. OPPORTUNITIES for INVESTMENT of diaspora remittances

Improved business environment– Increased investor protections (World Bank Doing Business

Indicators, 2011). o Kenya among a number of SSA countries enacting new

commercial laws to improve corporate governance.

• Improved Policy environment

– The latest Country Policies and Institutional Assessment (CPIA) rating of 3.8 by the World Bank places Kenya fourth overall in SSA in terms of policy reform and institutional quality.

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3. OPPORTUNITIES for INVESTMENT of diaspora remittances…

• Deepening financial sector is promoting opportunities in debt and equity markets.– Innovative investment instruments – infrastructure bonds–Diaspora domestic bonds – retail savings instrument targeted at the

diaspora to tap their wealth for development back home.–Diaspora Investment Funds – e.g. the diaspora proposed Kenyans

Abroad Investment Fund (KAIF) in 2004. These can close the gap created by a short-fall of private equity capital due to foreign investors being averse to invest in Africa, especially due to dearth of information, perceived high risk & small size of markets.

• Credit for Information Sharing - establishment of Credit Reference Bureaus reducing risks in the credit market.

• Variety of products limited - room for more innovative financial products for the diaspora

• Including long term investment products such as mortgages and insurance products.

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3. OPPORTUNITIES for INVESTMENT of diaspora remittances…

• Broad areas under Public Private Partnership (PPP) include financing, construction, development, operations or maintenance of infrastructure or development projects of the Government through concession or other contractual arrangements (PPP Act 2012). For instance:

• Real Estate and Property Investment– With housing demand of 200,000 units against supply of

35,000 units a year. • Flagship projects under Vision 2030 creating good

opportunities for investment in properties – LAPPSET.• Entrepreneurship, ICT and Other Innovations

o Konza City, the Kenya IT hub to be the centre of IT research and development. This $7 billion digital village project is an opportunity for the Diaspora to invest their skills and expertise.

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4. Barriers to increased Diaspora remittances• Transaction costs:

o Survey data shows that exclusivity arrangements between banks and international money transfer agents contribute to the high cost of sending remittances (World Bank, 2011).

• Other factors cited are lack of access to formal financial services and regulations related to anti-money laundering & terrorist financing.

• Savings mobilization through current institutions remains narrow due to:

o High interest rate spreado Low level of financial inclusion and access especially in the rural areas

o There are continuing improvements in governance but there are still pockets of binding constraints: transaction costs; inadequate definition of property rights .

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5. What can be done to incentivize diaspora remittances

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5. What can be done to incentivize diaspora remittances...• Macro-level Support

Continue with efforts of reducing cost of doing business in the financial sector.

• Diaspora bonds - Mobilization of Diaspora funds through the issuance of a Diaspora bond as a way for tapping into their considerable wealth:

Need to market before issuing the Diaspora bonds. Having a credible Diaspora Association can be an attractive vehicle

for investment and confidence.• Transactions costs and provision of information on financial

development – diversity of remittance channels: UK–Kenya through M-pesa. Bank to bank transfers.

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5. What can be done to incentivize diaspora remittances…

Market development reforms fundamental for long term financial and institutional development and increase in national savings

Further Development of Credit reference bureaus – currently in place Legal system reforms – to address costs of litigation

o Collateral recovery and appropriate definitions of property rightso Strengthen Contract enforcement

Market enabling policies for private sector development Financial sector development and continued innovation Targeted SME Financing and investments Regulatory capability of the financial system and institutional development like demutualization of NSE

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6. Conclusion

• Though remittances are private funds, they can be enhanced for development and poverty reduction.

• The policy terrain is to provide an environment where there are choices and tools to enable them better manage and invest the funds.

• The diversity of options and choices for investment will enlarge the capacity for the economy to grow in future.

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THANK YOU

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