Fintech Now and in the Future: the Role of Central Banks
- All right, so it's 11:00 am here in New Haven in Connecticut. I'd like to welcome you all to Yale, to this very special event, a webinar between two distinguished alums of the department. I'm actually sitting right in front of the Department of Economics, where we have not been located for the past year during the Zoom era, but it's a beautiful spot as the Governor knows, and as Tavneet knows. It's a beautiful spot, and I know some of you are considering coming to Yale, perhaps as part of our IDE program, and I hope that you can experience this spot for yourselves next year.
So let me just say that what we're here for today is to celebrate the long history of the Yale IDE program, which really was the precursor, it preceded the creation of the Economic Growth Center, both of which have a very long and storied history here in the department, and I think because of these two institutions, the department over the last 50 to 60 years, really 65 years has grown into one of the world's centers for development economics. And not only doing research, but doing policy, you're asking the biggest questions and trying to change the world really and answering those policy questions. How do we develop? So we have a long and storied tradition, and it's a central part of the identity of the economics department. It actually goes back to, I guess, Lloyd Reynolds. I've read a history that Michael Boozer who's the current director of the master's program wrote and so I read some of that in preparing for this talk, I learned some things. So the history goes back to Lloyd Reynolds, who was chair of the department before me.
I'm the current chair, by the way, of the department. It goes back to the '50s, and then he brought in someone named Robert Triffin who created the International and Foreign Economic Administration program, which Bob Evenson then in the '60s, renamed to the current International Development Economics program. So we have a long and storied history.
Today, we have two of our illustrious grads of the programs. One, of either the Yale economics program or the IDE program or both. So we have here Governor Patrick Njoroge.
I hope I'm pronouncing that roughly correctly, 'cause I read about it on the web, so thank you very much, who has graciously decided to agree to join us today. He received his PhD from Yale in 1993 if I'm right and has worked in the International Economic Policy Community for a long time, the IMF and elsewhere, and is now the Governor of the Central Bank of Kenya. And I should say that we have a long tradition of central bankers coming from the Yale economics program. Of course, there's Janet Yellen, who's now the secretary of the treasury who is got her PhD in '71, Urjit Patel who won the Wilbur Cross Medal last year.
A very prestigious medal that we give to our illustrious grads from Yale received his PhD in 1990. I just learned today that the Governor of the Bank of Thailand is also a Yale PhD, 1994. I won't try to pronounce his name today. I didn't practice that one. So, and then Tavneet Suri is also here. She is not only a Yale PhD, but a graduate.
One of our illustrious graduates of the master's program in IDE. And many of our graduates have gone on to great things in policymaking and academia. And Tavneet is one of the role models, I think for many people. She's worked in many aspects of research and policymaking as a professor at the Sloan School of Management, but also as a very active member of the J-PAL, the Poverty Action Lab MIT. So we're very happy to welcome her here too. So with those words, let me just say, I'm looking forward to today's discussion on FinTech, which is a very important area that Tavneet has worked hard on.
I know, especially, so I will pass it over to you and I look forward to our discussion. - Great, thanks, Tony. I really appreciate it. And thanks for the kind words.
Yeah, we do have a storied history of central bankers, which is interesting. Maybe more to come. So thanks for everyone who's here, and who's attending. The way we decided to run this event is just have a conversation. Governor Njoroge is a pleasure to have you here. (speaks in foreign language), as we would say. (laughs)
And I'm gonna have a conversation with the Governor, and then we'll try and open up to Q&A. The way the Q&A will work for folks, please type in your questions into the Q&A in Zoom and I'll moderate and read them out as we go. And you can upvote the Q&A in the Q&A function of Zoom. So please use that if you have questions, and I think we're off to the races.
Governor, welcome again, thank you for being here on behalf of Yale, on behalf of all of us. It's really nice to start this series of celebrating both the Growth Center and the IDE program at Yale, sort of kicking off the celebrations with this event. And we're really glad you can be here. So welcome. - Thank you, Tavneet.
- Yeah, great. So let me start early days, and ask you a bit about kind of your career path, and how you ended up in Central Bank Governor in Kenya. And maybe you can tell us a bit about that journey and how you got there. - Thank you, Tavneet. And first I'd like to thank, Tony, and everyone else in my alma mater for the invite, and I'm definitely delighted to be back, though virtually.
And thanks, Tony, for that background on your Zoom portal. And really my journey started way back when, well, as an economist really, when I did my undergraduate and master's in the University of Nairobi, I was quite interested in economics more so that I can change the world, not so much in the sort of modern way, but maybe changing the lives of people in particular ways. So in any event, I did that and then of course came to Yale which was a very exciting time.
We can talk a bit more about that. And after doing my PhD, I went back to Nairobi and worked in the government ministry of finance, and then eventually decided that I had seen enough of the ministry. And I got a job at the IMF from 1995 where I was for 20 years. That was very exciting. I mean, really that is where I learned to become a real, I mean, I was nurtured in a sense and improving my skills et cetera, 20 years of that.
But I was happy with what I was doing, and even career wise, et cetera. And that's when this job came up, the job of the Central Bank Governor. I wasn't very interested in it at the beginning 'cause I had everything sort of in front of me, but then I had this nagging problem which is maybe I could make a difference at home in Kenya having worked with all sorts of other countries. Maybe I could, maybe I won't, but I could never really tell. I could not tell unless I tried.
So that's what I did. So I applied and here we are, 5 1/2 years later as the Governor of the Central Bank of Kenya. - Great, thank you. Yes, we'll talk more about you being Governor in a little bit. But let me ask a little bit about the IMF and the transition from the IMF to being Central Bank Governor to moving back home. I spent a lot of time at home, but I haven't quite moved back home yet like you.
So how was that transition, and how has it been over the last few years? - Yeah, first, I mean I did enjoy my time at the IMF. It was great. I was challenged as an economist, and really honed my skills as an economist. The transition from sort of classroom paradigms to sort of actual policy and discussion with the authorities in governments, across geographies, et cetera. I mean that I think was very good training ground, and I learnt a lot and really got that sort of instinct of where things are, et cetera. So that was very exciting.
Of course we have very interesting people that were interested, that are still interested in development economics generally. but I think policy was obviously important. One of the things that I learned there of course was a phrase that one of the gov--, I guess somebody told me, which is no one cares what you know until they know how much you care.
And that I think is something that has stayed with me all this time and all these many years. But the transition coming back home, of course you're coming back home from let's say an environment where everything is all clear, systems work to a system where obviously your things are not working very well. So there was a bit of a transition and then realizing that it is you. If you don't do, if you don't make policy, you don't push, it won't get done. Of course there are other things that were really surprising like of course, I always knew about Kenya being at the forefront of digital money, et cetera, et cetera but coming back home and realizing that to this day, I've never done an over-the-counter transaction. Everything for me is digital.
Yeah, okay, there is an occasional check that I have to write, but beyond that. So I think it was kind of exciting in some ways, but also quite challenging in others. Of course, you don't have much time to worry about your own personal things.
It's all the issues in front of you, but it's been quite challenging, and I have enjoyed the challenge. - Yeah, and you get to see family all the time. - Absolutely. (Tavneet laughs) And the weather is better than Washington, I think, than also New Haven.
And so that's something. - Oh, way better. Way better. (laughs) Yes, one of the things I miss most, the weather, sadly. (laughs) - Absolutely. - Yeah, I think, it's interesting, the digital stuff, it's different seeing it from afar and then like being sort of in-person realizing just how salient and broad it is, and how much it's sort of pervasive and a pervasive part of life around, not just Nairobi, but all over.
So let's talk about that piece a little. Why do you think it's been so successful, and what do you attribute that to? Is it kind of the regulation side? Do you think there's other pieces of the success of this that you would love to talk about? - Okay, well, you're right, Tavneet. Really Kenya is the cradle of FinTech. We could also argue between ourselves and Ethiopians whether Kenya is the cradle of man, but that can take us way into the evening.
- I think we'll both say the same thing. It really is. - Absolutely, absolutely. Two Kenyans talking about this.
Yeah, we would agree instantly. - Exactly. (laughs) - So the cradle of FinTech, and this is really where it started. And really that was back in 2006, that is when or among other things, that's when we had the first iPhone. But I think more importantly, that's when the product MPESA came into being, actually in 2007, that's when we actually brought it into the live world as it were.
And it has been very, very successful. I think there are many ways of measuring the success of this but I think the first one I need to point out is how successful it has been in bringing us forward in terms of financial inclusion. It was at 26% financial inclusion or 26% of our adults were included in 2007. And now it is actually 83 plus percent. So it has really helped us leapfrog in terms of financial inclusion. Those are things that I think you and I in a policy environment or class discussion, you think also of doubling financial inclusion to 50%.
I mean, that's huge. So going to 85%, and still increasing is something that is obviously remarkable. That's one way of measuring it.
But I think your question is, well, the other ways, but I'll come to that towards the end. Why was it successful? I think first and foremost because there was a particular need. So there was a need that it was feeling, basically it came to us through the transfer, payments sort of as a payment platform. So I could send money to people. There was a need in the sense that people needed to send their money to their family back home in the rural areas.
And instead of giving it to the, let's say to the bus conductor or using the postal service and et cetera, et cetera, I mean this actually filled a very urgent and indeed important need. So, and that's really what happened. So when it was devised, it was a really devised as a transfer between P2P as we call it today, between persons. So the need.
Secondly, the regulator looked at it, and actually was innovative. Meaning didn't want to throttle the technology, but actually looked at the concerns like financial stability and other concerns, security, et cetera and allowed the innovator to sort of improve so as to mitigate against those risks, and then allow them in a sort of a test and learn environment to launch the product. Obviously knowing or understanding that if there was a significant problem, it would be pulled off the wall as it were in the manner of speaking. I think that was something that was also very important in terms of it.
So your question about regulation, there were no regulations at the time. So actually the regulations came later in 2013. That's when we put some regulations in place, but there was clear understanding between the innovator and ourselves about sort of the rules of the game and how we move that forward.
Obviously at the end of the day, there was very effective collaboration amongst everyone else, the consumers, et cetera, regulators. I mean, among everyone else who came into this ecosystem. And today, now it is a very elaborate ecosystem that is not just on the payment side, but has grown into a well, a mature sort of environment. - Yeah, great, thanks.
So let's talk about that mature environment. You're just teeing up all my questions, Governor. I love it. So one of the big pieces that has grown from it is kind of these apps or wallets that allow you to borrow. So the most successful example in Kenya is a digital bank account that the Commercial Bank of Africa has built over the rails of mobile money. It's called M-Shwari just for the audience, not for you, Governor of course.
And so that's one of the most successful digital lending products and digital bank accounts. What do you see the future of those sorts of things? Are there benefits to them? Are there risks? Are you regulating them? How do you think of those sorts of products over the rails of mobile money? - Okay, precisely we do have the rails now, and now what we need to do is to put on the wagons as it were. And I think one of them is the one that you mentioned, or one set of products are the ones you mentioned sort of lending. And this is of micro lending. That's what I guess we used to call it before.
And now on your mobile, you can call it all sorts of other things, on your mobile device. I think there's a great future for them. And it isn't just that one wagon, there are many other wagons that need to be put in place. As a matter of fact, with the rails now, what we need to do is to work to make sure that the environment continues to, or the ecosystem continues to mature. Of course there are some risks.
And I think these are the concerns that we as a regulator need to watch out for. It's not our job to innovate in the sense of saying this is the direction, let's say picking winners in the old fashioned way. We do understand that was actually a bane of let's say industrial policy in the past. Industrial policy 1.2. So not picking winners, but actually setting the rules so that the innovators can expand as needed, et cetera.
But I think the concerns often are, from our perspective, financial stability, and this could be if it is in a lending environment from over-borrowing or over-lending or for that matter, the issues of consumer protection, so costs, et cetera. And these are things that we need to or the way the consumers are being dealt with. So that is something that we as a regulator need to be not just conscious of, but to monitor and improve. One of the concerns we have actually is some so-called well, we call them credit-only lenders that are not regulated by the Central Bank or for that matter by anyone else.
And unfortunately they've grown like mushrooms, and also like mushrooms, you need to be careful which mushrooms you eat. Otherwise you may eat some poisonous stuff. And this actually have been a big concern for the consumers. As a matter of fact, in terms of their size, they are less than 1% of a credit in the system. Actually they are less than the smallest bank that we have here in Kenya. But in terms of the noise from the consumers, I mean, it's huge.
So we are putting in place now some regulations and actually there is a bill that is in parliament today that will put order in this area. But I think the point to make is that it is important to be clear from our perspective, CBK, so the Central Bank's philosophy with regard to regulation which is you want to maximize the opportunities from innovation while minimizing the risks. And the benefits as you say, are huge. One of the first papers I read about the impact of MPESA was yours, Tavneet.
You remember that? Where you mentioned that the impact of a MPESA was what? 2% of GDP? - 2% was reduction in poverty, yes. - I never told you that, what actually went through my mind at the time. You see, years ago, I was trying to do a term paper at Yale, of course.
And T.N. Srinivasan was the one, it was his class. And I don't remember what it was about, but basically we were discussing the impact of trade. Yeah, the trade reforms that were there at the time.
And T.N. was an expert on that. And how actually in general equilibrium models, if you try to measure the impact of a trade reform liberalizing trade, the models always give you a very small estimate. Somewhere like 1% to 2%. But we all know that the advantage of trade reforms is much more than 2%.
And T.N. told me sort of in passing as part of my paper. I mean, he made the point that actually the benefits come from new products. And I remember going away trying to figure out, okay, how am I gonna model these new products? Creation destruction or whatever else it is. But anyway, the point I'm making is your 2% as you mentioned is actually a major under estimate because you have all these other things that have mushroomed being in the wagons. And those have actually huge benefit as we have actually seen.
- Yeah, absolutely, Governor. I completely agree. That's like the pure rails on the rails with nothing on the rails, except that. Yeah, I will say, you mentioned T.N.,
I took T.N.'s class only a few years after you, Governor, but I did. It was like a trade development class. - He was still the same person. (chuckles)
- Yeah, I remember him fondly. So I can imagine him saying just what you're saying. Yeah, I think trying to aggregate up all the bits and pieces will take us some while as researchers, but I think it also means there's a lot of interesting open questions to understand what each of these products does and how you can design them better, how you can build them better. I personally have been a little underwhelmed by the innovation 'cause I feel like there should be more products. So I'm hoping there's a lot more coming.
And I like your view of regulation being we don't wanna restrict innovation, we just wanna manage the risk the financial system that come from it. - But Tavneet if you just let me say one thing that just struck me now, (indistinct). You see I spend a lot of time listening to innovators.
I mean, they come here and do the dog and pony show and they show us what they are doing, their widgets and things like that. And there are certain things that strike me. First, it's a lot of them that are in Africa are still stuck in the payments area. Payments, payments, payments.
Now they all say that they want to reduce the cost of payments, but I think they need to expand and begin to look at other problems elsewhere in the financial space as it were. And I think that is what I would strongly encourage the innovators if there innovators on this webinar. In the US actually it's not so much in the payments space. It's more in the capital markets area, wealth management, et cetera.
That's where there's a lot more action by FinTech, et cetera, et cetera. But I think my point here is let the innovators look at the problems and figure out how to fix the problem. Let them not come with a sort of a prefixed or preordained idea that everything is payments because that's not true. I think we need more wagons elsewhere. - Yeah, I'm in complete agreement.
Sadly, I'm not gonna disagree with you, Governor. No controversy here. - We'll get to a point where we are gonna disagree, I'm sure. - Yeah, I'm sure, but I agree. - It's the first time we agree on everything. - I just gave a spiel on a call this morning, Governor where I sort of gave this example, there's not enough wagons and wagons that work for 70% of people, not 5% of people in the country.
I think a lot of people get absorbed in the Nairobi lifestyle, kind of that's their view of the country. And to be honest until I did field work in Kenya, I didn't really appreciate kind of the breadth that is our country. So I think that's a piece where people's use cases often are for a small group of people. And then the wagon doesn't really take off. It just doesn't do all that much. So I would also encourage people to think about not just wagons, but wagons that work for large portions of our population, not just a few.
Awesome. So we've talked a bit about this stuff. What do you see as the future of FinTech? So when we think about innovation, where do you see the scope for those products? What do you think that FinTech itself can really bring to the continent? Bring to our company? - Okay, my view is that the future of FinTech in Africa is bright. I mean, let's begin there for many reasons. First, there are many needs.
You can look around, and you'll see many problems that need to be resolved in the financial space we are talking, of course. And I would call this sort of more generally the democratization of financial services. You and I can have a lot of less financial services that are available to us. You can go to even wealth managers or whatever or savings options, not everybody in Africa has that. As a matter of fact, there's a lot of, if we want to move ahead in terms of investments, savings is a key driver, but we need to get the savings from everyone else.
So I think there is a lot of need here. Secondly, you don't have legacy structures. So you can actually leapfrog from where we are with very little in terms of structures to something that is let's say designed with 21st technology et cetera, et cetera. Sadly, remember 60% of our population in Sub-Saharan Africa, are youth. And that is about 1/3 of our workforce is below the age of 25. So you have a lot of let's say, the pyramid is a truly a pyramid.
And a lot of the youth are educated, et cetera, et cetera. I mean, it's not being a PhD sort of person that you need to, that's not education here. As a matter of fact as we have discovered the Kenyan population are very technologically savvy. I have stories about this, and I'm sure we can tell stories if we more time about meeting people who are actually doing, let's say things that you and I are kind of not quite get there quickly, right? They have it in their fingertips in terms of using technology, adopting technology. Our grandmother's kind of very accustomed to technologies that maybe people in the US are not.
I mean, we're still having trouble with our TV remote, et cetera. Well, actually people here are very advanced in terms of dealing with those things. But also, as I say, I think people should begin to look at, I mean, some of the things just as examples, I know a lot of us are stuck with the technology. So the questions I get are blockchain, DLT, things like that. I think that's looking at things the wrong way. Look at the problem.
What problem are we trying to resolve? And then ask the question, what solution do you need? So it's a bit like writing a term paper. You don't write the term paper by first solving the equations or whatever else it is. What is the problem that you are dealing with? What is the economic problem or the research problem that you're dealing with? So it is more that. Having said that, I really think that applying the, let's say all the ideas that are out there, Africa would really leapfrog, not just on FinTech, but in other areas as well.
And I think here is where much more excited because I mean there's so much that can change quickly. I talked about more than tripling of the financial inclusion numbers in Kenya and actually elsewhere in Africa because of such a sort of transformative technology. I mean, you have other things as well that have changed in that way. I mean, in terms of, for instance and the example that I remember is Rwanda. Rwanda in terms of ease of doing business in that much maligned, let's say, let's just leave it. - You shouldn't talk about ease of doing business anymore.
- I should. (laughs) I mean, that's going to embarrass us as the economist as well. But I think the point is in 2007 there were at number 130 something, 135 or thereabouts. And by 2017, there were at number four or five in terms of doing business and other things.
I mean, an example that I also in my head is in 2007, Nigeria was the second largest importer of cement in the world. Number one, of course is the US. But then in 10 years later, a little more than 10 years later, actually they were sufficient, self-sufficient in cement and actually pushing to export because there has been such a change in that industry. So I'm just making the point that most of the things if they are done correctly can be transformative.
Of course, as development experts or people interested in development as economists we ask ourselves, is it actually changing the lives of people? And I think it is, I think it is. - Yeah, excellent. Yeah, I think what problem you're trying to solve is a big one. Especially when people talk about blockchain as you said.
I always pushed, like, what is it solving that a regular pretty decent database won't solve for me? Tell me there's value. But I think people often don't quite get that view of the world, which is try and figure out the problem you're trying to solve for at least, in my books, also not just one person, many people. I want it to be a reasonably broad problem you're trying to solve. Yeah, I think FinTech will be interesting to watch over the next couple of decades. I think it will either take off and be great or kind of we won't have figured out enough innovation to get as much out of it as we could.
And I hope it's the former. Let me go back a little bit, and just talk a bit more about kind of policymaking in Africa or Kenya more specifically. We've known each other for a few years now, Governor. I think we met right as you got appointed, if I remember correctly. (laughs)
And I think it was the museum. I think that's where we met with the national museum. - Absolutely. - Yeah, so, I know you've worked extremely hard in Kenya to make our banking system, should I say more efficient, let's say more efficient (laughs) without being explicit. I'd love to hear your perspective on what you think your biggest success has been so far. And also what you found hard about your current position.
- Wow, and all within two minutes. (laughs) - No, no, take your time. We have time, we have time. We have plenty of time. - Okay, well, you see, Tavneet, I am not sure at this point, one can look back and sort of be comfortable, but then let that be.
But if I were to, okay, fine. If I'm thinking of the most significant things, I think the first one in my mind without a doubt would be COVID-19, the response to COVID-19. This has been a very difficult year for any policy maker anywhere and for any economist anywhere. And the numbers have been swinging numbers, not so much numbers, but economies have been swinging huge numbers.
I remember in March last year I was looking at some of my notes actually from a year ago because of we are now at one year there. And I was looking at some of the statements that were made by the Jay Powell, the Governor at the Fed, US Fed. And he was saying that we would have something like well, actually 30% sort of declines, things that nobody ever thought of. You're thinking huge declines is 5%, but it was amazing off the charts surviving that. But it isn't just surviving, is actually figuring out policies that would maintain and strengthen the economy. Even as the containment measures were put in place, restrictions on travel, close down, et cetera, et cetera, I think we have been quite successful all things considered.
And we have had some sort of retrospection over the last few weeks. And in terms of, for instance, the way the banks have responded or responded at the beginning, we've been quite, I think we did reasonably well on that. The decline actually, we still haven't seen the first numbers, I mean the first print numbers, but they estimate something like 1% growth, maybe a little less, but around there. Actually, I'm not sure it is just that, but let's wait a few weeks and they'll give us the first numbers. But I think I told you this, Tavneet.
The first time, I mean, from around February which is when we began to see this thing coming. The first time I actually slept a sound sleep throughout the night was sometime in October. All those many months sort of figuring, in a sense, being very very uncomfortable with things, et cetera, my mind not at ease. So I think that is number one in terms of what I'm proud of, and what may be has been the most important if we had not done what we did, I think we'll be talking a completely different story.
That's one. The second one is maybe what you mentioned, but the way I put it is sort of the strengthening of the banking sector. And I think there has been a lot there. First and foremost, I would say is the culture that was pervasive in the banking sector. A culture that is probably not consistent with proper pricing and ethical practices, et cetera. So clean up of the sector, of course that also meant that we had to take the hard decision of closing some banks.
We've closed three and put them in receivership. But one, we actually put them in liquidation and the other two in receivership. So it was tough obviously knowing the impact on the people, and until COVID 19 came along, this was the toughest decisions that I ever did or we ever did.
And we didn't take those decisions lightly. I remember one in particular, we were up 48 hours straight working on this. And that was sort of the final moments after many weeks and a few months also sort of trying to deal with those issues. So that is one. Now of course, it isn't enough just to clean up. You need to put it in play.
You need to sort of begin a new normal as it were. And I think that is what we've tried to impact all the actors in the sector. And we want the banking sector to work with, and for Kenyans and actually during this COVID-19 period, it is because of that sort of new found way of looking at things that we have been able to do what we we did. So in that sense, just a thumbnail sketch on this.
It was more important for Banks. Banks understood that it is more important to protect their balance sheet as opposed to protecting their PNL, so their profits. And in a sense, that's why they restructured some of the loans with their borrowers so as to maintain. The borrowers of course were selected in the sense that they were already.
I mean, they had performing loans. So you are not restructuring. You're not evergreening. You are doing the right thing which is only performing loans, restructuring them to support them, et cetera.
So that is important. And of course, customer centricity, correct pricing et cetera, et cetera. So that's number two. Number three briefly is strengthening the, this is something that most people have not seen because it's really fixing the backroom, things in the backend. And this sort of strengthening the financial infrastructure. So the infrastructure itself, for instance, hardening it to be, I mean on cyber issues, hardening it a lot more.
Improving for instance the credit information system which we have done significant refresh in that space, but also other things. We've improved our RTGS which is our real time gross settlement systems. And frankly, this now is at world standard. And we can now move to as a 24/7 economy because we have the capacity to do that. I mean, to run that in terms of numbers, in terms of all the options that you have. But importantly, data.
I mean, if we are in the 21st century, we have to talk data. And so we are doing a lot of work to make sure that we are putting data together in a particular way so that we can make data-based decisions rather than sort of random decisions in a sense. So there's also having a better central security depository system.
With all these things, we will really be in the 21st century. And at that point, it wouldn't be just saying, we are an important financial system. It will be well, we are there. It is Nairobi because everything else is in place.
And those are the three things I could probably say. - Great, thanks, Governor. I appreciate it. I'm gonna switch to Q&A in a second. But yeah, I think, it feels like with all of these improvements now, the innovators just have no excuse anymore. Come play.
I think that's what we need to say to innovators is just come play. And Nairobi is the greatest city in the world. No exceptions. - I think that we are not gonna argue, Tavneet. (both laugh) We agree entirely. - Yes.
I argue with lots of people over Nairobi being the best city though. I will say. All right, I'm gonna start some questions if you don't mind from the audience, Governor. I hope that's okay.
I'll start with a question from Irene Wangaki. Irene, thanks for being here. She asks FinTech credit at the moment is mostly for consumption smoothing.
Most SMEs have to go to banks for sizable funding. M-Shwari is not lending to SMEs, and there's still a lot of consumer protection issues there. Do you have a vision for how FinTechs can solve SME financing issues? - Well, excellent, excellent, excellent, Irene. I think this is something we've been working on for some time. I think we need to dial back maybe two years. It was January of 2019 when we went out there and began looking at the FinTechs.
Not FinTechs, I'm sorry, SMEs. And I toured the various places, the various markets. Actually I loved that. Since my return, I hadn't had that sort of freedom to walk in the thick of things. Anyway, but one of the things that came out of that actually is a product that is called Stawi. And basically this is an anytime anywhere financing for SMEs.
And it really, the whole point here is that as an SME, my information in terms of transactions, et cetera that I do, buying selling is on my phone, say my mobile platform. So if that information is gathered and assessed correctly, you can actually provide a pretty good sense of a credit score there. As a matter of fact, I don't remember the numbers now, but it is better than having a credit officer in terms of judging the credit worthiness of somebody using that information. So this is something that I think we, well, unfortunately COVID-19 came. And so that was put on let's say on the shell, on skis, on ice or whatever else it is. But I think now that the economy is beginning to come or is coming back, this will be a central point.
Now I should hasten them to say that the SMEs, they need credit, but they need credit plus, and that plus element, other elements, like maybe being given some sort of, well being trained to do the accounts better, or for that matter, improving their skills. I mean, one of the ones that we were thinking of, and I saw this is (indistinct) welders. And they need to be taught how to do better welding sort of joints and things like that. And basically they can do that in three hours.
So the bank works with them, and they bring some sort of truck on site that actually they taught how to weld for three hours in the day there. And I think it is those sorts of things, innovative ways of let's say upscaling people's skills, providing them with credit. One of the person I remember when I went on this, whatever it is, excursion, was a painter and a carpenter. So he would sell paint to the people that are painting.
They repair your car, and then they have to repaint it. So his job was to sell. It was all about paint. And we asked him, so what will it take for you to move to the next level? And he said, well, actually all it will take me is something like a $1,000 worth of equipment which would make him sort of, or allow him to sort of mix the paints, and therefore have all sorts of colors.
Not just have the, I don't know, the 10 different colors or however many colors you need in that sort of environment. So I'm just making the point that the SME story is a big one and we need to work on it in all directions. We just started recently a credit guarantee scheme, but credit is not everything, it is credit plus.
- Great, thanks, Governor. I've got a question from Ali O. Paul who starts off saying Kenya's work on FinTech is truly impressive. Thanks, Ali.
The Governor will take full credit for it, don't worry. He asks being the cradle of FinTech, he's curious about what lessons you might have for Central Bank policy of having a mature FinTech environment. You touch on the financial stability angle. Are there any specific lessons for the transmission of monetary policy that you think about? - Wow, difficult question.
(laughs) I mean, generally, I think, depending on the wagons that you put there, you'll have different, let's say risks on transmission on monetary policy. Obviously, if it is lending, then this has a significant impact. And we've had to do some work. As a matter of fact, for you to know we are improving our monetary policy framework.
Precisely because of reasons such as this because now mobile money is very important. It is no longer just something that is in the corner somewhere lending, et cetera. And therefore you need to incorporate that when you are thinking or designing a policy. So there is that.
But I think that is only one angle. The other elements, depending on the wagons, as I say, if you are into savings, by the way, remind me, Tavneet, to tell them about our savings product. - Yes. - If you're into savings product, then obviously transmission will be somewhat different, but it will still be there. My point is, you need to think through it step by step.
And so there's no shortcut. You have to do the sort of the brute force sort of step by step checking of how this monetary policy is being transmitted through all the channels and indeed through all the products that are there. But in terms of Central Bank policy more generally, I don't think the biggest issue for me for this product is on the risk.
I don't think it is on monetary policy. I think the biggest risk is more on financial stability. And that is an important element. And I think here is where you need to be more on top in terms of monitoring.
Monitoring, getting data is so very important. This is one of the reasons why we are much further ahead on data and we want to make sure that we have sort of a data lake that you can slice and dice any whichever way. And I think in that sense, then you can see the problem before it comes over the horizon as it were. You can already begin to the elements of that. So that is there.
And then the other thing, the last point on this is the law needs to change. I mean, a lot of us think that you have a law and it is static. Actually, in this area because it's very dynamic, the law needs to be much more malleable. And so how you craft it, the way you write a law, well, that that's one issue.
But I think also appreciating that you do need to go to the law and amend it and tweak it in whichever way, and maybe it is in the law directly, it's also other things like the Prudential guidelines when they come out you need to, I mean, writing this quickly and change them as needed. So those are the directions I would probably put out for, I mean, to think in terms of Central Bank policy. - Yeah, to lead to one of the questions in the chat. I'm not gonna ask the question directly, but it's about kind of, how do you think about big data that's also coming from the telcos, and is there a piece of that that gets regulated by you guys for use in credit scoring, et cetera, like you said, and how do you think of that data piece? I know we have a data bill that imposes significant restrictions on the use of data, but we're going into a world where you know a lot about people from their phones, and as people use smartphones, you learn even more.
The digital lending apps can see Facebook, can see your car records, can see your text message content. So we're getting to the point where some people have access to a lot of datas. Do you think of how you regulate them or is that up to the communications commission, and how do you see that regulation process? Because it fits into the credit banking system somewhat. - Yeah, a good question. I think we are definitely involved in it.
Let's start there. But I think it isn't so much who is involved in it that is important. I think it is the attitude with which or the prism that you view the data that is available wherever it is.
I think first and foremost, the data belongs to the consumer. It does not belong to the telco. It does not belong to the, let's say the bank that is working with the individual telco or whatever else it is. And therefore to use the data, you do need to provide them with, I mean, you need to do it with a complete understanding of the consumer. And here is where I think, and sorry to put it this way, but I think we all understand it. Your iPhone or whatever, it updates to a new operating system, right? 13 points, whatever.
I don't know now it's 13 or whatever it is. - I don't actually know either. (laughs) - Whatever it is.
This is exactly my point. So for me, at least it updates. I leave it in the evening, that's when it'll update. And then in the morning, it'll ask me, push this to agree on the conditions, and yes or no. I mean, you know so well, and they know that I cannot say no. I just push yes, and move on.
It's not informed. So this informed consent is very important. It has to be brought down to the level of the consumer. And also the consumer needs to be given many opportunities to in a sense withdraw from all the sort of engagement and all the data is removed and it's hard work. Surely, it's hard work. But it is important to do all there is to protect the consumer.
I think what has happened now, and this is the problem of some of the digital lenders that we are dealing with is when you join, they will ask you, we would like to use your list of contacts. And then you say, yes, and you move on, right? - Yeah. - And then what happens? They haven't told you how they are gonna use it. But what happens is when you don't repay, they will call people on your contacts list. I mean, just think of that. Your family, your boss, and your priest back in the rural area.
And everybody's been told, listen, so-and-so hasn't and this is your brother. He hasn't paid up. You need to do something.
So I'm just making the point that that is not informed consent. - I use that example a lot saying, also, I think, Governor, the difference is if Apple had something really bad in the terms and conditions, someone would have found it and there would have been a process around uproar to solve it. That's less so in this case, I think. The institutions don't function quite the same way.
- But Tavneet, here, I disagree with you. I don't think that- - Yay, something you disagree with me on. (Patrick laughs) - I mean, there was this, anyway, it's on my phone somewhere, would have read it to you, but when they introduced something, when was it? Back in 2019. And in a sense it was, anyway, it wasn't informed consent.
Let's just be honest. - Yeah, I think this is gonna be a big issue is how we think about who owns data, and how you give consent to use that data and for what, and as we do digital identification as well with the Huduma number and things like that and start to connect it to things, I think this is gonna become really important from like you said a consumer information perspective, but also a regulatory perspective. - And I think that's the, to be honest this is where I have. Well, we've been a bit concerned about the large telcos. If I may just have a segue into that, because in a sense there is a bit of a monopolistic behavior as they try and sort of grab data. There's a lot of data in the payment space, a lot of data in the payments space about people, et cetera, et cetera.
And so when you get a large telco getting into the payments space, and not just a large telco, I'm just talking about the big tech generally, we need to be careful. I mean, and this is one of the things that in my mind when you think of some of the large big techs around the world sort of making inroads into Africa, I think the first question is what are they gonna do with the data? And I think in some sense they also know that there's a first mover advantage. So once they grab some of this data, it would be very difficult to get it out of their hands.
And so I think we need to be careful about data. We have a responsibility as regulators to make sure that the people that we are responsible for do not fall in those sort of problems in our jurisdictions. - Great. I think we're close to running out of time.
So I think we should wrap up. There is just two minutes left, Governor. So let me take the opportunity to thank everybody who's attended and thank you for being here. Sorry, we didn't get to all the Q&A, but I really wanna thank you, Governor, for being with us today and kicking off our celebrations of the Growth Center and the IDE program, and making time. I know it's evening in Nairobi and just having a conversation with us which is way more fun than speaking, I think. And so for, at least for me, it is.
I hope it was for you too, but we're really grateful for your time, and for you being here today. I don't know, Tony, if you wanna add anything. - Thank you, Tavneet. - That was great.
Really interesting. The Q&A format was quite useful. And I learned a bunch of things I didn't know about how money and finances work in Kenya. I knew a few things, but it's quite interesting, and you're kind of on the forefront there. I think we can learn a lot from that from what's going on there.
So I think it was a great event, very much enjoyed you both participating. And I'll just close with saying, this just shows the extent to which I think Yale is a center for development economics. So this kind of conversation happening here is an illustration of that. And let me congratulate again the IDE program on 65 years of existence. It's one of the premier programs of its kind in the world.
So that was great in showcasing all that success with that program. So thank you for participating. - Thank you, Tony.
- Thank you, Tony. Thank you, Tavneet. - Hopefully see you in Nairobi soon. - We hope so. Looking forward to seeing you.
- Yes, sir. Thank you for being here, we really appreciate it. - Okay, all the best. Goodbye to the participants. - [Tavneet] Thank you. - [Tony] Thank you.