Digital registration sets stage for growth in financial services sector

Kenya is in the process of setting up a National Digital Registry Service. While conversation on the merits of this service has mainly centred on how it would impact national security and service delivery, the country stands to benefit a lot more from this initiative.

The financial services sector, which is among the top five largest contributors to the gross domestic product (GDP), generating up to 5.4 per cent, is one such beneficiary of the system that is slated to go live in June 2016.

The establishment of the National Digital Registry Service would aid expansion of this sector and increase its contribution to economic growth.

It will significantly strengthen Kenya’s financial infrastructure and enhance its completeness. Indeed, this is the revolution that we have been waiting for to support the sector and lift it to the next level.

Of fundamental importance to the financial sector out of this service is the provision of a digital identity for individuals and corporate entities.

Identity is a pre-requisite for the stable, efficient, safe and inclusive financial sector that is envisaged by Vision 2030.

It is in the planned process of identification, as well as a host of services that could be included in this initiative, that will grant an assurance of safety and accessibility to the financial services sector. This will significantly enhance the country’s competitiveness.

At the moment, the national registration system in Kenya, like many other African countries, has gaps. This leaves some individuals and corporate entities without identity.

Without identity, they cannot easily access and enjoy benefits of the financial sector, including credit. Whereas the use of the identity card in Kenya has partly mitigated this challenge, a central repository of personal and corporate information will facilitate banks in their credit risk appraisal.

This will not only ease access to credit but also reduce the cost of loans, given the lower search costs.

In addition to this, most businesses at the moment are thriving in the informal market. These are mainly the small and medium-sized enterprises (SMEs) that drive economic growth.

However, they lack formal identity that is critical, in particular, to access credit. This is further compounded by the businesses’ lack of a formal identity or track record that is required to access credit.

The current level of private sector credit in Kenya stands at about 40 per cent of GDP, which is still far below those that have been recorded in comparable emerging economies such as Malaysia, South Africa and Mauritius. It is a widely accepted fact that the rate of a country’s economic growth is driven by investments.

These investments are largely dependent on the ease with which productive enterprises access funding in order to transform their viable ideas and opportunities into productive ventures. This consequently drives economic growth through job and wealth creation.

For SMEs and other investments to access credit that would enable them to flourish, grow to the next level and continue making the very important contribution to economic development, it is imperative that they acquire a formal identity and a documented track record.

Only then, together with other ongoing initiatives put in place will these enterprises be able to access credit and grow their business.

It is for this reason that, the Central Bank of Kenya (CBK) has been supportive of the Integrated Population Registry Service (IPRS), an automated population database that compiles details of citizens living in Kenya or the diaspora, as well as non-citizens in the country.

The IPRS has been a useful tool for financial institutions to validate the identity of their customers. The CBK has asked all banks to utilise the IPRS in their ‘know your customer’ checks in order to mitigate fraud risk.

The National Digital Registry will build on the IPRS and provide an even more powerful tool for the financial sector and especially for SMEs.

Evolution in the financial sector has posed serious challenges in the form of fraud perpetrated through identity theft. We need a digital registry service as the repository institution for any verification and cross-checking.

The register will significantly reduce the risk of fraud, particularly identity theft, and cut the operational cost of this crime to the financial sector.

Through the register, financial institutions will be able to meet the statutory legal and regulatory requirements for anti-money laundering and combating the financing of terrorism as well as other common frauds in banks that we encounter every day.

These have become issues of key global concern and effective mitigating measures are important to ensure the integrity of Kenya’s financial sector. When we have a safe transaction network, transactions increase, and this is good for the economy.

Therefore, Kenya’s drive towards establishing a National Digital Registry Service calls for the support of the entire financial services sector.

It is an excellent example of leveraging off innovation to strengthen the financial services infrastructure and position the country as a regional hub.

Prof Ndung’u is the governor of the Central Bank of Kenya.