Financial regulation in Kenya: Balancing inclusive growth with financial stability

Abstract

This case study investigates the potential tradeoffs between regulations and stability of Kenya’s financial sector and their implications for inclusive growth. This is done in the context of six areas: (i) size and growth of the financial sector relative to LICs and MICs; (ii) implications of a mixture of local banks (some of which have spread to neighbouring countries), foreign banks and development finance institutions; (iii) evolution and macroeconomic implications of financial innovations and inclusion; (iv) cost and access to credit, especially to SMEs; (e) prudential regulations; and (f) management of capital flows in the context of large current account deficits, mainly financed by short-term net capital inflows such that their easy reversibility could potentially generate a currency crisis.