CBK governor proposes regulation of finance institutions

The Central Bank governor Njuguna Ndung’u has proposed tighter regulation of development finance institutions (DFIs) to put them on a stronger financial footing.

DFIs, most of which receive annual funding from the Treasury, have not had their presence felt in the economy, with some consistently teetering on the brink of collapse.

There are five DFIs in the country: Agricultural Finance Corporation, Industrial Development Bank (IDB) Capital, Kenya Industrial Estate, Kenya Tourism Development Corporation (KTDC) and Industrial and Commercial Development Corporation (ICDC) which the government has recommended should be consolidated under one “Kenya Development Bank.”

“DFIs are expected to mobilise resources for long term lending to productive sectors of the economy. For them to play this role and fulfill market expectations, some ground rules should be set and finance allocated,” said Prof Ndung’u in a presentation on the sector last week.

The impact of DFIs in the country has waned as commercial banks have become much more aggressive in taking up their space.

The development institutions currently do not have a regulator, though they are audited annually by the government auditor.

In last year’s budget the then finance minister Njeru Githae had stated the government’s intention to review laws governing the DFIs.

DFIs have been successfully used in other countries such as Tanzania, Uganda, Nigeria, China and Korea to support key economic sectors.

The decline of DFIs has seen the government partner with commercial banks to pump funds into sectors that it wants to intervene in such as agriculture and youth development.

As at June last year the five institutions had loaned out a total of Sh6.8 billion to the targeted industries, which include small and medium enterprises, trade, manufacturing, tourism and agriculture.

Retail lenders Equity, Family, Co-operative and KCB have been the major beneficiaries of the government funds with development partners also following the same path.

DFIs managed by other governments have become major investment players in Kenya with France owned Proparco and German DEG being shareholders of companies such as I & M Bank, Bank of Africa, Rift Valley Railways and Chase Bank.

The challenges facing DFIs in Kenya came to the fore when some of them were forced to retract to being DFIs after attempting to convert to commercial banks in the 1990’s.

Challenges faced by the institutions included high non-performing loans, violation of lending limits with 95 per cent lending done to fifty borrowers and under capitalization.

The government has also been accused of failing to fund the DFIs forcing them to rely on internally generated finances only.

The governor said regulations of the industry should provide for powers to address non-compliance, prudential requirements while factoring the economic development orientation of the institutions and their long-term lending.