Counties should set up their own banks to fund development projects
In the 1970s and ‘80s, finance development banks (DB’s) played a significant role in in Kenya’s industrialisation. Companies like Bidco and other manufacturing industries were funded through the developments banks, making import substitution possible.
Key to realising the Government’s Big 4 agenda is availability of sufficient financing mechanism. During the Addis Ababa Conference in 2015, which was organised by the United Nations on Financing for Development, it was acknowledged that well managed national development banks could play a significant role in filling financing gaps.
Large financing gaps exist in areas are crucial for sustainable development, including infrastructure, agriculture, industrialisation, science, technology, innovation as well as financial inclusion.
Recently, the lake Region Economic Bloc, an umbrella of 14 counties, proposed to start a regional development bank that can play an important role to spur growth and make funds available to farmers, businesses and even county government projects that require long-term investments. Commercial banks are not suited for this purpose because they target short-term investments and on a small-scale. The commercial banks are also dependent on customer deposits easily mopped out in case of sustained borrowings by clients.
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There are only a few development financing institutions now in Kenya. The Treasury Cabinet Secretary has proposed legislation to merge several institutions under the umbrella of Kenya Development Bank. This effort might strengthen the capacity of one strong financial institution to allow clients a variety of services under one roof. However, more initiative is required for development banks to reach every section of Kenya.
President Uhuru Kenyatta’s recent visit to China made it possible for Industrial Development Bank to provide a line of credit for manufacturers to import industrial plants with the support of Exim Bank of China.
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The county governments often have ambitious development plans that can make them competitive for business. Isiolo County, for example, is operationalising an abattoir expected to give hundreds of livestock farmers access to markets overseas, in particular the Gulf states where appetite for both fresh and chilled meat is high. But Isiolo requires capital to purchase equipment for slaughtering the animals and preparing them for export.
The project will require about Sh1 billion to be viable. Many other counties, particularly those in arid areas, have challenges accessing finances because few banks are interested in investing in those areas and generally, a preference for Islamic Banks excludes them from working with conventional banks.
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In the history of the world, no country has ever developed without the support of an adequate financing mechanism. China and the other Asian Tigers have impressive growth because development banks support manufacturing of export products.
In recent decades the private financial system has not performed any of these functions. It has been pro-cyclical, over-lending in boom times and rationing credit during and after crises, limiting working capital and especially long-term finance crucial for investment.
In both tranquil, but more in turbulent times, it has not funded sufficiently long-term investment in innovation and skills which businesses need to grow and create jobs. Key sectors like infrastructure, renewable energy, and energy efficiency have been insufficiently funded.
Small and medium enterprises get insufficient credit, which is often costly and short-term.
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In supporting devolution and enhancing economic growth, development partners need to prioritise making funds available for increasing value-addition for primary products. This can be done by investing in regional economic bloc-based development banks. Kenya loses colossal sums of money because of exporting cash crops and other primary products. The gains from exports are distorted by high cost of importing finished goods that affect the country’s foreign exchange balances.
Establishment of regional development banks as envisaged by the Lake Region Economic Bloc could in the long run reduce counties dependence on national treasury. We need to envisage a time when taxes collected at county levels might fund national government projects.
Mr Guleid is the Executive Director of the Frontier Counties Development Council.
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GovernmentBig 4 agendaAddis Ababa Conference