How commercial banks can help grow the economy

Kenya Bankers Association launching of the Sustainable Financial Initiative (SFI), expected to help banks and financial institutions balance their immediate business goals with the economy’s future priorities and social-environmental concerns, is welcome.

But the bankers would do themselves and the country a greater favour were they to prod the government to include them in charting out and financing the manufacturing sectors already identified.

The 10-year plan launched by Industrialisation Cabinet Secretary Adan Mohamed in mid-September, for example, could go the way of earlier plans unless the government and the country’s financial intermediaries come together and craft a new way of doing business.

The fact that Foreign Direct Investment (FDI) to Kenya fell 37 percent last year should jolt the thinking of those who believe that all the government needs to do is come up with a bankable blue-print and foreign investors would flock into the country.

The realisation that Kenya led the rest of the East African region should be no comfort because the quality of these new investments is also questionable as most of it consists of what has come to be known as hot money. This is the money that flows into a country when the economic conditions are conducive to making super profits in the money market but quickly flies out—literally at the touch of a button—as soon the economy begins experiencing turbulence.

A look at other countries, particularly in South East Asia who moved their economies from agriculture based, low income to industrial, middle income in one generation reveals the path they took was getting the big banks to work closely with the government in launching and running the identified key industries. It would be foolhardy for Kenyans to try and re-invent the wheel especially when time is of essence.

To its credit, the government has already identified agro-processing, apparel and textiles and leather as the sectors that would lead to rapid job and wealth creation. It has been estimated, for example, that the value of agricultural produce could be increased by 10 times were it to be processed before export. The same holds true for leather and textiles.

Contrary to the common narrative, the challenge the country faces in its bid to turn its plans into reality is not money. After all, experience has shown that every time the National Treasury goes into the market to source for money by floating short and medium-term bonds they are over-subscribed. Indeed, there is reason to believe that the over-subscription would be even higher were the Treasury to launch the proposed wananchi service targeting ordinary Kenyans.

Performance contracts

No! What the country requires is its leaders—especially those sitting in State House and Treasury to allow their thinking to go through a paradigm shift. The money raised through special Treasury bonds could be augmented with funds raised from banks and pension funds led by cash-rich National Social Security Fund (NSSF).

The financial institutions would be invited to buy shares in a special investment vehicle created for the purpose. They would also be encouraged to second their best talent to run these companies which could—for the sake of guaranteeing independence—be run by chief executive officers recruited from outside the country.

Needless to say, all the personnel running these enterprises would be chosen by third-party recruitment firms and would be required to sign strict performance contracts.

It is at this stage that foreign investors would be invited as minority shareholders. The criteria used to choose those to be brought aboard would be their proven ability to penetrate the foreign markets.

The international firms owning successful brand names would be especially welcome. But even were they to shy away preferring to run their own show under their own terms the country could still move ahead with its plans because the global market is bigger than any one company—no matter how big it may be.

The ordinary Kenyans—particularly those producing the raw materials—would then be invited to buy shares after the companies demonstrate a track record of profits. This would allow reluctant initial investors such as banks to bail out at a good profit.

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