By Jimnah Mbaru
Ministries have returned more than Sh101 billion to the Treasury over the last financial year. These funds were earmarked for development purposes and represent a tenth of the 2011/2012 budget.
With the several projects the State needs to fund, it is a shame that these funds have not been put to immediate use. The ability to mobilise and deploy capital efficiently is a crucial skill Kenya needs to develop. As this is available right now, I propose that the Treasury uses this money to fund a bank of industries with a capital base of Sh100 billion.
A bank of industries would be used to fund the industrial and manufacturing sector that would in turn help boost exports. The funds would be for new industries or for the expansion of existing ones.
We have previously argued the Central Bank should let the shilling depreciate as it would be good for economic development for the following reasons: a weak shilling would help stimulate exports and move the country from import focus to export focus, help promote manufacturing, encourage remittances from the Diaspora, develops Nairobi as a financial/services hub and discourage conspicuous import-driven consumption.
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To boost industrial and manufacturing output in Kenya, we need to tackle the current challenges to the sector, which include the need for cheap capital and cheap energy. A bank of industries would be set up to finance the industrial sector through the provision of loans with low interest rates such as below six per cent for industries.
The large capital base will allow the bank to participate in sell and lease back financing which industries with large asset bases can use to unlock capital. To fund capital expenditure, the bank would also act as a conduit for trade finance such as export credit agency financing.
There are people in Kenya who are serial entrepreneurs and industrialists. However, even with their great track record with their existing businesses, they struggle to get funding for new ventures. These are the people Kenya needs to push their industrial and manufacturing agenda and a bank of industries would become a great facilitator in this sector.
Historically, banks or private wealth have been one of the key drivers of industrialisation. Alexander Gerschenkron, a political economist, formulated a model of late industrialisation, which is widely known as the “patterns of industrialisation” which identified key institutions which drove industrialisation.
From a working paper by Jang-Sup Shin of the National University of Singapore titled The East African Industrialisation in the Gerschenkronian Mirror: Catching-up Strategies and Institutional Transition, the author noted that Gerschenkron developed a three-country paradigm to explain “patterns of industrialisation”.
Gerschendron identified distinctive institutions spearheading industrialisation as follows: In Britain, the forerunner who pioneered the industrial revolution, the accumulated private wealth of capitalists was a major source of finance and individual entrepreneurs played a central role in industrialisation.
In Germany, a moderately backward country, “the universal banks” played a major role in financing industrialisation and organising the private sector. In Russia, the state mobilised financial resources and created new industries.
So how would the Government go about creating a bank of industries? One solution would be to convert and recapitalise Industrial & Commercial Development Corporation or Industrial Development Bank into a bank of industries. Another option would be to create a bank of industries from scratch with equity contributions from Treasury with the ability to obtain concessional loans from DFIs and other governments in order to lend onwards to industries.
The writer is former chairman, Nairobi Securities Exchange and also chairman, Dyer and Blair Investment Bank