Working Paper No.14 of 2006 on Development Finance Institutions in Kenya: Issues and Policy Concerns

Abstract

Development Finance Institutions (DFIs) in Kenya were set up to provide longterm finance to prioritized sectors as part of the industrialization strategy. Despite the existence of DFIs since the 1960s and 1970s, there is still a glaring development-financing gap in Kenya, thus raising concern as to how the private sector is going to expand and grow without appropriate finance to ensure long-term investment. Industrial growth cannot he achieved without long-term investment growth. The stock market as an alternative source of long-term capital is shallow and thin while the corporate bonds market is at a youthful stage of development. Deliberate efforts are therefore required to develop institutions for mobilizing long-term capital in Kenya. Various constraints have made DFIs unable to contribute significantly in meeting their responsibility in the development process. The constraints include their ownership structure, which has made the institutions susceptible to political interference in both management and investment decisions; regulatory issues, which have led to too many controls and bureaucracy; inadequate funding, especially with the withdrawal of government guarantee on loans obtained; and the downturn of the economy and unfavourable business environment, which have impacted negatively on financed projects. A number of options are suggested as a way of tackling these issues. The study proposes alternatives such as reducing government ownership to curb political interference. Various methods through which these institutions can raise funds, including floating long term bonds, floating shares, having budgetary allocations, accessing contractual savings, setting up a revolving fund, and establishment of a resources pot are also suggested. There is also need for efficient investment allocations for sustainability of DFIs. All this requires development of an appropriate policy framework to strengthen DFIs and enhance their efficiency.