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DOMESTIC FINANCE STUDIES NO.70
A FINANCIAI POLICY FRA~W0RK FOR ACCELERATED SOCIO-ECONOMIC
DEVET.JOPHENT IN KENYA:
PART I: THE POLICY FRAMEWORK
AND
PART II: THE INSTITUTIONAL FRAIEWORK
By
V.V. BHATT/G. NANKANI, and K. SAITO
The views presented in this pape- are solely those of theauthors and do not necessarily reflect the official opinions o.fthe World Bank or its affiliates.
June 1978
Public and Private Finance DivisionDevelopment Economics DepartmentDevelopment Policy Staff
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PART I - THE POLICY FM PWORK
CONT-TS -Page Nos.
Preface
Abbreviations r
Introduction 1
I. The Financial Sector in K.enva 5A4
A. Introduction 5B. The Financial Sector: A Synoptic View 7C. Basic Weaknesses of the Financial System: Feasible
Approaches 11
II. Policy Framework for Financial Institutions 20
A. Central Bank of Ken-a 21
(a) Regulatory Function 21(b) Allocatl.on Function 23(c) Development Function 25(d) Research and Planning Fumction. 26(e) Education 'and Traininag Function 27
B. The Commercial Bahks 30
(i) Branch Distribution Network 31(ii) Level and Structure of Interest Rates 31
(iii) Fincial Instruments 32
C. The Co-aDerative Structure and AFC 34
D. Other DeveloDment Institutions (ICDC, IDB. DFCK and KIE) 36
E. National Social Secur±t7 F u;nd 37
F. Post-Office Saving Bank 39
G. Informal Credit Markets 39
III. District-Level Co-ordination -of Financial and TechroloeicalFunctions 42
IV. Financial Institutions and Technolozv Polic7 45
V. Efficiencv of the Financial Svstem 51
VI. Financial Savings, the Eouit7 Market and Tax Polic7 34
VII. Financial Proj ections 1078-83 36
Tables: VII.1 Money Supply Projections, 1978-83 57VII.2 Domestic Resource Mobili- zat±on and Allocaticn:
Tle Financial System, 1978-83VIT.3 Financing of Gross Investment, 1978-83 62
Appendix to VII: Domestic Resource Mobilization and ItsAllocation: 1978-1983
Table AVII.l: Central Bank of Kenya
Table AVII.2: Commercial Banking System
Table AVII.3. Private Non-Bank Financial Institutions
Table AVII.4: Insurance Companies, NSSF and POSB
Annex I: Financial Policy Framework: Classification
of Recommendations
PREFACE
At the request of the Ministry of Finance and Planning, the World
Bank sent our mission - comprising Mr. G. Nankani, Mrs. K. Saitc; and myself -
to study the Kenyan financial structure and policies and make such policy
recommendations as would enable the financial structure to play an effective
active development role in the attainment of the basic objactives of Kenya's
next Five Year Plan (1979-83).
2. We arrived in Nairobi on March 8, 1978. In Nairobi, we had inten-
sive discussions with the senior officials of the Ministries of Finance and
Planning) Cooperatives, Housing as well as the Central Bank of Kenya and of
financial institutions like the three major commercial banks, the IDB, the
DFCK, the ICDC, the KIE, the Co-operative Bank, the HFCK and the AFC. We
also had field visits to Nyeri and Machakos where we had discussions with
the officials of the AFC branches, the Dist:rict Co-operative Unions, the
three commercial banks' branches, the KIE, the Ministry of Co-operatives,
and the Ministry of Planning. These field visits gave us a much more vivid
and accurate image of these institutions and their role '--an we. nad in
Nairobi.
3. This report is based on our prior study of Kenyan institutions as
well as the intensive discussions ve had in Nairobi, Nyeri and Machakos.
4. We believe that if our policy recommendations are implemented in
an integrated way and in the spirit in which we have made them, the function-
ing of the Kenyan financial structure would be much more effective, efficient
and vital in quickening the pace and promotina the pattern of socio-economic
development that are consistent with the objectives of the Five Year Plan
iv
(1979-83).
5. fHowever, we would like to suggest that before any policy action
is taken, there should be within the Kenyan policy-making organs a thorough
discussion of the policy measures suggested in relation to the problems
identified. In particular,.a critical review of our recommendations by the
Ministry of Finance and Planning, the Ministry of Agriculture, the Ministry
of Co-operatives, the Central Bank, the Development banks, and the KCB and
the iNBK is essential. We would suggest that a working group representing
these institutions be appointed to study our report. From such a review, a
policy framework more suited to the Kenyan context may emerge; in any case
the policy changes.accepted for action would then be based on a thorough
understanding by these institutions of the problems that need to be tackled.
V. V. BHATT
V
ABBREVIATIONS
1. Agricultural Finance Corporation ...................................... AFC
2. Bankers' Training Institute ............................................ BTI
3. Central Bank of Kenya ................................................. CBK
4. Development Finance Company of Kenya .................................. DFCK
5. Economic Development Institute (World Bank) .......................... EDI
6. Financial Development Institute ....................................... FDI
7. Rousing Finance Corporation of Kenya ................................. HFC
8. Industrial and Comercial Development Corporation ..................... ICDC
9. Industrial Development Bank ........................................... IDB
10. Industrial Survey and Promotion Center ................................ ISPC
11. International Finance Corporation (World Bank) ........................ IFC
12. Kenya Commercial Bank ................................................. KCB
13. Kenya Industrial Estates.............................................. KIE
14. Managerial and Technical Services Centre .............................. ,TSC
15. National Bank of Kenya ................................................ NBK
16. National Social Security Fund .........................................NSSF
17. Project Identification Center ......................................... PIC
18. Post Office Savings Bank .............................................. POSB
19. Technological Research Center ........................................ TC
A FINANCIAL POLICY FRAMMO&I( FOR ACCELERATEDSOCIO-ECONOMIC DEVELOPQFi IN KENYA
Introduction
1. Since independence, Kenya's economic performance has been quite
impressive, in spite of some slowing down of the development momentum in the
last few years. However, the basic problem of ensuring a certain minimum
level of living to each family has persisted and probably intensified rwith a
fairly high degree of unemployment and under-employment and with a labour
force growing at more than 3 percent per annum. A minimum level of living
cannot be provided to each. family without employment, and employment cannot
be provided without aenerating projects and programs consistent with the
development obj ectives.
2. The basic objective of our report is to indicate the development-
promotional role that the financial institutions can play in generating_, a self-
reinforcing process of socio-economic development to ensure full employment
and a minimum level of living to each family within the shortest possible
period. The policy framework we suggest seeks to provide a development
orientation to the financial structure.
3. The financial structure in Kenya is fairly well developed and has,/.
the necessary institutional and functional diversity. However, the struc-
ture does not seem to be integrated; it lacks the leadership and coordinated.
functioning required for its development orientation. As a result, potential
financial saving is not mobilized; its resource allocation pattern diverges
from the desirable pattern; there is no systematic effort at adapting-and
improving modern technology to suit local resource - endowments; and finally,
the actual efficiency of the system, as a whole, i s much less than its potential.
2
4. The basic purpose of our policy recommendations is to promote the
integrated and coordinated functioning of the already well-developed and
diversified financial structure to attain the following development objec-
tives:
(a) To raise the rate of saving and in particular the rate of
financial saving of the honsehold sector. It is possible to regulate the
allocation of financial saving with the policy instruments that are poten-
tially available; the allocation of non-financial saving in the form of
private lending or physical assets is more difficult to regulate and control;
(b) To allocate resources mobilized by the financial system to
sectors and projects in the light of criteria consistent with the develop-
ment objectives;
(c) To improve the productive efficiency of enterprises financed by
the financial institutions;
(d) T6 orient the financial institutions towards assuming an active
promotional role with regard to (i) identification of project ideas, (ii)
preparation of feasibilitSy and detailed project reports, based on technology
choices suited to the Kenyan conditions, (iii) ent'repreneurial training and
selection and (iv) monitoring of the projects during their construction and
operation phases with a view to providing them with managerial and technical
assistance required for improving their productive efficiency;
(e) To improve the efficiency of the financial system by reducing
the non-financial costs of borrowing and lenriig.
The plan of our two-part report is as follows. Part I of the report de-
lineates a Financial Policy Framework for Kenya. In Section I, we present a
synoptic view of the Kenyan financial structure, its basic weaknesses and
feasible approaches. In light of this discussion and the development
3.
objectives mentioned in paragraph (4) above, we present in Section II the
policy framework required for the effective regulation and active promo-
tional functioning of each set of financial institutions; the policy
recommendations are indicated with reference to each set of institutions
separately to facilitate and pin-point policy decisions and action. The
coordinated role of the lead institutions - the ICDC, the KIE, the A4FC, the
KCB, the NBK, and the Co-operative system - in promoting the development
process in the backward districts of the country is delineated in Section
III. The organic functional relationship between the financial institutions
and the M-lanagerial and Technical Services Centres (fTSCs) and the Project
Identifications Centres (PICs) at the District level and the role which the
ICDC, the KIE, the IDB, the DFCX, the KCB, the NBK, Co-operative Bank and the
AFC should play in setting up, monitoring and coordinating the role of these
Centres with the functioning of the financial system are discussed in Section
IV. The policy recommendations for improving the efficiency of the system
through training institutions, credit guarantee schemes for small farmers
and small enterprises, and deposit insuranee schemes are presented in Section
V. The tax policy implications for promoting saving in the form of financial
assets - shares, bonds, deposits, claims on social security institutions -
are indicated in Section VI. Two alternative projections of the sources and
allocation of the resources of the financial system for the 1979-83 Plan
period are presented in Section VII; the first set of projections is based on
the Plan objectives and the marginal relationships among the relevant variables
during the 1972-76 period, while the other set takes into account the impact
of our recommendations on resource mobilization and allocation.
4.
The policy changes suggested are classified into three categories:
those relating to (a) marginal modifications of existing policies; (b) new
functions and (c) reorganization of old functions. They are also classified
on the basis of the priority attached to them in the light of our under-
standing of the Governments' objectives, as those that are: (a) critical;
(b) important and (c) desirable. And finally the classification is on the
basis of the time-horizon for their implementation into (a) short-term and
(b) medium-to-long-term. These classiLications form the basis of a Financial
Policy Framework Table that is presented in Annex I.
It ought to be noted here that the emphasis in this entire report is
on the functions to be performed. Thus, though suggestions on the institu-
tions that may carry out these functions are made at various places, they are
to be regarded as initial points of departure for further examination by the
Government.
7. Part Two of the report describes the institutional framework of the
Kenyan financial. sector in terms of six sets of institutions: the co=ercial
banks, the non-bank private financial institutions, the public financial institu-
tions, the financial intermediaries in the public sector, the Cooperative system
and the Central Bank of Kenya. Together with the fieldwork, this analysis of the
financial sector forms the basis of our policy recommendations.
5
L. The Financial Sector in Kenya
A. Introduction
8. The growth record of the Kenyan economy in the decade following
independence in 1963 has been quite impressive: its GDP increased at a
rate averaging 6.6% per ann.-m. Between 1973 and 1975, the effects of
drought, world recession and inflation on the Kenyan economy were severe.
Some economic recovery did however follow the February 1975 Government Action
Program, which aimed at adapting the development objectives and. plicies of
the 1974-78 Development Plan to the new situation.
9. The Action Program's policies are medium-term in nature and cover
the remainder of the original plan period, that is, FY 76 through FY 78,
while the Fourth Development Plan will cover the 1979-83 period. The Action
Program relies mainly on global monetary and fiscal policies, reinforced by
agricultural pricing policies and wage policies.
10. The ultimate objective is to adjust the economic structure in such
a way that high growth rates can be reached again in the 1980's. To achieve
this objective, while benefiting the country's poorest groups, the Fourth
Development Plan is to attach priority to the development of (a) the agri-
cultural sector and (b) resource-based and labor-intensive export and import-
saving manufacturing. It is therefore proposed, on the one hand, to reallocate
substantial public investment funds to the above sectors, and on the other hand,
to modify prices and income-earning opportunities to reflect these priorities
11. In this exercise, the role of the financial structure of institutions,
instruments and interest rates is critical. Although the fundamental dynamics
of economic development may lie outside the financial sector, the latter, through
its effect on the mobilization and allocation of financial savings, can either
significantly hasten or retard development. A successful restructuring of
the economy along the above lines would therefore depend significantly on
the configuration of the financial institutions, instruments and interest
rates that prevail in the Kenyan economy.
12. Some Observations on the Present Study: The present study of Kenya's
financial sector was undertaken with the ultimate aim of making policy recom-
mendations for ,mproving the functioning of the financial sector in the light
of the objectives of the 1979-83 Development Plan. The process of study and
deliberation that culminates in a set of policy recommendations partakes of
the nature of both science and art: quantitative analysis plays the major
role, but qualitative and judgmental factors are indispensable. It is, how-
ever, necessary to describe the latter meticulously, so that the rationale
and analysis underlying each recommendation are clear to the policy-makers.
The recommendations made are informed by two premises of a qualitative nature:
first, they reflect the objectives of the 1979-83 Plan, namely that priority
iS to be attached to the agricultural sector, to resource-based and labor-
intensive export and import-saving manufacturing, and to small-scale enter-
prises in particular; and second; they are based on the general philosophy
of development in Kenya that public participation in any economic activity
is desirable only if it cannot be adequately performed by the private sector.
13. The quantitative basis of the recommendations made here is provided
by an analysis of the functioning of Kenya's financial sector (see Part II)
On the basis of this analysis and the discussions held with the management of
the Kenyan financial institutions, a synoptic view of the Kenyan financial
sector is offered in the nest sub-section.
7.
1/B. Financial Sector: A Synoptic View
14. The financial structure in Kenya comprises the Central Bank, the
commercial banks, the non-bank private financial institutions, the develop-
ment banks for agriculture, industry and housing, the cooperative credit
system, the insurance - both life and non-life - comipanies, the Post-office
Savings Bank and the National Social Security Fund.
15. Banking System: Most of the non-bank private financial institutions
are effectively extensions of the commercial banks and were started initially
because the Central Bank's requirement with regard to liquidity was not
aRplicable to them; however, they have since been made subject to the Central
Bank's liquidity requirements and hence there is not much difference between
them and the banks. The cooperative credit system is linked with the Coopera-
tive Bank, through which the system obtains credit from the Government/Central
Bank, and with the commercial banks, with whom the Cooperative llnions keep a
part of their deposits. The Cooperative Bank, though owned by the Cooperatives,
is recognized as a commercial bank. Thus the banks. the private non-bank financial in
stitutions and the Cooperative System are an integral part of the co=mercial
banking system, which mobilizes resources through the deposit instruments and
provides, by and large, short-term credit mostly to the medium and large enter-
prises in the fields of agriculture, trade and industry. The system is largely
oriented to medium and large enterprises and households with regard to both its
functions - mobilization and allocation of resources. The proportion of time
to demand deposits is quite low by international standards; in conjunction
with the interest rate scructure, this fact suggests that the banks have not
tapped the full deposit potential, especially that relating to the small savers.
Nor is there a systematic effort to mobilize savings in the rural areas.
1/ The major characteristics of the Kenyan financial sector that underlie this -synoptic view are summarized in che ADpendix to chis section, while a detailed
- description is provided in Part two of the report.
8.
16. Only the Kenya Commercial Bank has taken the initiative in financ-1/
ing Small Industry. It has set up, with the support of the International
Finance Corporation, a Business Advisory Service for Small Industry. Its
portfolio of small industry loans is still not very large but it has made
a beginning in providing technical and financial assistance to Small In-
dustry.
17. In agriculture and related activities, the emphasis of the finan-
cial system is on financing the farmers growing cash crops - coffee, tea
and cotton. The small farmers growing maize and other subsistence crops
or engaged in activities like poultry farming, fisheries, plggeries and
horticulture have only limited access to credit from the System. Their
credit needs are met, if at all, by a reliance on informal credit markets,
as are those of a large number of small traders and small enterprises of
all kinds. It is noteworthy that even the cooperative system provides
financial services largely to farmers growing cash crops.
18. The System's transaction costs (administrative costs plus default
risk) are quite high with regard to small enterprises and small farmers
and its administrative set-up and information and communication system
are not geared to providing financial services to the small sector -
whether in Industry, Trade or Agriculture. The small sector is not on the
1/ See Appraisal of Small Scale Industry Project, Kenya (World Bank,October 31, 1977).
1/Agenda of the banking system - to use Arrow's expressive phrase.
19. The Develovment Banks: Two of the industrial development banks
the ICDC and the KIE - do provide financial and technical assistance to the
small enterprises. But their appraisal and supervision machinery appears to
be weak and their transaction costs are quite high. Further, since they doA
identify project ideas and also prepare feasibility studies, there is a ten-
dency to finance projects identified by them: the combination of the pro-
motional function with the financing function tends to create a vested
interest in the projects identified. This feature of the ICDC's function-
ing is also characteristic of its financial assistance to the medium and2/
large enterprises.
1/ See Kenneth J. Arrow, The Limits of Organization (New lork: W,W. Norton& Co., 1974). To quote: "In classical maximizing theory it is implicitthat the values of all relevant variables are at all moments under con-sideration. All variables are therefore agenda of the organization, thatis, their values have always to-be chosen. On the other hand it is a com-monplace of everyday observation and of studies of organization that thedifficulty of arranging that a potential decision variable be recognizedas such may be much greater than that of choosing a value for it." (p.47).
On his major theme he writes: "The theme to be presented is that thecombination of uncertainty, indivisibility, and capital intensity associatedwith information channels and their use imply (a) that the actual structureand behavior of an organization may depend heavily upon random events, inother words, on history, and (b) the very pursuit of efficiency may lead torigidity and unresponsiveness to further change."
2/ See Appraisal of Small Scale Industry Project, Kenya, op. cit.
10.
20. The IDB and the DFCK concentrate only on financing medium and large
enterprises - and in particular - enterprises with foreign technical or financial
collaboration.
21. In the agricultural field, the AFC too concentrates on medium and
large farmers, growing cash crops. Like the banking system, the AFC also does not
provide adecuate credit to small farmers engaged in the growing of food crops or
for activities like fisheries, poultry farming, etc.
22. The major weakness of the development bank is their complete reliance
on resources provided by the government and the international agencies. They are
not integrated with the banking system in that they do not mobilize resources
directly from the savers or from the banking system.
23. Social SecuritY Institutiorns: Among the social security institutions,
the life and the non-life insurance companies seem to have a weak capital
structure. Adequate regulation of the insurance companies is lacking, and there
are no systematic oolicies to promote their growth and provide guidance with regard
to the investment of their resources in a manner consistent with the country's
broad development objectives.
24. The NSSF's full potential for mobilizing resources, it would seem, is-
not exploited. International comparisons of the structure of household saving
show that next to deposits and money, the most preferred asset are claims on
contractual saving schemes. This seems to be true also of Kenya where private
pension funds have grown rapidly alongside social security savings over the past
decade. The concurrent growth of both funds suggests that there is much scope for
increasing the latter: the advtantage being, of course, that social security savings
are more easily allocated to priority sectprs than private pension funds. Thus one or
our most important recommendations relates to measures designed to increase the
mobilization of social security savings and to direct their allocation to Kenya's
priority sectors.
25. The POSB has the major advantage of a very wide network of branches
covering, in particular, the rural areas without banking facilities. The POSB
thus could be an efficient institution for mobilizing the savings of small savers in
such areas. However, it.would seem that it is not consciously being used as such
an instrument: the share of POSB deposits in total term deposits has been declining
in recent years, from 55 percent in 1960, to 19 percent in 1965, and in 1976 to
2 percent. Measures to exploit the comparative advantage of the POSB in the
remoter rural areas are therefore clearly warranted.
C. Basic Weaknesses of the Financial System: Feasible Aporoaches
26. The basic weaknesses of the financial system are; (a) a lack of
integration and coordination of the several parts of-the system - the banks,
the development banks and the social security institutions; (b) a lack of
development orientation - that is, its functioning is not consciously
tailored to the nation's development objectives and plans; (c) the lack
of an adequate institutional set-up to link the financial system with the
managerial and technical consulting services and the latter with technical
research institutions; and (d) inadequate training Lacilities resulting in
an acute shortage of qualified personnel in the financial sector.
27. The first two weaknesses arise as a result of the absence of
any adequate institutional machinery to translate the objectives and strate-
gies of the development plan in terms of monetary, credit and banking policies
and the lack of effective policy instruments to regulate the volume and pat-
tern of credit. Both these functions relate to the Central Bank.
28. Financial Planning and Policies: Central Bank Functions: The
Plan is largely formulated in real terms and the financial implications of
the Plan are formulated only for the government sector and without an appraisal
of their impact on the private sector. The Plan, to be of operational rele-
vance, has to be translated in financial terms, i.e. in terms of the sector-
12.
wise surpluses and deficits, following which the mechanism and policy instruments
for effecting the transfer of financial resources from the surplus. to the deficit
sectors have to be identified. Such financial planning should be the responsi-
bility of the Central Bank for two reasons. Firstly, it has or should have the
data on sector-wise saving and flow-of-funds and the expertise to interpret these
data. Secondly, the Central Bank, given its other functions, is best able to
translate the implications of financial planning in terms of an internally con-1/
sistent package of financial policies - monetary, credit and banking policies.
Needless to add, the ultimate responsibility for formulating the Plan and
the related financial policies has to rest with the Ministry of Finance
and Planning, of which the CBK is only an arm.
29. For the purposes of financial planning, therefore, the Central
Bank needs to have close and intimate contact with the financial system and
adequate policy instruments to regulate the volume and pattern of credit.
The Central Bank's contact with the system cannot be intimate without finan-
cial sanctions: the system needs to depend on the Central Bank for resources.
The Central Bank, therefore, should not be merely a lender of last resort; it2/
has to be a lender of primary resort to the system in some crucial areas.
The Central Bank has remained somewhat aloof from the financial system and
has discouraged the dependence of the system on its resources. Hence the
Central Bank lacks the requisite financial sanction that is so essential to
making it a central focal element of the entire system.
30. To ensure such central status, the Central Bank should have
adequate policy instruments to regulate the volume and pattern of credit.
At present, its only instrument is the liquidity ratio: the banks and the
private financial institutions are required to keep 20 percent of their
deposits in the form of liquid assets, comprising cash at hand, inteff-bank
balances, government securities and balances with the Central Bank. Of the
1/ on this, see V.V. Bhatt, Some Asnects of Financial Policies and CentralBanking in Develoning Countries (World Bank Reprint Series: Number Tw-enty-one)..
2/ See R.S.Sayers, Central Banking in Underdeveloped Countries (Cairo, 1956).
13.three,' only balances with the Central Bank are crucial; if the liquid assets
are in the other three forms the Central Bank could not have much control
over the overall lending capacity of the banks.
31. It is for these reasons that the Central Bank was uinable to mop
up the excess liquidity in the system that arose as a result of the coffee
boom, with the result that interest rates in real terms declined, thus
accentuating the inflationary pressures and the misdirection of resources
towards speculative channels, and encouraging consumption (as the banks
were unwilling to mobilize deposits). If the Central Bank had relied on a
cash ratio (balances of the banks with the CBK as a proportion of total
deposits) and had the power to raise it within a certain range, these in-
flationary consequences of the export surpluses could have been, to some1/
extent, avoided.
32. Further, it is essential for the Central Bank to have a policy
instrument that can ensure positive real rates of interest - which are so
essential for mobilizing savings in the form of financial assets as well as
for the efficient allocation of resources. The Central Bank at present
fixes the maximum rates on deposits and advances. Such a ceiling on in-
terest rates is not consistent with the objectives of promoting saving in
the form of financial assets and ensuring an efficient allocation of resources.
Further, it is not possible to coatrol both price and quantity simultalneously;
if the volume of credit is to be regulated (as it should be i n the context of
capital market imperfections and fragmentation), the interest rates should be
flexible. TWhat should be fixed, if at all, is the floor and not the ceiling.
On grounds of equity a=,d of the efficiency of resource allocation, the floor
could be fixed on the basis of some long-term considerations - for example,
the minimum rate on one year deposits could be such, in real terms, as would
induce savers to put their surplus in the form of deposits rather than use it
for private lending and/or socially undesirable Lorms of investment.
1/ The logic of the cash ratio for Kenya is discussed at length in Dorrance' sR t hCn in1977.
14.
33. What mechanism would ensure that this minimum rate would be
positive in. real terms? It would be administratively cumbersome to fix this
rate in real terms by linking it with some price-index. Further, such link-
ing would introduce an unnecessary degree of rigidity in the interest-rate
structure. This purpose should be served in an indirect way.
34. The Central Bank could issue a consumer price-indexed bond with
a real return of 2-3 percent per annum, and the sale proceeds of such a bond
could be kept in a speciUl reserve fund with a view to sterilizing the surplus
liquidity of the system. Such a policy instrument would reinforce the impact
of the cash ratio and at the same time would provide a floor to real interest
rates without adversely affecting the system's discretion to change the struc-
ture of interest rates in the light of the emerging situation.
35. There is probably some justification for fixing the maximum rate
on advances to small farmers and small enterprises. The transaction costs of
lending to these sectors are hhigh and as a result the total cost of lend;n,,,
including the cost of funds, is probably around 12-15 percent per annum. In
addition, the transaction costs of borrowing for these sectors are higher than
this level by 3-4 percentage points because of certain fixed charges like
travel costs, appraisal fees, etc.; for obvious reasons, these fixed costs do
not form a significant proporti on for large borrowers. Thus the actual cost
of borrowing would be in the range of 15-19 percent per annum. It is quite
likely that at this cost, there would not be much incentive Lor the small
sector to borrow. Assuming that the expected rate of profit in this sector
would be on an average of 15 percent per annum and taking into account the
fact that the small -ctrtn would need-i t:o keep adequate liquid funds to meet
the impact of external shocks, it is unlikely that this sector can be expanded
on viable lines with the cost of borrowing as high as 15-19 percent. Hence
15.
there is a need to fix a ceiling on the lending rate at around 10 percent. The
banks should be induced to reduce their non-financial lending costs by improv-
ing the productivity of their operations through such devices and measures as
are indicated later in this report.
36. Similarly, there is also some justification for fixing minimum
rates on saving deposits and instruments. The minimum on saving instruments
like deposits, however, should be such as to provide a high enough interest
rate differential between short-term and long-term financial instruments as
to promote saving in the instruments with longer-term maturities. At present,
this differential is very narrow and does not provide any incentive to savers
to go for mediu or long-term maturity.instruments/deposits'. If savers are
to be discouraged from private lending and investment in sr'eculative and other
undesirable assets, it is essential to fix the minimum interest rate, say on
a five-year deposit, at a level which could be comparable to the yields (With-
out risk) on private lending or physical assets. Such a level would also
ensure that only such investment projects would be taken up as would result
in a yield higher than this level. For saving mobilization in the form of
financial assets and efficient investment decisions, it may be desirable to
fix the minimum rate on, say a five-year deposit, at about 10 percent per
year. If the banks have longer-term liabilities, they would be induced to
lend also for medium-long term in the form of bonds as well as loans. To
induce them to overcome their inhibition against medium-long term lending,
the Central Bank could fix a taraet - as,a proportion of deposits - for
medium-long term lending to enterprises and financial institutions.
37. Normally, with these policy instruments, it would not be neces-
sary to have additional instruments to afifect the allocation of resources if
the money and capital markets were not imperfect and fragmented. However,
1/ Since we also recommend that banks be recuired to lend 15 percent of their total4:ne Frt-n zana2 : TT& ,-4 ... :1 ..--- eTTAE
16.
because of transaction costs and subjective risk arising from historically
conditioned information and communication systems (I la Arrow), the small
sector - both farm and non-farm - is not on the Agenda of the commercial
banks. Assuming that this sector is inherently viable and that other
policy measures would be taken to improve the economic viability of this
sector, it would be essential to induce the system to finance this sector.
Credit guarantee schemes can reduce subjective risk; but the other trans-
action costs would not be reduced till the banks acquire economies of
experience, learning and scale. To induce them to cross this hump, it may
be desirable to fix the allocation pattern of credit, particularly for the
sectors that at present have no access to bank credit. However, it is
essential to have a continuing dialogue between the banks and the Central
Bank in fixing the initial pattern, and its revisions, in the light of the
developing situation. Further, the main purpose would not be served unless
the various financial instruments are accessible to the small sector through
branch expansion and unless there exists a coordinated functioning of the
financial system and the other institutions providing managerial and tech-
nical assistance and infrastructural facilities. Such concerted measures
would require a lead institution strategy that needs to be formulated by the1/
Central Bank in consultation with the other financial institutions.
38. The development banks, as mentioned earlier, are not integrated
with the other parts of the financial system. They are largely dependent for
their resources on the government and the other international institutions.
It is essential to link them with the institutions that are savings mobilizers
as well as the Central Bank. The administrative costs would be needlessly
1/ On this see V.V. Bhatt, Structure of Financial Institutions, Chanter I(Vora & Co., Bombay, 1972).
17.
high if they have to mobilize resources directly from the savers since they
cannot have the nation-wide branch network that the banks have. Form the
social point of view, these additional costs are avoidable, if the banksC
could be induced to purchase their bonds. To overcome the initial resistance
and inhibitions,- it may be desirable to declare their bonds as approved
securities and to fix a certain proportion of deposits as a liquid-asset
requirement, in addition to the cash ratio. The liquid assets should
comprise bonds of development banks and governm1nt securities, and the
Central Bank would have to manage the flotation of these bonds in the light
of the likely aggregate bank resources and the requirements of each of the
development banks and the government.
39. Financial Institutions and Technology Policy: The regulation of
the volume and pattern of credit in the light of the Plan Priorities--
promotion of labor-intensive small industries, resource-intensive and export-
oriented industries and small scale agriculture--would not suffice; the third
basic weakness of the financial system, identifiea above, is also critical.
Credit policies would be abortive if these sectors are not inherently viable.
A.nd for this purpose, there has to be an institutional machinery to identify
project ideas, prepare feasibility and detailed project reports and promote
such projects. These functions require institutional capability to search
for alternative processes and products, and select and adapt such products,
processes and machines as are consistent with Kenva's resource-endowments
and development obj ectives. 1/
1/ See V.V. Bhatt, On TechnologZ Policy and Its Institutional Frame (TWorldBank Reprint Series: Number Twenty-nine).
40. At present the ICI:C and the KIE have some capability in the fields
of project identification, formulation and promotion. The Industrial Survey
and Promotion Center (ISPC) is also engaged in such Twork particularly related
to large industry. The IDB has set up a Project Advisory Service (PAS) to
provide technical assistance to Kenyan enterprises. 1/
41. This set-up has several drawbacks:
(1) Each institution has limited talented professional staff and this
set-up disperses and scatters Kenya s limited and scarce professional staff
instead of concentrating it at one place to realize economies of scale and
coordination.
(2) Even the ICDC, the KIE and the ISPC have not developed the competence
for searching for appropriate modern technology and adaDting it to the Kenyan
conditions. Without this crucial design-engineering competence, technological
research problems cannot be-identified and technological research cannot be
organically linked with real problems.
(3) Since the ICDC and the KIE combine the functions of project
identification and formulation with those of project promotion, evaluation
and financing, one gets the impression that the project evaluation function
is not properly performed and there seems to be a tendency to finance All
identified and formulated projects, irrespective of their social costs and
benefits. Further, the benefits of the promotional activity of these two
institutions are not available to the other parts of tne financial system.
1/ See Appraisal of the Industrial Development Bank (IDB), Kenya (World Bank,May 1977).
19.
(4) In the fiels of agriculture, research, extension and project
formulation and promotion functions are rneither adequate nor organically
linked; again these functions are not linked with financinge. either. 1/
(5) KIE's technical assistance is given free and this leads to fairly
high transaction costs and probably to some misuse of the KIE's services.
Ir the KIE or the ICDC assistance does result in an improvement of the
project, there is no reason why costs of technical assistance should not
be recovered from the promoters.
42. Training and Efficiency of the System: The Kenyan financial
system suffers from an acute shortage of qualifed personnel. The pace of
Kenyanization of the staff has been somewhat rapid and the scarcity of
qualified personnel probably explains the rise in transaction costs and
the reluctance of the system to adapt policies and practices to Kenya's
development strategy.
43. At present, each of the three major banks, the AFC and the
Cooperative System, has a training program for its own staff. But there is
no training program where staff from different institutions come together
to learn from each other's experiences. Nor is there a training program
in which the government and the CBK officials and the staff of the commercial
banks and the development banks come together to discuss the implications for
the financial system of Kenya's development strategy.
44. Both sets of programs seem to be essential to realize economies
of experience and give a development orientation to the financial system.
1/ See Small Farmer Credit in Kenva, (Agency for International Development,Department of State, Washington, D. C., 1973).
20.
APPENDIX TO SECTION I
21.
Table I.1: BRANCH DISTRIBUTION OF COMRCTAL BANKS - 1977
(A) National Data
No of Bank Branches - 134
Estimated Population - 14.3 million
Bank Branches per million 9.3
(b) Provincial Distribution of Bank Branches
Province Percentage Share of Branches
Nairobi 30.6
Costal 17.9
Central 15.7
Rift Valley 14.9
Nyanza 8.2
Eastern 6.7
Western 5.2
North Eastern 0.8100.0
SOU'RCE: Tables 11.1 and 11.2, Part Two.
22.
Table I. 2: KiJOR CHARACTERISTICS OF CODQERCIAL BANK DEPOSIT AND LOANSTRUCTURE, 1974-1977
Devosit Structure 1974 1975 1976 1977
Ratio of Term to Demand Deposits .50 .65 .61 .58
Agricultural Credit By Typeof Farmer
Small Scale (4 50ha) .23 .23 .27 .23Large Scale (')50ha) .51 .51 .47 .38Co-operative Societies .14 .13 .09 .15Agricultural Boards .12 .13 .17 .24
Agricultural Credit byMaturitv of Loan
Short-Term (0-2 years) .61 .72 .69 .73Medium-Term (2-5 years) .31 .25 .23 .22Long-Term ( .5years) .08 .03 .08 .05
SOURCES: Tables 11.8 and 11.9, Part Two.
23.
Table 1.3: TRANSACTION COSTS OF KIYAN FINANCIAL INSTITUTIONS - 1976
Institutions Transaction Costs as %age of Total Assets
Commercial Banks 4.68
KCB 6.55Barclays 5.85Standard 4.50
Public Financial Institutions
AFC 5.28ICDC 3.74IDB 0.87DFCrI 2.55
SOURCES: Table VII.1, Part Two.
24,
II. Policy Framework for Financial Institutions
The basic purpose of our policy recommendations is to promote
the integrated and co-ordinated functioning of the already well-developed and
diversified financial structure, and thus to make it an effective instrument for
1/attaining the development objectives identified earlier.- In this regard, atten-
tion must be drawn to the Financial Policy Framework Table (see Annex I) in
which the-policy changes suggested in the report are classified into three categories:
those relating to (a) marginal modifications of existing policies; (b) new functions;
and (c) re-organization of old functions. They are also classified on the basis
of the priority attached to them in the light of our understanding of the
Government's objectives, as those that are: (a) critical; (b) important; and
(c) desirable. And finally on the basis of the time horizon for their implementation,
they are classified into (a) short-term and (b) medium to long-term. The Financial
Policy Framework Table thus summarizes the nature, the priority and the requisite
tinme horizon for each of the policies recomended in the report.
It ought to be noted that the emphasis, in our policy suggestions, is on
the functions that require to be modified, re-organized or introduced de novo.
Thus,though suggestions on the institutions that may carry out these functions
are made at various places, thev may be reaarded as initial Doints of departure for
further examination by the Government. For example, although we recommend below
that the functions of financial planning and of lead institution strategy formulation
be undertaken by the Central Bank, these functions could be performed within the
M iinistry ofPalnnrIng with the assistance of the Central Bank. ;
This section is related to the six sets of financial institutions in Kenya.
On the basis of our study of this institutional set-up, we offer recommendations on
the functional modification and reorganization, as well as the introduction of new
functions that, in oi-r opinion, are essential for the effective and co-ordinated
.1/ <av .. Ra di-n ...... i ,nn__Tr:n_ _ .. . ........ .....- . .. , i, -----
25
functioning of the financial system.
A: Central Bank of Ken-ya
A-1 The Central Bank at present is not equipped with policy
instruments that are effective for regulating and strengthening the
financial structure as well as for orienting this structure towards
national development objectives. We suggest below policy measures
related to each specific function of the Central Bank.
A-2 (a) . Regulatory Function: (i) The Central Bank needs to enforce
a cash ratio--defined,as balances with the Central Bank as a ratio of
total deposits--of 3 percent with powers to raise it up to 10 percent
for all banks and non-bank private financial institutions. The current
liquidity ratio serves no meaningful purpose and should be withdrawn.
At the same time, the Central Bank should be prepared to lend to these
institutions at the Bank Rate up to 1 percent of their total deposits;
any further lending should be in amount, as well as in terms, at the
complete discretion of the Central Bank.
A-3 (ii) To strengthen the capital structure of these two sets of
institutions, and to promote a stable plough-back of profits, the
Central Bank should make it obligatory for them to transfer to their
annual reserves, say, 20 percent of their post-tax profits. This
measure will also limit the repatriation of profits by foreign banks
and thus contribute to easing the balance of payments situation.
26.
A-4 (iii) The insurance companies--both life and general-should be
brought within the regulatory framework of the Central Bank or Ministry
of Finance. It is essential to examine the soundness of their capital
structure and investments, for which na adequate machinery now exists.
A-5 (iv) The banking sections of the District Cooperative Unions
should be converted into branches of the Cooperative Bank and thus
brought under the regulatory framework of the Central Bank; without
some such measure the Central Bank would not be in a position to
regulate efficiently the overall volume and pattern of credit.
A-6 (v) The Central Bank should be empowered to issue its owqn consumer
price-indexed bond bearing a real interest per annum of, say, 2-3 percent
as an additional instrument for controlling inflation and regulating
the structure of interest rates in the country. The sale proceeds of
these bonds should be kept in a separate reserve'fund which should be
used only to purchase these bonds from the public in times of economic
recession. There is likely to be a demand for these bonds only when
the inflation rate exceeds 7 percent as the money rate on, say, five
year deposits would be around 10 percent; this policy instrument would
be an effective device to control double digit inflation.
A-7 (vi) The Central Bank should fi. only minimum rates for deposits
and permit the banks to pay whatever rates above the minimum rates
they think proper to pay. Illustratively, the minrimum rates.should be:
5 percent on Savings Deposits, 6-7 percent on one to two-year deposits
and 10 percent on five years deposits.
27,
A-8 With regard to lending rates, maximum rates should be fixed
at, say, 10-11 percent per annum only with regard to lending to small
farmers and small enterprises. For the rest, the banks should be
allowed to charge whatever rates they think desirable to charge.
A-9 Such an interest rate policy would encourage saving in the
form of deposits and in particular long-term deposits, bring about a
rational allocation o.f resources and prove to be an additional
efIffective instrtuent to control inflation.
A-10 (b) Allocation Tun'tiorn: (i) The Central Bank should require1.
all banks and non-bank private financial institutions to keep 15 to 22 percent
of their total deposits in Approved Securities to be defi-ned as govern-
ment securities, and bonds of the ICDC, the KIE, the IDB, the DFCK, the
AFC and the EFCK. The financial resources of the mobilizers--banks
and ion.-bank private financial institutions--thus would be effectively
allocated for investment in the priority sectors. The total issue and
composition of the Approved Securities each year should be regulated
by the Central Bank, in the light of the deposit resources of the banks
and the non-bank private financial institutions, and the requirements
of each developtent bank and the government.
A-1l (ii) The life insurance :;crcaT;iies should be obliged to keep a large
proportion, say, 80 percent of their accmmulated life-fund in Approved
Securities as defined earlier.
A-12 (iii) The Central Bank should create out of, say, 45 percent of its
annual profits the following funds:
1/ Together with the cash ratio of 3 to 10 percent of deposits, this sets the newly-defined liquidity ratio at 25 percent of deposits.
Z8
A-13 Industrial Development Futid to be used for providing interest-
free loans to the Managerial and Technical Services Centres ('MTSCs),
grants to the Technology Research Centres (TRCs) and equity participation
in the ICDC, the IDB, the DFCK and the KIE.
A-14 Agricultural DeveloDment Fund to be used for supporting the
agricultural TSC and providing equity participation in the AFC.
A-15 Training Fund to be used for setting up a Financial Development
Institute for training senior level personnel from all financial insti-
tutions--one for the members of the cooperative system and the other for
the officials of the District Cooperative Unions-and for donating a
chair along with two research assistanships to the University of GTairobi
to do research on Financial Development and Policies. These research
assistants should be Ph.D. students and may be recruited to the research
department of the Central Bank after the completion of their degree
program.
A-16 (i7) The banks and the non-banking financial institutions should
be induced to strive for an allocation pattern of their resources-
ot.hier than those required for the cash and the approved securities
ratios-of the typk illustratively presented below:
Proportion (%) of total deposits
Agriculture 17
Small Enterprises 15
Medium to Long-term loans to mediumand Large Industry 10
29.
If these institutions are not in a position to provide credit
directly to these sectors, they should be allowed to give resources of
this order to the AFC and the cooperative Bank (for agriculture), and to
the KIE, the ICDC, the IDB and the DFCK (for small enterprises and
long-term loans to medium and large industry), in whatever form (loans,
participation-loans, bonds, etc.) they think desirable.
A-17 (C) Development Function: (i) The Central Bank should formulate
in consultation with the KCB, the KBE, and the AFC a five year plan for
the opening of their branches in various locations wilthin the backward
districts-the ultimate objective should be to have a bank branch or
agency in each area with a population of 3000-5000 families.
A-18 (ii) The Central Bank should each year select two backward districts
in consultation with the ICDC, the KIE, the KCB, the NEK, the AFC, and
the Cooperative Bank, and formulate and monitor the Lead Institution
Strategy to be implemented by the above-mentioned lead institutions
for idettifying, formulating and financing agricultural and industrial
projects. (For details, see Sections III and IV below).
A-19 (iii) In order to reduce the default risk of the institutions lending
to small farmers and small enterprises, the Central Bank should set up
a Credit Guarantee Scheme; such a scheme would induce the financial
institutions to lend to these sectors.
A-20 (iv) Again to inspire confidence of depositors in the financial
system, the Central Bank should set up a Deposit Insurance Scheme.
A-21 With regard to the Credit Guarantee Scheme as well as the
Deposit Insurance Scheme, the Reserve Bank of India has almost
18 years' experience in operating them; the Central Bank may like to
study the Indian experience.
A-22 (d) Research and Planning Functions: (i) The Central Bank
would have in its possession all the financial data required for
financial planning. For a Five Year Plan, the government and the
Central Bank have control over only the resources generated by the
financial system. Hence the essence of a development plan consists
in proj ecting the resources that would be available to the financial
system and allocating them for sectors and projects that are consistent.
with the national development objectives, with the help of effective
policy instruments. No five year plan can be a real action clan with-
out such financial planning; a macro-plan exercise that is cast in
terms merely of over-all saving without a saving and flow-of-funds
matrix can only be an academic exercise.
A-23 It should be the responsibility of the Central Bank Research
Department to formulate such a financial plan and indicate, in the light
of such a plan, concrete economic-financial policies required for
matching the surpluses and the deficits of various sectors. Needless
to add, the ultimate responsibility for the formulation of the Plan
lies with the M4inistry of Finance and Planning.
(i') The Central Bank, therefore, should expand its research
department by creating the follaowing two new Divisions: Divi'sion of
L, , , , , . |t
31t
Finencial Planning and Policy District Lead Institution Strategy
Division (the latter to perform the development: function indicated
earlier).
A-24 (iii) In order that these two Divisions be effective in their
functioning and in their advisory role to the Central Bank Governor
and the Ministry of Finance and Planning, they should be located
directly in the Central Bank Governor's office, and should be headed
by a person whose sole function should be to formulate, suipervise and
guide research in the areas indicated earlier. Needless to say, he
should be a highly qualified economist with considerable: research
experience in the field of financial institutions and policies.
A-25 (e) Educative and Trainine Function: (i) The Central Bank
should set up a Financial Development Institute (FDI) to train senior
and top level officials of the Central Bank, the commercial banks,
the development banks, the cooperative banks and the officials of the
Ministries of Industry, Agriculture, Cooperatives and Finance and
Planning. Each seminar type course should be for a duration of three
to four weeks; and each year, there should be about three such courses.
A-26 This course should be in the field<of National Economic
MHanagement with svecial emphasis on Financial Institutions and
Policies. The Economic Development Institute of the T'orld Bank may
be willing, if requested, to provide technical assistance in formu-
lating such a course as well as in assocqiating its own staff in
conducting such a course. This course can be organized under the
joint auspices of .the Central Bank Research Department, the Kenya
Institute of Administration and the EDI of the World Bank.
A-27 Such a course would have several advantages. It would
provide the senior and top level management an overall development
perspective for approaching their individual functions. Only some
financial institutions seen to approach their tasks in the light of
a clear understanding of the overall development problem and strategy.
This course would provide a development orientation--of the type
that exists in Japan, Weist Germany and India--to the comercial banks.
A-28 Further, the Ministries need to have a clearer idea about
how in practice the financial institutions function and what their
const.raints are. The bringing together of the Ministry officials
with the officials of the financial institutions would promote
mutual understanding as well as a common approach for the integrated
and coordinated functionina required for solving the development
problems.
A-29 To give, enough time in a relaxed atmosphere for reflection,
seminar discussions and informal discussions outside seminar rooms,
this course should be held away from Ntairobi at a place where there
are adequate facilities for the participants (about 25 for each
seminar course).
A-30 The FDI should plan to have its own facilities, which can
be used for a variety of other purposes as well.
A-31 (ii) Bankers' Training Institute: The Central Bank should set up
under its own auspices--as some Central Banks have done--a Bankers'
- ~33,
Training Institute (BTI) tc train middle-level management from all
types of financial institutions. Each course should be an intensive
course for three months for about 30 participants and there should
be three courses held in each year.
A-32 The BTI would promote mutual understanding as well as
habits of coordinated and cooperative functioning among the officials
of the different financial institutions, and at the same time, enable
them to formulate and apr-eciate their role ir. the development process.
A-33 (iii) The Central Bank and the proposed Kei.ya Instit-ute of Bankers
should induce the University of Nairobi, and if necessary offer it
financial and technical assistance, to institute a one-year Banking
Diploma course for high school graduates who intend to take up a
banking career after they have obtained the Diploma. Such a course
would facilitate the recruitment policies of the financial institutions.
A-34 Further, if the financial institutions recruit only high
school graduates with a Banking Diploma for tasks that can easily
be done by them, they need nct recruit--except for some specialized
tasks-otherwise over-qualified university graduates. Sucn a policy
would have several advantages: (i) the institutions would be able
to reduce their administrative costs and at the same time, since the
recruits would be relati-vely younger than the graduates, would be
able to obtain more energetic, hard-working and disciplined staff;
(ii) individuals seeking a banking career would be able to save money
and time which they would have spent to become University graduates-
if banks continued to reveal a preference for graduates; (iii) the
34.
country would be a gainer as it would be. able to save real resources
that would otherwise be required for expanding university education.
Thus, the institutions, the individuals and the country--all three
would benefit with the type of recruitment policy suggested.
A-35 As indicated earlier, the setting up of Cooperative Training
Institutes (at the District level) for the members as well as the
officials of the cooperative system should be actively supported by
the Central Bank.
B. The Commercial Banks
B-1 As active agents in the financial system, the commercial banks,
as presently constituted in Kenya, are best relied on to play the role
of the primary mobilizers of financial savings. With respect to twJo
other functions of the financial system, namely the actual functions
of lending long-term funds and that of inducing an increased demand
for long term credit through direct efforts in the identification,
design and formulation of investment projects, it is recommended that
the commercial banks leave the arena largely to the other financial
institutions, as described in the other parts of the paper.
B-2 To improve on the mobilization performance of commercial
banks, three sets of recommendations are seen to be necessary: these
relate respectively to the branch distribution network, the level
and structure of interest rates and the financial instruments provided
by the commercial banks.
B-3 (i) Branch. Distribution Network: The branch distribution
network of the commercial banks is concentrated in two respects: on
the one hand in favor of urban areas, and' on the other hand of the
Central and Western Provinces and parts of the Nyanza and Rift Valley
Provinces. This clearly reflects the present distribuition of economic
activity. However, the commercial banks have an important role to
play in the mobilization of resources in parts of the country in which
economic activity is already beginning to develop or will develop as
a result of the project-related work of the other financial institutions.
B-4 The commercial banks should be the active mobilizers of savings
in these areas both because of their comparative advantage in this
activity and because the profitability of their urban and Wrade-biased
operations better allows them to support this function. They should,
as recommended above, be guided in their branch expansion activity
by the Central Bank on the basis of its District Lead Institution
Strategy.
B-5 (ii) The Level and Structure of Interest Rates: With respect to the
allo'cational role of interest rates, it was recomended above that the
maximum lending rate for small-scale enterprises be fixed at say,
10-11 percent while there should be no ceiling fixed for the rates for
other types of enterprises. As a device for mobilizing savings, the
possible effect of interest rates on the maturity structure of deposits
has hardly been exploited by the commercial banks. That such an efLect
exists and is significant is suggested by the rapidly increasing share
of deposits held by the private non-Bank Financial Institutions which
36
have offered higher rates for longer maturities: their share has
increased from 8 perc.,nt to 25 percent between 1971 and 1977. As
such, it is recommended that, in addition to the existing (i)
5 percent saving deposit accounts and (ii) 6 to 7 percent accounts
with one to two-year maturities, the commercial banks should offer
(iii) up to say, 10 percent on maturities of up to five years. This
recommendation ties in both with the upwardly flexible lendi-ag rate
mentioned above, and the increased participation by the co=ercial
banks in the purchase of Approved Securities sugaested earlier. The
rates suggested should be taken as minimum rates: the CBK should not
fix any ceiling on these rates.
B-6 (iii) Financial instruments: The objective of increased mobilization
of savings cannot be divorced from the nature of the financial instru-
ments or deposit schemes offered to clients. Such instruments should
be tailored to the basic motives to save and linked with services
desired by clients. In the Kenyan context, it is recommended that
the commercial banks introduce deposit schemes along the following
broad lines: 1/
B-7 (a) Denosits Linked to Lending: The general principle underlying
lending-liked deposits is that one is induced to increase one's
saving, in effect on a semi-contractual basis, if one is guaranteed
a loan equal to a pre-determined multiple of oue' s total deposits,
conditional upon consistent saving over a period of years and the
viability of one's project. For example, -a Housing Deposit scheme
1/ On this topic, see V.V. Bhatt, Structure of Financial Institutions(Vora and Co., Bombay, 1972) Chapter 4.
-L i: . . l -.. . . . . g ,.i-... .
37.
may offer a housing loan equal to twice one's total deposits after
a ten-year period of consistent saving, at a somewhat preferred rate
of interest. Similarly, there could be Education-, Marriage- and
Medical-Deposits, etc., for the housel*1.d sector and similar schemes
for projects in small-scale agriculture, small-scale industry and
other small enterprises.
B-8 (b) Dewosits Linked to Old Age Provision: Such a scheme would accept
a retiree's provident fund lump-sum benefit at his retirement, and
pay him a monthly installment (including interest) for a stated period
of time.
B-9 (c) Deposits Linked to Insurance: The first variant of this scheme
would be specifically tailored to the small saver who is unlikely to
undertake a regular life insurance policy. It requires the saver to
build up to a minimum deposit, the corresponding interest payments
being treated as premiums for an appropriately calculated benefit
payment. 0n similar principles, a Crop Insurance deposit scheme could,
in a drought year,-lend a farmer (say) twice his deposits subject to
a maximum of (say) Ksh. 10,000.
B-10 Clearly the commercial banks will ha-ve to work out the detail s
of the appropriate deposit schemes in the Kenyan context. Our
discussions do suggest that these schemes are, prima facie, marketable
in Kenya. It is recommended that the Kenya Comuercial Bank and the
National Bank of Kenya be encouraged to experiment with these and with
other such schemes.
38.
B-1l In concluding our recommendations for the commercial banks,
it must be emphasized that although we have stressed their mobili-
zation function, in line with the general tenor of our recommendations,
their investment advisory services and merchant banking facilities
also need to be strengthened; they too could have a favorable impact
on deposit mobilization.
C: The Cooperative Structure and the AgriculturalFinance Corporation (A.F.C.)
C-1 As noted earlier, the cooperative structure (defined to
encompass all three tiers: the Cooperative Primary Societies, the
Cooperative District Unions and the Cooperative Bank) seems to have
evolved as an excellent mechanism for mobilizing savings and providing
secure short-term credit to Larmer-members at very reasonable trans-
1/actional costs by inte..r.ational standards. Further, contrary to
expectations, it was Euoi-nd that the Banking Sections of the Cooperative
Unions do not operate; s:m:side the general banking structure: since
they maintain all their deposits either with the Cooperative Bank or
with commercial bank L::-r.iaches, they act in effect as agents of these
institutions and are t:herefore indirectly subject to the CBK regula-
tionis. They are not, of course, required to so manage their deposits;
but they choose to operate in this manner because they are not equipped
to securely store cash on their premises. Their de facto incorporation
into the formal banking structure will be secured by the recommendation
made earlier that Banking Sections of the Cooperative Unions be
1/ Oral evidence sugoests that these transaction costs are between 4 and 6 percentof total assets, a range that compares very well with rates in the Philippines,M4auritius and India (see Section VIII, Part Two).
converted into branches of the Cooperative Bank, of fhich they are
themselves the sole shareholders.
C-2 Similarly, where the AFC has branches, it seems to have
performed the function of providing long-term credit to medium and
large farmers also at reasonably low transaction costs by inter-
national standards. In addition, the following recommendations are
made for the two institutions under consideration:
C-3 (i) That the AFC be evolved into a full-fledged Agricultural
Development Bank that is also permitted to mobilize savings directly,
particularly in areas where the cooperative system has not spread.
C-4 (ii) That the Cooperative unions and the AFC together sponsor the
agricultural wing of the district-level Project Identification
Centers (P?.Cs). (For details see Section IV below). In this respect,
the primary function of the Cooperative Union and the AFC would be to
perform the lead role in the identification, formulation and evaluation
of projects arising out of the agricultural production possibilities
of the district. Institutionally, the functioning of the district-
level PIC, as at the national level, should be independent of the
financing functions of the Cooperative Union and the AFC,. in order to
avoid the imvlicit conflict of interest. Needless to add, in its
functioning, the district level PIC would complement and coordinate
its services with those of the Ministry of Agriculture Extension
Services. Further, in districts in which oully one of the two
organizations exists (Cooperative Union or AFC) that organization
should sponsor the PIC. For new districts, the AFC should perform
40
the lead functions in question, with its expansion guided by the
CBX District Lead Institution Strategy.
C-5 (iii) That where the AFC, in implementing the suggestions emanating
from the CBK area surveys, is the only financial institution in a
district (excluding the P.O.S.B.), it be permitted to accept depo3its
as an, agent under CBK Supervision.
C-6 (iv) Finally, that in periods of crop failure the AFC should consider
giving credit for subsistence purposes to those farmers whose land
title-deeds are already held by it in lieu of earlier investment1/
loans (see Section 1I-G below).
D. Other Develonment Institutions (the ICDC,the IDB, the DFCK and the KIE)
D-1 With respect to the above named development institutions
two recommendations are made:
(i) The first of these, already referred to earlier, is that they
be permitted to sell Development Bonds under CEK supervision. As
suggested earlier, the marketability of these Bonds should be ensured
by declaring them to be Approved Securities, and hence a permissible
part of the commercial banks' liquid assets.
D-2 (ii) Secondly, the ICDC, the DFCY}, the KIE, the KCB and the NBK
should jointly form an autonomous body with the specific function of
identifying, formulating and promoting industrial projects-large
and small. Such ŽManagerial Technical Services Centers (one for Industry
and one for Agriculture) (for details, see Section IV below) will be
1/ Although the AFC operates the Guaranteed Minimum R.turn Scheme in periods of cropfailure, this has to date been available only to farmers with 15 or more acres,
represented at the district-level by the KIE-affiliated Rural
Industrial Development Centers (for industrial projects) and as
described above, by the Cooperative Union/AFC sponsored PICs (for agricultural
projects). The expansion of the PICs into new areas will be guided by the CBK
Lead Institution Strategy surveys.
D-3 Finally, for the same reasons as in the Cooperative/AFC case,
the entire MTSC network shoul.d function independently of the financing
function perfGrmed by the various development institutions. In
particular, the present combination of these functions in the ICDC
and the KIl is unsatisfactory. The unlinking of these functions and
their adoption by an autonomous body (staffed by the same and addr.itional
personnel from the four institutions) is expected firstly, to improve
the efficiency of their performance, and secondly, to avoid conflicts
of interest between the project design and financing functions.
E: National Social Security Fund (NSSF)
E-1 Our recommendations for the NSSF are twofold: The first
having to do with the mobilization, and the second with the: allocation,
of savings. Cross-country comparisons of the structure of housenold
sectors' financial savings show that, next to deposits and money, the
next preferred asset are claims on contractual saving schemes such as
social security s-avings, pension-and provident fund schemes, life
insurance schemes, etc. 1/ Much the same seems to be true in Kenya,
1/ See V. V. Bhatt, Some Aspects of Financial Saving and CentralBanking in Developing Countries (World Bank Reprint SeriesNumber Twenty-one).
- 42.
where social security saving;s and private pension and provident fund
schemes 1tave grown significantly over the past decade. The cxistence
of the latter in the presence of the former suggests that the
potential role of social security savings is not fully tapped. Cer-
tainly, in comparison with the other developing countries such as
Malaysia, Sri Lanka, Philippines and India, social securi,ty savings
account for a lower proportion of total financial savings.- Thus
the following recommendations are in order:
E-2 (i) It is recommended that as a measure for increasing the mobili-
zation of saving, social security contributi ons be
(a) based on the individual's entire wage or salary income,
instead of being based only on the first K Sh. 1600 of
-income;
(b). the eaployees' contribution rate be made progressive
. with income, with 5 and 8 percent being the lower and upper
limitss,respectively, instead of the present uniform
5 percent rate; and
(c) the employer's contribution be at the fixed rate of
5 percent of wages and salaries.
On the basis of a quick estimate, these measures are likely to
increase the annual NSSF resources by at least 70 percent, and
perhaps double them.
E-3 (ii) Secondly, that the allocation of social security contributions
to the Approved Securities mentioned earlier be permitted up to (say)
50 percent of annual increases in the NSSF Fund, the rest being
1/ Th's proportion is 25 percent for Kenya and 30 percent and above for the othercountries listed above (see Section VII below).
2/ The evidence on the magnitude of the substitution effect between contractual andnon-contractual saving is mixed. In Kenya, however, one would expect some substitu-tion from the private pension funds (which at present do not necessarily flowthrough the financial institutions covered here), from non-financial saving, andperhaps from consumDtion, and to that extent, an increase in the mobilization
43'
allocated to Government Securities, The rationale anderlying the
mechanism of Approved Securities as an allocation device has been
discussed earlier.
F: The Post Office Savings Bank (P.O.S.B.)
.F-1 The major advantage of the Post Office Savings Bank is, of
course, its wide branch network and the associated lower overhead
costs. The role of the P.O.S.B. is therefore particularly important
in the mobilization of savings in areas that are not likely to be
serviced by commercial banks in the near future.
F-2 In order that the P.O.S.B. successfull' perform this function
of complementing the commercial bank system, it is recommended:
(i) that the deposit and withdrawal procedures be simplified to the
extent possible;
(ii) that higher interest rates be offered for deposits of higher
maturities, as recommended for the commercial banks; and
(iii) that new deposit schemes, as recommended for the commercial
banks but after their initiation by the latter, be considered
for implementation by the P.O.S.B.
G: Informal Credit Markets
G-1 Informal credit markets, it would seem, are not very widely
prevalent in Kenya. Based on our discussions,and as corroborat6d
by a sample-survey study by E.M. Kanoga (Post-graduate student,
44,
Economics Department, University of Nairobi), informal credit
market operations are largely of the "rotating credit' or "partner
type." In this type of credit activity, a group of persons
contribute a predetermined and equal sum at specified intervals,
each member, in turn, receiving the total of a single period's
collecticn. Such a system is well-worth preserving since it relies
on communal trust and sanctions to mobilize savings, very often for
persons with no security to pledge against credit from a formal
financial institution. The evidence also suggests that, at least
for the majority of non-salaried persons, such funds are invested
rather than consumed. Any attempt at regulating such activity is
likely to be superfluous since communal regulation already exists,
and may indeed stifle such mobilization.
G-2 - Other informal credit market activities include friendship
loans between long-standing acquaintances: these are few, self-
regulatory, interest-free, and insignificant in the economy-wide
context. Although the prevalence of professional informal money-
lending is also on the low side, the rates of interest charged are
extremely high (ranging from about 100 to 240 percent per annum);
such lending is often for consumption purposes ard in distress
situations. For the specific cases of the small farmers without
accass to credit for consumption purposes in periods of drought,
this clearly suggests a credit gap that should be filled by the
AFC, in particular if it already holds the farmer's land title deed
for an investment loan.
45.
G-3 A fourth category of informal credit activity is that
between large-scale urban traders which is largely indistinguishable
from general trade-credit. Since its scale is likely to/be very large,
it is an activity that clearly ought to be studied further. A start
in this direction has already been made by J.X. Mbaru (Post-graduate
student, University of Nairobi, Commerce Faculty), but not anough is
known of its scale and its modus operandi to permit any policy
recommendations at this stage.
4E,
TII. District-Level Coordination of Financialand Technological Functions
3-1 The major unifying theme underlying all the policy recommen-
dations here under consideration is that of coordination. Coordination
is here emphasized in two senses: (a) that among the financial insti-
tutions under the guidance of the CB1K and (b) that between the
financial and technological-service components of investment projects.
Reference has already been made both to the CBK's District Lead
Institutiov Strategy and to the nationwide network of Managerial and
Technical Service Centers (baSCs). In particular, it was suggested
that the ICIIC, the KIB, the IDB, the DFCK(, the KCB and the NBK,
jointly s-p;o:i.sor the Central MSC for medium-large industrial projects
and that the. district-level PICs service small enterprises. A similar
setup for agriculture should be undertaken by the AFC and the
Cooperat- ve UnTnions. The rationale for forging links between the
financing and the technological-service functions is explained in
Section IY. This section makes recommendations )n the district-level
coordination of these and related functions. The recommendations are
two-fold: the first advocated the need for a district-level lead
institution to coordinate these functions, and the second points to
the critical importance of a physical coordination of service-delivery
points:
3-2 (i) It is recommended that in each district, one institution, from
among the Cooperative Union, AFC, KIE, KCB and the NBK be selected
by the CBK to perform the lead function of coordinatina the policies
-47,
of the other financial institutions and the PICs in the district.
The choice of lead institution in any given di-strict should be based
on its actual or potential dominance in the economic activity of the
district. The main functions of the lead institution would be:
(a) with CBK guidance, to help in designing district plans for
branch expansion; (b) estimate the current requirement of credit in
the district and, in conjunction with the other financial institutions,
prepare a phased programmed to meet it; (c) informally coordinate the
activities of the agricultural and small-scale industry PICs; (d)
coordinate the financing of projects emanating from the PICs by the
various financial institutions: and 'e) devise and/or experiment with
such deposit schemes and financial instruments as would prove attractive
to the district's households and effective for the purpose of raising
the rate of financial saving in the district.
3-3 (ii) It is a commonplace that physical distance and
related factors, through their effect on transaction costs, are
critical in determining the accessibility of ofLered services to the
potential recipients. And yet these effects are often ignored or
under-estimated. It is recommended that, wherever possible (in
particular in new areas of expansion), the services offered by the
area's financial institutions, the PICs, the Cooperative Unions, the
input-suppliers, the recreation facilities, etc., be physically
coordinated within what may be called the District Development Center.
The essence of the logic underlying this recommendation is that by
reducing the transactions costs of distance and of information
48 1
gathering, and by improving the chances of information exchange
between producer-members of the area, the Development Centre will
help provide some of the synergism which underlies economic
development at the decision-making levels.
492
IV. Financial Institutions,Consultancv Ser-rices and Techijology Policy
4-1 The development of the financial structure, by itself, is
not enough. The demnd for credit of all sorts crucially depends on
the generation of viable well-formulated proj ects in agriculture
and industry to be implemented by private promotors either singly
or in collaboration with foreign enterprises as well as financial
institutions like the ICDC.
4-2 It is not possible to generate a large number of projects
without developing indigenous technological competence in the fields
of identification of project ideas, preparation of feasibility
studies, detailed design and engineering and complete project formu-
lation. If such competence is not developed locally, Kenya would
have to depend on foreign consultancy ser,vices, and it would not be
able to generate a self-reinforcing process of socio-economic devel-
opment consistent with its basic development objectives.
4-3 For Kenya cannot afford simply to borrow and adopt modern
technology. This technology has to be adapted and improved to suit
Kenyan objectives-objectives of basing technical processes and
products and equipment designs to use local materials and employ fully
the available manpower resources. What international consultants
provide is the technology actually available 'and in use in the
developed countries. There may be available labor-intensive and less
skill-intensive technology in other less developed countries and at
the stage of laboratory results-a type of technology about Twhich
international consultants are generally not aware. For example,
Kenyan fruit canning industry would have been less capital-intensive
if Kenya had been able to adopt the equipment and processes used in
Thailand. Again, as the bright economist of the Rural Industrial
Development Cetntre at Nyeri told us, he was able to identify the
possibility of installing a small sugar plant simply because he was
able to search purposefully for such labor-intensive techniques;
this sugar enterprise--now very successful--is in, fact a good monument
to the ingenuity, enterprise and imagination O; the KIE.
4-4, Thus Kenya needs to know what type of technology suits her
and for this purpose should be able to make an active search all over
the world. Further, if the desired technology is not available
anywhere in the world but is required to use local materials, a
research problem can be identified to be solved by the Technological
Research Centres (TRCs) which should be set up by the National
Committee on Science and Technology; if they do not have the required
competence, they can refer the problem to any other foreign or
international research center.
4-5 Thus, it is essential to set up in Kenya two Mianagerial
And Technical Services Centres (MTSC)-one for industry and the other
for agriculture. These MTSCs should have the competence to identify
project ideas and for this purpose it should set up in each district
a Project Identification Cantre, (PIC)--like the Rural Industrial
Centre which we visited in Nyeri. They should, further, possess
adequate design engineering capability to search, improve and thus
choose the right type of technology and to develop contacts with the
foreign and international consultants for advice and assistance in
such cases for, which they have no adequate competence. But in any
case, they should have the ability to ask the right questions and
pose their own problems to foreignra consultants to obtain the product
they desire. "Ask and it shall be,--t :Lj,:ven unto you, "' but if one does1/
not know what to ask one may get ,1ri--ut one does not desire.
4-6 Further, the ZTSCs shoCl.dl be able to pose research problems
to the TRCs. Without such MTCSs;r;HLtth a capacity of identifying real
research problems, the TRC would function in a vacuum and would prove
to be a costly luxury, as has happened in many countries.
4-7 The TRCs, MTSCs, project promoters and Linancial institutions
-these have to be organically and functionally interrelated and have
to interact with each other for the generation and implementation of
viable, sound and socially valuable projects.
4-8 The develovment banks would be lame without 8uch MTSCs; for
they would.not be able to find out for projects presented to them for
financing by national or foreign promoters whether these projects
were based on technology suited to Kenya. Again, they would be
ineffective if they did not have the right type of projects to finance--
only ?ATSCs cana generate such projects. They would be unable to find
out small industry projects based on local skills and traditional
techniques, unless there were MfTSCs with the competence to uograde
traditional technology-a task .hat no foreign consultant would either
understand or would be capable of understanding.
1/ See V.V. Bhatt, On Technolozv Policy and Its Institutional Frame, (World BankReprint Series, No. 29).
4-9 Similarly, MTSCs without development banks would generate
projects that would prove abortive arnd obsolete. The MTSCs would
generate projects in a responsible and'serious manner once they know
that these projects would have to be acceptable for financing to the
development banks in terms of their project evaluation criteria, which
obviously have to be related to the development objectives. In many
countries government operated EISCs have proved to be failures as they
were not linked organically and functionally with the promoters and
the financing agencies.
4-10 It is for such reasons that we recommend that the ICDC, the
KIE, the IDB, the DFCK, the NBK and the KCB jointly set up a MTSC.
The representatives of these six institutions would constitute the
Board of Directors of such a MTSC. The functions of the Board would
be to recruit a highly qualifed Managing Director of the MTSC and then
appoint other staff-technicians, economists, engineers--in consultation
with and full agreement with him. The second task of the Board would
be to supervise the over-all functioning of the TSSC; this they would
be easily able to do on the basis of the nature and quality of
projects, prepared by the MiTSC, that are presented to the development
banks for financing. The Project Evaluation Departme-nt of these
institutions would be able to judge easily the quality of the work of
the MTSC.
4-11 The MTSC should have a PIC in each district, located In the
District Development Centre to be sponsored by the six institutions
along with the AFC and the District Co-operative Union.
53t
4-12 The AFC and the Co-operative system should set up in the
field of agriculture another MTSC and, in each District Development
Centre, a PIC.
4-13 The ICDC, KIE and the ISPC (Ministry of Commerce and
Industries) have already been performing some of the functions of
the proposed MTSCs. We have been impressed by the clarity of vision
and dynamism of these institutions in undertaking these functions.
However, these tasks require to be performed in a much more systmatic
and intensive way with adequate competence to search, adapt and improve
modein technology to suit Kenyan conditions and to upgrade traditional
techniques in indigenous traditional enterprises. Further, it is not
a wise policy to combine the functions of project generation and
project financing; these two functions combined in one institution
are likely to result in the adoption of unsound projects.
4-14 However, we recommend that the staff in ICDC and KIE
performing MTSC like functions along with the rural industrial
centers be transferred to the proposed =TSC. Similarly, the 4inistry
of Agriculture should transfer its staff involved in agricultural
research to the Agricultural TRC and its agricultural extension
staff to the Agricultural MTSC and PICs.
4-15 The financial institutions should concentrate on the tasks
of project evaluation, project promotion, project financing, and
project supervision and monitoring. In this process, they would be
able to identify project ideas that are related to the projects financed
by them. They should provide such project ideas to the MTSC for the
purpose of detailed project formulation.
Z E= akkk+.g W*>¢i. >z^ 35tit-< st r.v.rF+. 5w'{g1S5'.s;-'-*wiSS44ihr;Xo....... ...-£2/
'.=' 6 We strongly believe that if this proposed link is
established among the TRC, the 4TSC, the PIC, and the financial
institutions, Kenya would develop such technological competence that
would enable it to develop even new technology and quicken the pace
of its development process in the direction of providing a rising
minim=m level of living to each family with full employment and
progressively rising labor productivity.
4-17 Finance and Technology-these two are the vital elements
in socio-economic development;, in fact they are the essence of
development.
55.
V. Efficiencv of the Financial Systems
5-1 The Kenyan financial system seems to be quite efficient in the
sense that its non-financial administrative costs and default risk-
these two together we call transaction costs-are comparable with
similar systems in the other countries like the Philippines, India,
and Thailand and appear to be lower than the transaction costs in
countries like South Korea, Nigeria and some Latin American countries.
Eowever, the commercial banks hardly take any risk and do not
serve the customers-small farmers, small enterprises and small savers
-to whom, say, commercial banks in India do provide a variety of
credit facilities and other services. They do not even entertain a
saving account of up to K Sh400-an amount which for a small saver is
quite large. Since they do not perform the vital tasks of resource
mobilization from and allocation to sectors to which Kenya assigns
high priority, it is surprising to find that their transaction costs
are not lower than those of the Indian co=ercial banks.
5-3 The most creditable record by international standards is that
of the Ministry of Cooperatives, the Cooperative System and the AFC.
They provide credit as small in amount as K ShlOOO to small farmers
(growing cash crops) and the District Cooperative Union maintains
saving accounts of amounts as small as K Sh40 with thousands of such
accounts. In our field visits, we visited the branch and area offices
of the AFC as well as the banking sections of the District Coop7erative
Unions and our information is based on the actual records we have seen
and the intensive discussions we had with their officials. We must
put on record our impression that tha competency, dedication,
innovative spirit and the understanding of the farm problems,
that these officials have are very impressive and few LDCs have such
officials and such sound institutions. Few countries have devised
such sound linking of credit and marketing as the Kenyan Cooperative
System has and it is because of this sound necessary link that the
default risk of the District Cooperative tinion is negligible.
5-4 The transaction costs of the AFC and the Cooperative System
appear to be about 4 to 6 percent of their total assets--costs which
are lower.than those of similar institutions in many countries of the
world.
5-5 These costs can still be reduced if our suggestions with
regard to the Credit Guarantee Scheme, Deposit Insurance Scheme,
recruitment and training, and the coordinated functioning of the
AFC, TEE Cooperative Ijnions, the KIE, the NBK, and the KCB in.a
District Development Centre are implemented.
5-6 Credit guarantees would reduce the default risk of each
institution. Training facilities provided by the Central B;ank and
the Cooperative Bank (Cooperative Colleges for members and officials
of the Cooperative System in each district) would improve the
productivity of officials and thus reduce administrative costs.
Our suggestion of recruiting high school graduates with DiDloma
Course in Banking would again reduce wage and salary costs and at
the same time provide to the financial institutions young, energetic
and contented staff. Deposit insurance would inspire confidence
57,
in the potential depositors and thus enlarge the scale of business
of financial institutions, thus enabling them to realize the economies
of scale and thus lower costs of operation.
5-7 If evaluation and supervision of large projects to be financed
by several institutions are done jointly by them--instead of each
doing the same tasks separately-the development banks.can reduce
their administrative costs. Similarly if banks like the KCB coordinate
their appraisal and supervision tasks for small enterprises with the
KIE, the administrative costs of both the institutions would be lower
than what they are.
5-8 Among the financial institutions, there is an urgent need for
an integrated and well coordinated approach to the development tasks
that face Kenya. All our policy recommendations have the basic
purpose of providing the institutional and policy framework for the
integrated, effective and efficient functioning of the financial
structure to enable it to play an active promotional developmental
role in quickening the pace of socio-economic advance and rpogress of
Kenya.
5-9 The institutions that should provide the necessary leadership
in this task are the CBK, the development banks, and the KCB.
58,
VI. Financial Savings, the E_uity M4arket and Tax Policy
6-1 The recommendations made in this section are two-fold and
relate to tax policy as it directly affects the magnitude of financial
savings and the operation of the equity market.
6-2 (i) In order to promote saving, particularly in the form of
financial assets, it is recommended that the Personal Income Tax Base
be defined as: "All Incomes from all sources plus Capital Gains and
net Gifts less Change in (Value of Principal Residence plus Specified
Financial Assets less Specified Financial Liabilities)". Such a tax
would not only promote financial savilngs, but also has the advantages
of an income tax, a capital gains tax, a gift tax, and an expenditure
tax. The exemption limit may be set at about the per capita income
level. 1/
6-3 (ii) The Capital gains tax in Kenya has resulted in a marked decrease
in activity-both primary and secondary-in the equity market, and
seems to have encouraged much tax evasion. By treating capital gains
as suggested in (i), not only is financial saving encouraged, but in
addition, the implicit capital gains tax, when levied, becomes
progressive. In order to activate the equity market further, it is
reco=ended that the Corporate Tax be levied on a tax base defined as
"Interest + Profits." A profits taxY alone is, in effect,- an incentive
to borrow rather than to raise funds through equity participation by
shareholders. A tax on both interest and profits would make this tax
neutral with respect to the source of financing. It would also,
incidentally, make interest rate and credit policies more effective.
1/ See V.V. Bhatt, Taxation for Economic Development, Develonment Digest,October 1973.
59,
6-4 (iii) Thirdly, it is recommended that the ICDC Investment Company
be encouraged to increase its activity on the equity market in order
to better perform its role as a mutual fund. Given the tax modifica-
tions suggested above, this would have the advantage not only of
inducing small investors to participate in equity investments, but also
reverse the trend of increasing concentration of equity ownership that
seems to characterize the equity market currently. The occasional
evolution of publicly-quoted companies into private ones as a result
of such concentration of equity ownership is particularly likely to
be discouraged by this and the other measures suggested in this
section.
6-5 (iv) Fourthly, it is recommended that for all publicly-supported
development finance institutions, namely the ICDC, the IDB, the
DFCK, the AFC, the KIE and the HFCK, all transfers of profits to
Investment Reserves not be subject to tax.
6-6 (v) Finally, it may be noted that tFC's Capital Markets
Department, if so requested, may be willing to study the securities
market in Kenya and make further recommendations for its restructuring
and strengthening, and to provide assistance on various other financial
policy recommendations offered in this report.
60.
VII. DOMSTIC RESOURCE MOBILIZATION AND ALLOCATION: PROJECTIONS FORTEE FINANCIAL SYSTEM, 1978-83
We present in this section the projections with regard to the
resource mobilization and its allocation by the financia.l system for the
period 1978-83. We have tried to indicate a technique for financial
planninig on the basis of data that we could collect and process; this exercise
can be - and should be - refined by the Central Bank by developing a more
comprehensive frame of flow-of-funds data and analysis. The other purpose
of this exercise is to quantify the impact on resource mobilization and alloca-
tion of our recommendations.
The financial projections are made on two alternative sets
of assumptions: under the first set, all projections are on the basis of
past trends while under the second set, it is assumed that the major policy
recommendations offered in this report are implemented durings the Plan period.
In financial planning, one of the key links with the macro-frame of the -
Development Plan is the realtionship between the growth rate of money supply
and the projected growth rate of the GDP. Kenya's GDP is projected to grow
at 6 percent per annum over the Plan period, and given the already high degree
of liquidity in the economy following the coffee boom, a unitary income elasticity
of demand for money is assumed.- Thus in the Monetary Projections in Table
VII.I below, the money supply is assumed also to grow at 6 percent per annum.
Two other assumptions underlie Table I: first, that the marginal
ratio be ween Money Supply and currency in circulation would be the same as the
observed ratio during 1974-77, and second, that reserves of the commercial banks
1/ This is consistent with the statistical analysis in G. Dorrance, op. cit.
Table VII.l: MIONEY SUPPLY PROJECTIONS, 1978-83- (mil; slh. 1977 prices)
Stock as at Projected Stock as at Projected Stock as atJune 1977 increase June 1983 increase June 1983
(Ass. 1) (Ass. 1) (Ass. 2) (Ass. 2)
I. Money Supply 7529.54 2710.62- 10240.16 2710.62 10240.16
/ba) currency 1765.14 611.79- 2376.93 611.79 2376.93
/bb) demand deposits 5764.40 2098.83- 7863.23 2098.83 7863.23
II. Reserve Money 3250t67 713.35 3964.02 733.59 3984.26
'Ca) bank reserves 1485.53 101.56 1587.09- 121.80 1607.33A
b) currency incirculation 1765.14 611.79 2376.93 611.79 2376.93
/a Money supply allowed to grow at projected growth rate of GDP: 6 percent p.a.
/b Assuming constant shares of currency and demand deposits in money supply.
/c Allowing for bank reserves at CBK of lO.percent of projected total deposits.
.1 X --- -- - - - -- -
, - 62.and the non-bank private financial institutions with the CBK average out at
10 percent Of their respective total deposits. Total deposits include term
deposits, and the latter are derived on the basis of the marginal relationship
between term deposits and demand deposits during 1974-77. On these
assumptions, Table VII.1 below provides projections for the Money Supply
and Reserve Money,' and their respective components.
Projections of the mobilization and allocation of domestic
resources by the financial system over the 1978-83 period are presented in
Table VII.2. Under Assumptions I, all projections are made on the basis of
past trends by assuming, in general, that the marinal relationship of
the 1974-77 period (or the most recent 3-year period for which data are
available) will continue to hold for all projected increases in the mobili-
zation and allocation of financial resoucres.--
Under Assumptions 2, the major policy recomendations offered iii this
report are assumed to have been implemented. These are: (a) as a result of the
restructuring or the term structure of interest rates on deposits, the term2/deposits to demand deposits marginal ratio would'increase by 10 percent F(b) a
C- restructuring of the social security contributions made by employees and em-
ployers (see Section II.I above), would tend to increase social security con-
tributions by 70 percent- (in 1979 and thereafter) over the projections under
Assumptions 1. Together these imply an absolute increase in financial resources
mobilized by the financial system of the order of i .Sh. 1582.08 m;illion, or a 17
1/ There are some exceptions to this: (a) Agricultural lending is assumed toincrease to 17 percent of total deposits; (b) Bank Reserves with the CI.;to average at 10 percent; (c) Capital and -Reseryes of tne commercial banksand tha non-bank private financial institutions are assumed to grow at 10percent per annum; and (d) A longer period (1972-77) was used wherever t,'ediver-ence between the average and marginal ratios for 1974-77 seemed tGo br:..'= 2/ rEe level oe ±ncrease ±s ess tlaly a gSuecttmate; however the assumption thatthe interest elasticity of savings in this range is positive is supported bytwo racts: Ci) the share of deposits held by the private non-bank financialinstitutions has increased rapidly since their introduction of higher interestrates than those offered by the cmmercial banks; and (ii) the ratio of
term to demand deposits in Kenya is rather low by i-nternational standards.3/ As indicated earlier, this is a lower bound estimate, the use of which is
warranted by the likelihood that the substituticn effect on other forms of
Talule VI.2: DOWIIST1C RESOURICE MOIIILIZAT101 AMID ALLOCATIONZ TIIE FINANCIAL SYSTEtW 1978-83
(mil. sh. 1977 prices)- -SOURCESS - --- -- ) -- - - USES -
Projected Percent- Projected Percent- Projected Percent- ProjecEted Percent-Increuses age intereases aga i siureases age Increases &.goSrurces tif Funds (Asa. 1) shares (Ass. 2) shares Uses of Ftinds (Ash. l) hares (Ass. 2) shares
1. renur.l Bank 1211.79 13.2 1211.79 11.2 1. Gvrnmet 41£3.43 45.4 3391.44 31.!.a) cturrency 611.79 6.7 611.79 5.7 'a) cencral government 4042.62 43.9 3250.63 33.1b) profits 600.00 6.5 600.00 5.5 j b) governMenL enterprises 140.81 1.5 140.81 1.3
2. Co!mmercial Basnks 4091.99 44.5 4240.87 39.3 ! . Prieare.Scc 3723.41 40.5 2462.62 22.8 1a) total deposits 3587.74 39.0 3736.62 34.6 a) agrIculture 1829.68 19.9 1829.68 1D.0b) capital and reserves 504.25 5.5 5 04.25 4.7 b) manufacturing .386.07 4.2 141.45 1.3I c) othe:r 1507.66 16.4 491.49 4.53. Privatre flan-bantl:. Fin. Inst. 1340.23 14.6 1393.43 12.9
a) total daposits 1222.15 13.3 1275.35 11.8 3. Ptiblic Flnancial Inst. 218.01 2.4 4011.10 37.2b) capital and reaerves 118.08 1.3 118.08 1.1 ca) redits to public fin. inst. 218.01 2.4 440.15 4.1b) approved securities --- 3570.95 33.14. tJ.S.S.F. 2302.11 25.1 3682.56 34.2
contrlbutor'st funids 2302.11 25.1 3682.56 34.2 j 4. Other Uses 1080.63 11.7 922.85 8.6a) CBK industry fund -- - 90.00 0.85. P.0.S.I. 108.44 1.1 108.44 1 .0 b) C1K agriculture fund -- -- 90.0a 0.8total de.positr 108.44 1.1 108.44 1.0 c) CDK tralining fund -- 90.00 0.8T . d) other 1080.63 11.7 652.85 6.26. LIlfe-lnsuranct, eCnpanlesi 43.51 0.4 43.51. 0.4
life ftund 43.51 0.4 43.51 0.4 5. Total Uses 9205.48 )0l.0 1n78S.0l .Q.ofl.7 . I.na-l.fie Insurance Company 107.41 1.1 107.41 1.0
insurance ftund 107.41 1.1 107.41 1.0
8. Total Domestic Resotorces 9205.48 100.0 10788.01 100.0
9. Pro cretd Ch:anrt In Re;±oarces
L'uu.l; r .4.usu,.L, Ion 2 ___________a) al.solut.e increase 1582.03b) percentage increase 17.0Q|
la All cransaccions witlhin the Financial Sector ara izacted out.
LI) These totalu only include transactionas wich the non-financlal sector. t
/c ThIA caEtzery only Includes lendintg to thlc privato sector by iaueticutsonsother than the Public Flnancial Inistitutions.
CM
6.4
percent increase, over the projected resources under As.=ptions 1,
Assumptions 2 also imply changes in the allocation of financial
resources. These are: (c) 15 percent of their Total Deposits will be invested
by the commercial banks and the non-bank private financial institutions in
Approved Securities sold by the public financial inst-:Zutions (AFC, ICDC,
IDB., KIE HFC: and DFCK) under the guidance of the CBK and the Ministry of
Finance and Planning; (d) 55 percent of the CBK's annual profits will be
transferred to the Central Gover nent while the other 45 percent will be
used for the Industry, Agriculture and Training Funds of the CBK (see
Section II.A). (e) 40 percent of the increase in Reserve Money will be pro-
vided as Credit to the six financial institutions; (f) 50 percent each of
NSSF's mobilized resources will be invested in Government Securities and
Approved Securities, respectively.
The fundamental assumption underlying Assumptions 2 is, of course,
that the recommended-links between the financial institutions, the CBK and
the network of technological and research centers (see Section IV) will be
forged. This would not only make likely a commensurate increase in the demand
for credit arising from projects identified on the basis of economic criteria,
but also make possible an allocation of this credit in accordance with the
priorities of the 1979-83 Development Plan.
Table VII,2 summarizes the mobilization and allocation of domestic
resources by the financial sector, netting out all intra-sector transactions.
The four individual Tables underlying Table VII.2, one each for the CBK,
the commercial banks, the non-bank private financial institutions and the
residual group (the NSSF, POSB and the Insurance Companies), are presented
in the Appendix.
Finally, Table VII.3 presents a breakdown of the financing of Gross
Investment for the 1978-83 period. It is based on the Investment and Saving
65,
Account of the Plan's macro-frame and on the financial sector projections in
Table VTI.2. It indicates that the share of financial savings in total
savings increases from 20.5 percent under Assumptions 1 to 24.1 percent
under Assumptions 2, with the share of the foreign savings/reserves correspoond-
ingly decreasing from 12.8 percent to 9.3 percent. This result shows the
directional impact of our recoendations,
66.
1/Table VII.3: FINANCING OF GROSS I=VESTENT, 1978-8.J
(million shillings)
Assumptions 1 % Share Assumptions. :2 Z share1978-83 1978-63
Gross Investment/Saving 44,761.4 100.0 44,761.4 100.0
Financial Saving 9,205.5 20.5 10 24.1
a) Government FinancialSaving 2/ 1,440.4 3.2 1,440.4 3.2
b) Private Sector Finan-cial Saving 7,765.1 17.3 9,347.6 20.9
Other Saving 33,555.9 79.5 33,973.4 75.9
3/Other Government Saving- 6,089.1 13.6 6,089.1 13.6
Physical Assets 4 23,744.3 53.1 23,744.3 53.0
Foreign Saving/Re-serve 5/ 5,722.5 12.8 4,140.0 9.3
1/ Based ot= Investment and Saving Account, 1979-83 Development Plan1 macro-frame,mimec and on Table 7 1.2 above,
2/ Total DeDosits of the Central Government and Government Enterprises with -hefinancial system.
3/ Government Saving other than that held by the financial system.
4/ Investment financed by own-savings of the private sector.
5/ Calculated as a residual.
67.
APPENDLX TO SECTION VII
Tt1abl AJIT.1: SOUJRCES AND USES OF FJUIJ1S--PIUFO.E(!rTO14S FOR 'rilE CENTRAl. IIANK OF KENYA. 1978-83
(wil Sh. 1977 pricaS)
f SOURCES - -- ItSES3
Stnci: as at Pruj.cted Stock as at Projected Stuck as at 1t Sltl as at Projecred Stock as at Projec[e' Sto,:k a,. cJuine 1977 InCrea6es June 1983 Increasea June 1933 Itasi Jutnae 1977 JnzraaAes Iunie 1933 incrias-i Ju:: !±:S3
(AHs. 1) (Az;s. 1) (Ass. 2) (As: . 2a (Ass. 1) (Ass. 1) (Ass. 2) t .; . 2
1 rv- .. ,, 325M.E7 713.35 3964.02 733.59 3914.26 1 fll. vLernmwuc 941.23 954.60 2124,59 .4e na 6a) govarnintnt securities 741.23 (354 (1#)9583 293.,/ 1234.67
I-L ln ! la..,a Ituar inp.a 14/.5.51 101,56 15117.9 121.80 1607.33/a i b) direc advantces 200.00 ( (a) :.x- Lr.rci al bank ra5arv. 1240.45 46.85 12S7.30 61.74 1302.19 | c) transfer of Cb1; profits I- /d 600.00 600.00 330.00/f 3 0.03
i9 L:.eV ina. inst. 245.08 54.71 299.79 60.06 305.14' .1
2. I muntictiil In-stlEtictons -'A - l5IY : :.1 C.' irr.rne. In Circulation J/, 1765.14 61179 2376.93 611.79 2376.93 i a) cansuiarcial batiks -
b) ather private fin. inst. -- -- -- - --2 Profits /c 228.76 600.00 8Z8.76 600.00 828.76 c) pLublic fin. lnst. -- -- -- 440.15
3. Total li.ao,rcsC. 1/.79.43 1313.35 4792.78 1333.59 4813.02 3. Othler Uilau 2538.20 358.75 266A.19 !7nEAno/h 2S9.3.20a) lindnti-ty fund -- -- -- 90.0 o--b) agriculture fund -- -- -- 90.00 --c) training fund -- -- . -- 90.00 --d) ocrlar 2538.20 353.75 2668.19 -- 253i.20
4. Totallseg 3479.43 1313.35 4792.73 1331.59 43t-3.k2
l.a 19d3 !'anI Reserves at 10 p&rcent of projected Local deposits ultih banks and tio!aa-bank fgn, inst.C:a:c:a1 r. LL- 6 percr--it
,. pru.fits per antioiw projecEed at 100 saill. e1a.t I ',J7 VFX cr a.ruf ns trsnsfurre-d to cencral government ara aiacluided In -"Other Uses".
. ta inrn::se In P.eerv. Monuy.
:- 1' of incremsz In Res.rve Vaoziay' 45,.f CIIK profics.
.,-
T'able AVIJ.2: SMIRCcES ANU II U IS OF VlOtIIIs--pnnJIcciro,s Vlt TIII CAMERCIICAL. BAUKS. I91mi-83
(edi. sh. 1977 prices)
- SOURCES ---- - - - - -- USES - -- *--. .. ..
SrockJun 17 Precse Stock J e at Projecaed June 198 Stack asr at Projected Stock as at Prajected Sttocl as acStoc June 1977 increae JuSoe 1983 itPcreaje Juted IM June 1977 increase June 1983 increas.e Jur.. 1983(tss. 1) Ass. .) (Ass. 2) (Ass. 2) (Ass. 1) (Ass. 1) (Ass. 2) (Ass. 2)
IC.1 pluaa.:d IXPUtLcs 5764.40 2
098.83/;a 7863.23 2098.83 7863.23 1. Filinclal Iailtturions 1954.77 401.12 2355.S9 1025.01 2f79.7S. a) halancoa at CBK 1240.45 46.85 1287.301n 61.74 1302.10EA -. rn C.lla6ftd 3520.91 1488.91/a 5009.8i 1637.79/b 5158.71 b) loana to private fin. inst. 269.32 136.26 405.58 136.26 405.5S
c) credits to public tin. insc. 445.00 218.01 663.01 -445.00 --. n..,, 9285.31 3137.74 12873.05 3736.62 13521.94 d) approved securitieu -- -- -- 1272.01/e 1272.01c,ntral a 3gv.rnnent 386.8 BS 134 .91) 521.75 1 34.-90 521.75!'v:ern,nt eiEnterprises 1352.30 615.30 1967.60 615.30 1967.60 2. Covernmsent, 191.60 70H.53. l Fl 105.53 !f9la.I3priv.at b.-ccor 7546.16 2837.54 10383.70 2986.43/b 10532.59 a) caticral Covernmant * 1712.02 681.28 2393.30 681.2S 2 33. 30
and Pc,ervL:. L 654.35 504.25 1158.60 504.25 1158.60 government enterpriaes 179.58 27.25 206.83 27.25 206 83
3. Privire Sector 5637.85 22713.84 7Q113 6 18T!:.l% 7.,a1ll Besourc.d 9939.66 4091.99 14031.65 4240.87 . 14180.54 a) agriculture 868.38 1320.04 2138.41'L 13.5.35 2213.73 Lf.b) manufacturing 1076.50 272.51 1349.01 13S.85 1215.35c) contstructiont 574.37 136.26 710.63 67.03 641.4ad) rrade 1433.26 193.76 1624.02 95.76 1529.02e) transportation 165.17 27.25 192.42 14.36 119.53f) personal loans 656.22 136.26 792.48 67.03 723.258) other 863.95 190.76 1054.71 95.77 95;.72
4. Other Ulsds 455.Z4 7108.50 1163.94 6M.19 1!i.:l
5. Total Uses 9939.66 4091.99 14031.65 4220.d0 1Ll?.'. '
: for um!erlying assunptions.-iw.
1 r a 10Ir.ercent Increase in turk. deposits In responise to recomaended changes inr-n trucLure of iiicerest rates oni deposits.
,':c..ld troi:ch ac 10 percene per annun projected.oj.cc1.2 I.alinces WcLIh CB:; aC 10 percent of tocal deposits projected.JjeztL 2 purchat.u of approved securities at 15 percent of toctl deposits.
7 r Xnc of projected total deposiEs.
C1.
: -.bhiAVrF.I . Sl(M11C0I AHn uSFS OF ItIffrl--MlrFATTANS FOR TH 11VAI'r le NOff-iIAIIK PII4NACTAI. TNSTITWTPOrII 197. -L3
(mll.Sh 197T pricee)
Sources IlsesIte:m Stock at Projccted Stack an at Projected Stock flu at Item Stock at ProJected Stocki as at ProJeete.j Stock as atJunle 1977 Increase Julie 1983 increaue Juine 3983 June 1977 increase June 1983 increase Ju:ne 1'-J3(Ass. 1) (Aso. 1) (Ann. 2) (Ass. 2)
(Ass. 1) (ASS. I) (Ass. 2) (Ass3 2 i1. T,3tai -",Posits 1775.73 122215_ - 297l.683 1 2 7 5 . 3 5 3051.08 1. F'riancial litstitutions 1861.60 143.145 32i.05 636.105 ,Oc.' Ra) balances at CBK - 299.79 2s9.79 335.14 5,11Ce.tra1 iover,rr.ar.t 229.121 358.13 129.18 358 . i3 b) net balaiceas at otherb) E:neer:::re:t E.Lexprises L450.03 5(0.97 1011.05 56o.9? 1011.05 financial institutionas 1841.60 -156.314 23.26 -156.314t, 25.2{c) Priiate Sector 10¶i6.Ii 532.00 1628.t10 585.20 i681.60 c) approved securities - - - 1457. cc'
2. C!1Za1 S :eseres3 153.03 11.08 271.11 1113.0 27'.11 2. Governmenit 1211.18 12(1.75 253 .(1( 12.),^1 2935>a ) Central Gove:rnment 7.24 1.22 23. 4; 1u.22 23.4xo3. Crelit x'roa- 4-1err.uenta 93.96 2412.02 375.98 -93.96 - b) Gov't. Etnterprises 116.94 113.56 233.50 113.56 233.564. Total Seszulrces 2022.72 1622.25 361,41,97 1299.h1? 3322.19 3. Private Sector 1572.93 13i6.57 2_4__50 5_3__- ___
a agriculture - 509.614 50-).b14 53-).&;b) manufacturing 142.87 113.56 250.43 2.63 145.147c) constractlon 409.08 129.78 533.86 3.13 412.26d) trade 222.88 194.67 417.55 14.66 227.5!e) transportation - - - - -f) pernonal lons 7145.99 368.92 1114.91 10.70 756.69a) other 52.11 - 52.11 - 52.111. Other Uses 141.01 32.45 173.JI6 32.115 1?3. 46
5. otal Uses 2022.72 1622.25 3644.97 120)..47 3322.1')
; See text for un!erlyir.g assum:ptions.7S Ass.Int: a 103,,, increase in private sector term deposits in response to recommended changea In term structure of Interest rates on deposits.13 Fr>]ectel ,-'o:rtn rate = 0ot.7T Froiected grotrth rate - 26.7i Assr:lna 19~ of deposits held at CBK.7 A As-=.In gi, of' deposits held in approved securities.77 r oaf depsits.
-*
I0
Table AVIT..: .SOuCES Ail) lSlES OFp nmIri--Pno0.ICTrtrNS i R 'I'tl IISSP, PO)'11 AND) IIISJIIRAtCE SECTOR 19783-13
Sour;es UsesStock at Projected Stock an aEt Projected -Stock at at SLock at Projected Stoci; as at Prajectei St LSIter Jur.e 1977 Increase June 19813. Irncreaee June I9 q3 Itema June 1.977 tncreaue Julne 10'V3 in;reese J I:: l;(Asn. 1) (Ass. 1) (Ass. 2) (Ass. 2) (Ass. 1) (Ass. 1) (As*. 2) EArs. 21
1. Z;St 1. NSSF 2173.41d 2302.11 41,75,55 3t,:25 5-j5.,aW Cor.Lrllctorn Fun1, Reservc .:) Government2a:.a , trt Ltourcl a 2173.1. 230e2.1eLr ,1475 55 36832.56- 5856.00 securitle 6 i630t)" 2302.11 3932,19 1,41.23 3471.36b) Approved aecurittea- - - - 1941.2? l1.232. i-3
c) Other 5113.36* - 513.36 - 543.3.^I:ta1e-ce d:e DepositorsagA Other E3urcez 211.81. 1081.1 320.28 n.a. n.a. 2. POSS 211.t4* IM' li4 32J.21
a) Govt. aecurities 110.1lo lb0 9 1 o53. I:e t.s:rat.e Co'n. b) Othier uecuritlea 27.54 - 27.54 n.a. n.a.aj Lil'e lund and Otlher Sources 1050.311 131.814.4 1182.18 n.a. n.a. c) Other uses 74.14. 37.95 112.09
14. fliz-LI+e tr.irarar.na Co*,c 3e Llte lanureuce Coln. 1050.31a 131.34 11612.18a) Thsurence Furd and 6,5 a) Govt. securities 105.03 3.o 1X1.090t'.er Sources 632.03 1 0 711i1 1706.21. n.a. b) Loana 241.58 34.55 201.]3 u.s.
C) Other 703.73 Bi.33 792.G 06It. Hon-M. fe Inatnrancen Cola. 632.03* 1071A.18 17o5.2i
a) Govt. tnecurities lIFl,-' 13.96 32.92b) Loanu 37.92' 93.145 131.37 n.a. n.a.c) Other 575.15* 966.77 15141.92
* ~S- r.ate ./1 ?rojecte'J rate or growth 6 (IISSF contributlorus expected to grov part esanui uith total remuneration to employeea; the latter expected to grow at the GO? rate of growth).75 ::S- puolicy chasn,a allolni for a 7O, in.crease ir, contributiouna In 1979 and thereaLfter.*73 Rate of gra-.rth h 4,% (asstLuing a conntar.t ratio to total deposita in other financial Institutions ).7li roJ-ctel rate or grawtti - 3% (past trentd).
73 Pr-jecte! rate of arowth - 18% (pa-t trend).76 Reco=enled policy of allocating 30% each of increased contributiona to Governmeant Securities and Approved Securities.
ANNEX I
Anniex 1
ANNEX I: FINANCIAL POLICY FRMA1E WORK
Priority Classificationof Policy Recommendation Critical Important Desirnble - Remarks-- -- --------------------------------------------------------------------------------- - ------- - - ---- -- -- -- ----
Time ilorizon for Short- Miedium-to- Short- Medium-to- Sliort- Medium-to-Imp lementation term long term term -long termi term iong termi
Functional Classification'of Policy Rlecommendacions:
Mtarginal Niodifications 2In Existing Policies 4
67 3
10 1
9*
- - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - -New Functions 14
16182930
20*22*27*31*
15*
1719*21*23*24*26*25*28*
- - - - -- - - - - - - - - - - - - - - - - - - -32* -
Reorganization of 34* 33Old Functions 35*
**Critical Preparatory work required.
73.
'M odifidations in Etisting Policies
Policy Identi- Paragraph No.f ication No. in Report
1 Modification of Commercial Bank AnnualReserve Policy A-3
2 Insurance Companies Control by CBK orMinistry of Finance A-4
3 Reserves Policy of Insurance Companies A-4
4 CBR empowered to collect data fromCo-operative Unions A-5
5 Minimum Deposit Rates for Deposits ofVarious Maturities A-7
6 Maximun Lending Rates for SSEs A-8; B-5
7 NSSF increased mobilization and modifiedallocation E-1-3
* 8 Modification in P.O.S..B. operations F-1-2
* 9 Modification of Personal Income Tax Base 6-2
10 Modification of Capital Gains Tax 6-3
* 11 Modification of Corporate Tax Base 6-3
12 Encouragement of LMutual Fund Activity 6-4
13 Tax Exemption of Public Non-Bank FinancialInstitutions Profit Transfers to Reserves 6-5
74.
New Functions
Polic7 Identi- Paragraph No..fication, No. in Report
14 CBK Cash Ratio A-2
*15 CBK issuance of Price-Indexed Bonds A-6
16 CBK Control of Approved SecuritiesInvestments by all banks, non-bankprivate financial institutions andinsurance companies A-10-11
17 Partial Disposition of CBK Profits intoan Industrial Development Fund, Agricul-tural Development Fund and a Training Fund A-12-15
18 Sectoral Credit Distribution by banks andnon-banking financial institutions A-16
*19 Lead Institutioa Strategy Planning by CBK A-17-18;and Implementation by Financial Institutions B-3-4; 3-2
*20 Credit Guarantee Scheme A-19
*21 Deposit Insurance Scheme A-20
*22 Financial Planning and Policy Researchby CBK A-22
*23 Financial Development Institute under CBK A-25-27
*24 Banker's Training Institute A-31-32
*25 Banking Diploma Course at University ofNairobi A-33-34
*26 District-Level-Co-operative TrainingInstitutes A-35
*27 Introduction of New Financial Instrumentsby Commercial Banks B-6-10
*28 Evolution of AFC into a full-fledgedAgricultural Development Bank C-3; C-5
75.
New Functions
Policy Identi- Paragraph No.fication No. in Report
29 AFC lending for subsistence during crop-failures C-6
30 Issuance of Development Bonds (ApprovedSecurities) by ICDC, IDB, DFCK and KIE D-1
*31 Network of Managerial Technical Services D-2< z-1 toCentres-expanded and co-ordinated 2-17functions in project identificatioi,design and evaluation, agricultural andindustrial, large and small
*32 District Development Centers 3-3
71i,
Re-Organization of Old Functions
Policy Identi- Paragraph No.fication No. in Report
33 Banking Sections of Co-operative Unionsto become branches of Co-operative Bank A-5 and C-1
*34 District Level. Project identificationCenter for Industry (currently underRural Industrial Development Centers). C-4
*35 Managerial Technical Service Centers toundertake and expand the project identi-fication design and evaluation ?ork donepresently and independentlyi by ICDC, IDB,DECK, KIE. D-2; 0-4
* Critical Preparatpry Work Required.
PART II - THE INSTITUTIONAL FRAMEWORK
CONTENTS'Page Nos.
I. Introduction 1
II. Commercial Banks 2
a) Historical Background 2b) Branch Distribution 3c) Sources and Uses of Funds 9d) Comparative Analysis of the Loan Portfolio of
the Three Major Banks 18
III. Private Non-Bank Financial Institutions 20
IV. Public Financial Institution>- 28
a) Agricultural Development Finance Institutions 31b) Industrial Development Finance Institutions 37c) fousing Development Finance Institutions 45
V. Financial Intermediaries in the Public Sector 49
a) National Social Security Fund (NSSF) 49b) Post Office Savings Bank (POSB) 51
VI. The Co-operative System 54
VII. The Regulatory Powers of the Central Bank 59
a) Regulatory Framework 59b) Regulatory Instruments 59c) Interest Rates 60
VIII. A Comparison of Transaction Costs of Financial Institutions 63
a) Transactior, Costs of Kenyan Financia.l Institutions 63b) A Comparison with Financial Institutions of Other LDC's 65
LIST OF TABLES
Table No. Page No
I1.1 Commercial Banks.: Branches, Loans and Deposits by Province 4
II.2 Branch Distribution of Commercial Banks, Their Loans, Deposits
and Profitiability 6
I1.3 Branch Distribution of KCB, Barclays and Standard Banks 8
II.4 Commercial Banks: Summary Balance Sheet 10
II.5 Commercial Banks: Percentage Distribution of Assets and
Liabiiities 11
II.6 Commercial Banks: Ownership of Deposits
II.7 Commercial '3anks: Analysis of Bills, Loans and Advances 12
II.8 Commercial Banks: Agricultural Credit by Type of Farmer 15
II.9 Commetcial Banks: Agricultural Credit by Maturity of Loan 16
II.10 Analysis of Bills, Loans and Advances of KCB, Barclays& Standard 19
11.1 Non-bank Private Financial Institutionsk Summary Balance Sheet 22
III.2 Non-bank Private Financial Institutions: Ownership of Deposits 24
III.3 Non-bank Private Financial Institutions: Sectoral Alloca-
tion of Loans 25
III.4 Relative Position of Private Non-bank Financial Intermediaries
and Commercial Banks: Assets, Deposits and Loans and Advances 27
IV.1 Public Sector financial Institutions: Consolidated BalanceSheet 29
IV.2 AFC: Assets and Liabilities 32
IV.3 AFC: Analysis of Loans Approved 33
IV.4 ADC: Summary Balance Sheet 36
IV.5 ICDC: Summary Balance Sheet 38
IV.6 ICDC: Loans and Advances 39
Iv.7 DFCK: Summary Balance Sheet 42
IV.8 IDB: SumTnmary Balance Sheet 44
LIST OF TABLES CONTINUED
Table Noa Page No.
Wvf9 HFCK: Summary Balance Sheet 46
IV.1Q NHCK: SuTmmnry Balance Sheet 48
V.1 National Social Security Fund: Assets and Liabilities 50
VL.2 Post Office Savings Bank: Deposits and Withdrawals 53
VII.1 Structure of Interest Rates - 1967-76 62
VIII.1 Transaction Costs of Major Financial Institutions in Kenya 66
VIII.2 Administrative Costs: Selected LDC Credit Institutions 67
VIII.3 Cost Structure of Selected Financial Institutions,Philippines, Mauritius and India 68
PART II
The Institutional Framework of the Kenyan Financial Sector
I. INTRODUCTION
Kenya possesses a financial structure of substantial size and
complexity, particularly when compared with the country's still moderate
level of development. The financial system has institutional as well as
functional diversity. In addition to thirteen commercial banks and a Post
Office Savings Bank, there are a growing number of non-bank private
financial institutions providing hire purchases facilities, merchant
banking services, housing finance and other specialised services. There
is also a social security system covering the majority of the salaried
population, and numerous life insurance companies. Serving mainly the
needs of the industrial and commercial sectors are three development
finance institutions, and a small stock exchange. The financial require-
ments of the agricultural sector are provided by an agricultural finance
company, a development bank, and a cooperative system.
The financial institutions have also a wide geographical coverage;
commercial banks alone have more tharn onie hundred branches, in addition to
over one hundred and fifty sub-branches and agencies. This amounts to 18
bank offices per million inhabitants. The Post Office Savings Bank has an
even wider branch network. It is true that branch distribution is uneven,
but no more so than the geographical distribution of economic activity.
Also on the positive side, Kenya has a highly literate population which is
familiar with the banking habit.
This is a strong base on which a vital and innovative financial
structure can be developed; our recommendations serve this purpose.
2.
II, THE COMMERCIAL BANKS
(a) Historical Background
Of all Kenyan financial institutions, the commercial banks have
the longest history. Commercial banking dates back to the turn of the
century when the British presence in Kenya was first established. The three
banks-' which were set up followed the development of trade in the colonies
and concentrated on its finance. These banks soon were
able to collect deposits locally in excess of what they would use in Kenya,
and these surplus funds were invested in London. Following half a century
of banking by these three banks, several new banks began operations in Kenya,
mostly in the urban centres. These were the Nederlandsche Eandel-Maatschappij,
a Dutch bank incorporated in the Netherlands, and now renamed the General Bank
of the Netherlands in 1951; two Indian banks, the Bank of India and the Bank
of Baroda in 1953 and Habib Bank in 1956. Two years later, the Ottoman Bank
as well as the Commercial Bank of Africa were established.
During the late 1960's, commercial banking developed in a different
direction with the establishment of three locally-owned banks. In January 1968,
the Co-operative Bank of Kenya Limited was registered under the Co-operative
Societies Act as well as under the Banking Act. The bank is owned by members
1/ National Bank of India, which later became the National and Grindlays, andoperated mainly in India; the Standard Bank of South Africa, which laterbecame the Standard Bank; and the National Bank of South Africa, whichamalgamated with the Colonial Bank and the Anglo-Egyptian Bank to formBarclays Bank in 1916.
3,
of the co-operative movement and serves the needs of the members. A second
bank, the National Bank of Kenya, was established in June 1968, wholly-owned
by the Government. The business of the Ottoman Bank was taken over by the
National and Grindlays Bank in March 1969, and two years later, the latter ceased
operating with the introduction of Government participation. Its commercial
banking activities were taken over by the new Kenya Commercial Bank Ltd., in
which the Government.owned 60 percent. The merchant banking activities were
incorporated in a new bank, Grindlays Bank International (Kenya) Ltd., which
was 40 percent Goven-ment owned. In November 1976, the Kenya Government
acquired the 40 percent shareholding in Kenya Commercial Bank previously held
by Grindlays. As a result, the bank is now a wholly Kenya Government-owned
enterprise. Barclays Bank D.C.O. changed its name in September 1971 to
Barclays International Limited when it became a wholly -owned subsidiary of
Barclays Bank Limited. Two American banks were established in Kenya in 1974:
the First National Bank of Chicago and the First National City Bank of New York.
(b) Branch Distribution
The thirteen commercial banks currently operating in Kenya have
over 103 bank branches, in addition to over 150 sub-branches and agencies,
and several mobile bank units which visit rural centres at regular intervals.
In terms of 1977 population,- this amounts to 18 bank offices or 7 full branches_
per million of population, quite an extensive network for a developing country.2/
/ Projections from Kenva Statistical D±xestt, CentraL3ureau of StatisticsSeptember 1972.
2/ The number of offices per million of population for other selected developingcountries in 1970 were: Algeria - 6,22;Botswana - 31.86; Cameroon - 5.28;Ethiopia - 3.27; Ghana - 22.44; Nigeria - 4.62; Tanzania - 3.17; Zambia - 33.97;India - 10.21; Philippines - 6.67; Taiwan - 20.29; Brazil - 41.45; Mexico - 20,42;Source: U.Tun Wai, Financial Intermediaries and National Savings in DevelopingCountries CNew York: Praeger Publishers, 1972), Table 6, pp. 36-40.
4.
Table I1.1: COMMERCIAL BANKS: BRANCHES, LOANS AND DEPOSITS B-T PROVINCE
(Percentage distribution as of December 31, 1977)
Province Bank Branches OutstandingLoans Deposits
Nairobi 30.6 71.0 63.3
Coastal 17.9 11.0 16.5of which Mombasa District 13.4 11.6 16.0
North-Eastern 0.7 0.02 0.06
Eastern 6.7 1.5 2.8
Central 15.7 4.2 6.7of which Kiambu District 9.0 2.5 3.7
Rift Valley 14.9 7.2 6.4of which Nakuru District 6.0 3.4 3.0
Nyanza 8.2 3.5 3.1of which Kisumu District 3.7 2.9 2.0
Western 5.2 0.7 1.2
TOTAL 100.0 100.0 100.0
5
Distribution of bank branches, however, is uneven. Thirty percent are
in Nairobi alone, although Nairobi comprises only five percent of the total
1/population.- A further thirteen percent of the bank branches are in Mombasa,
which has less than three percent of the population. In fact, the major urban
centres of Nairobi, Mombasa., Kiambu, Nakuru and Kisumu wilich comprise 19 percent of
the population have 63 percent of all bank branches (Table 11 1). On a provincial
basis, the North-Eastern, Easiern, Western and Nyanza provinces had the
fewest bank branches, with the Nairobi, Coastal, Central and Rift Valley
provinces better endowed.
In terms of bank branches per head of population, the picture is
similar; the four provinces of the North-east, East, Nyanza and West fared
poorly, each with only 4 bank branches per million inhabitants (TableII.2).
In fact, the North-Eastern province had only one branch, owned by Barclays
Bank, in Garissa. The Rift Valley province also had few branches (7 per million
inhabitants),and if the "urbanised" district of Nakuru is excluded, the distri-
bution is reduced to a sparse 2 branches per million population. By contrast,
there were more than 50 branches per million inhabitants in Nairobi, and the
Coastal and Central Provinces also had a good branch network (19 and 17
branches per million population, respectively.)
The distribution of outstanding loans and deposits were even
more heavily concentrated in the Nairobi-Mombasa districts than the branch
network. These two districts had received 83 percent of outstanding loans
of commercial banks and accounted for 80 percent of deposits. (Table 1I.1).
1/ Population data from Kenya Statistical Digest,
- so c r31, i?)
0utstanding Average Loan?, z e:t,t Prp1:letion No.of Bank No. oIf Bank Braniches Ifemns DonIns1
ts Deposit Pro f .- sz(1977 EEt.000) Branches per Thous. Popnilation (K sli. milU)ODl)
,;a:,o Narobi 776 41 0.053 45'39.2 7656.o 65.c 314Coas'taT 1 3 rI 3 0.T 13.2 29.2 44.'j- 2
- le 263 - - -21 1 0.0o4l 2.0 5.1 31s,5, - 1
371 19 0.049 746.7 1934.6 541.35; 15136, 2 0.015 4.2 21.3 Nq. % -
,: ?-e r 61--------
123(3 24 0.019 766.1 1990.9 1h9* 14 17
r s * a 71 1 o.o014 1.0 7.0 1A4,3% -103 - - - - - -
_ _-_ 95 - - - - - -
_______= 269 1 0.014 1.0 7.0 111.3% -
23stern ;- 246 3 0.012 31.1 93.7 33.5% 2 i33
' 91 1 0,002 4.6 17.1 26.0% - II"" .1eS 597 1 0,001 13.3 59.9 35.1% 1 I
:*lSs;tt 55 - -2- h 0.005 4114.7 ]67.3 28.o, 2 2
7 _ -21124 9 0.ool0 93.7 338.0 211.3 5
e5;tral 12 0.020 158.8 41.6.o 39.)0 6:' rl y--a 277 * 1 0.004 11.0 67.0 16.1i 1
565 * 2 0.0011 30.0 95.3 33.2, 214L 234: 1 0o,04 8.7 21.2 41.0% 1
:' __r: 471 5 0.011 63.o 195.7 32.11% 3
' - 1239 21 0.017 271.5 815.2 36.0% 13
-;hfilley L~r;-:.;o 171 - - - - - -
192 - - - - -y 110 - -
6fS7 4 0.006 29.4 120.2 31.0,. 1 373 2 0.027 44. 4 53.9 82.3% 1 1
0307 8 0,21 219.6 364,4 46.o , 1 1270 1 0.003 6.6 11.7 56.4 / - 11'r:'146 - .i - - -/ -
EwL- *,rn 86 - - - - - --Iran 'Izola 1831 2 0.011 56.0 67.0 82.7 1 1
T : -- 166a - - - - - --hu 270 3 0.011 1
!;Yrr!Z.T, t '' 893 3 0.003 19.6 99.1 19.64 2 1550 5 0.009 190.0 238.1 72.A% 5
Cc,a9 1 0.002 4.0 13.5 29. ( - 1S) 4 >:.za 907 2 0.002 114.9 21.4 73.0 1 1
T-. ___ 28115 ]1 0.001 228.1h 371.1 514. 1% 3
":ester. r.ase:a 10';4 2 0.002 21.3 79.9 56.1% -3492 11 0.003 21.5 114.7 11.5$ 2 2
81:sla 252 0.003 1.7 14.7 ii.6%
o-L -- 1797 7 0.0011 411.5 139.3 3Q.T, 2 5
3 1- -9 t 12 0.009 6h62.2 120(11.4 7 51 Qt 02 42
7.
A comparison of the average loan/deposit ratios for bank branches
indicates a net inflow of f0undsto Nairobi- Mombasa districts, and to the _-__
Rift Valley and Nyanza provinces. The loan/deposit ratios were particularly
low in the Eastern and North-Eastern provinces, and in certain districts of
the Central and Western provinces (Table l.2).
Almost half of al'l bank branches recorded a net loss in their
accounts in 1977 (TableIt.2) and these tended to be located in the less
populous areas.. Of the seven branches in the Western province, five made a
net loss last year. The only branch in the North-Eastern province as well as
four of the nine branches in the Eastern province made a net loss. Those
branches operating in the districts of Nairobi, Mombasa, Nakuru, and Kisumu
were more profitable.
The branch network is dominated by three banks: KCB which has 37
branches, Barclays which has 36 and Standard which has 32 (Table I.3). The
other banks are located only in Nairobi and Mombasa except for the Bank of
Baroda and the National Bank of Kenya both of whi.h have two additional branches, the
former in Kiambu and Kisumu, and the latter in Nakuru and Kisumu. FNCB is only
located in Nairobi, attracting a large volume of deposits (K.sh. 236m.) and
with a substantial loan portfolio (K.'sh. 140m.) The Commercial Bank of Africa
has two branches in Nairobi and ovie in Mombasa. Its Nairobi branches have been
- very successful in attracting depostts; tF&y amount to K. sh. 520m., one-quarter of th
total deposits of Barclays Bank which has 36 branches. Similarly, National Bank of
Kenya has only six branches, three in Nairobi and one in Mombasa, and these few branch
have attracted deposits of K. sh. 1272 million,.more than half the total deposits
of Barclays and slightly less than half of those of KCB.
With the three major banks, the bulk of deposits are also
Table II. 3: BRLANCII DISTRIBUTION OF KCB, BARCTAYS , AND STANDARD BANKS(Amounts in K Sh. millions, as of Dec. 31, 1977)
-K.C.B Barclays StandardNo, of No, MakLng Outstandfn, No. of No. NIakini Outstanding No, of No. Making OutstandingProvince Branches Profit Loss Loans Deposits Branches Profit Loss Loans Deposits Branches Profit Loss Loans Deposits
Nairobi 6 6 - 951.6 1045.9 12 9 3 774.0 1270.0 8 5 3 792.4 1230.9Coastal 5 2 3 166.8 351.6 4 3 1 163.0 198.0 4 3 1 169.3 180.9Of which* ombasa District 2 2 - 160.5 323.3 3 2 1 156.0 183.0 2 2 - 163.2 167.9Nortl-Eastern - - - - - 1 - 1 1.0 7.0 -
Eastern 4 4 - 47.0 172.9 3 1 2 29.0 90,.0 3 'I 2 29.1 107.6Central 10 10 - 141.8 486.7 5 2 3 57.0 142.0 5 1 4 51.7 156.5O f w lhi clh
Kiamby District 3 3 - 53.3 174.6 4 2 2 51.0 118.0 4 1 3 33.5 123.4Rift Vallev 5 4 1 112.0 207.1 7 5 2 206.0 233.0 7 3 4 90.9 210.8* ~~Of whiich
_ ____Nakumf u District 2 2 1 57.0 97.8 3 , 2 1 63,0 98.0 2 2 - 40.7 72.0
4 3. 1 118.1 167.0 3 2 1 39.0 94.0 2 1 1 41.9 70.8Of whichlKisu=u District 1 1 - 96.1 108.3 1 1 - 24.0 50.0 1 1 - 40.5 40.5Wlestern 3 2 1 27.9 63.8 1 - 1 4.0 12.0 3 - 3 12.6 422Total 37 21 6 1565.2 2495.0 36 22 14 1273.0 2046.0 32 14 18 1187.9 1999.7
-r = , , -: -- --- = : = .-. =-
9
raised in Nairobi and Mombasa. Together, they have attracted K. sh. 6541 million
deposits, 65 percent of which were raised in these two urban centres (Table II.3)
K.C.B. has had more success in mobilizing deposits outside of these two cities.
Forty-five percent of its deposits are from other areas, mostly from the Central
Province, and to a lesser extent, from the Rift Valley Province.
Of particular interest is the fact that a far larger share of
K.C.B. branches made,a profit in 1977 than either Barclays or Standard Bank.
Of the 37 branches of K.C.B., only 6 made a net loss in 1977, compared with
14 of Barclays' 36 branches and 18 of Standard's 32 branches. The performance
of Standard Bank is particularly surprising, with a majority of its branches
running at a net loss. Those branches which are not profitable are located
mostly in the Eastern, Western and Central Provinces. Even in Nairobi, however,
Barclays and Standard both had three branches making a loss. One explanation
for this could be the recent establishment of certain foreign banks like
FNCB in Nairobi which apparently have succeeded in attracting some of
the more lucrative business away from the longer established banks. K.C.B.
however , apparently has not suffered from this competition, since all of its
six branches in Nairobi, as well as the two in 'Mombasa, are profitable.
c) Souirces and Uses of Funds
Commercial banks obtain more than eighty percent of their funds
from deposits, particularly demand deposits, which make up more than half
their total funds (Tables II.4 and 1I.5). Capital and reserves comprise an
additional six percent of total liabilities. The bulk of deposits are
owned by the private sector (70 percent), with the Government (mostly government
enterprises) owning a fuirther 18 percent and financial institutions and non-
residents owning the balance (Table II.6).
Table 11.4: COMMERCIAL BANKS: SUMMARY BALANCE SHEET(end June; K. sh. million)
1974 1975 1976 1977
ASSE'TS
Cash 374.35 458.64 484.51 1467.63
Notes and Coin (Domestic) 116.80 161.01 189.32 217.20Balatnces at Central Bank 253.52 291.19 285.43 1240.45
Notes and Coin (Foreign) 4.03 6.44 9.76 9.98Balances Due by: 324.43 263.66 226.82 408.06
Kenya Banks 180.67 140.37 123.55 272.38Foreign Banks 143.76 123.29 103.27 135.68
Treasury Bills 408.67 424.12 815.33 1498.85Bills Discounted, Loans and Advances 3934.60 4243.05 5171.87 6119.28Investments 313.58 276.32 297.81 625.95Other Assets 711.28 838.21 1002.36 1203.78
l'otal Assets 6066.91 6504.00 7998.70 11323,55
LIAWfLTTIES
Deposits 5102.70 5375.18 6716.48 9556.69
Demand 3406.05 3259.35 4159.32 6035.88Time 621.29 910.70 1156.86 1753.79Savings 1075.36 1205.13 1400.30 1769.02
Balances Due to: 327.43 328.84 265.33 382.91
Central Bank - 28.99 13,95Kenyan Banks 139.36 147,44 120.21 226,34Foreigii Banks 188.07 152.41 131.17 156.57
Bills Payable and nther Loans 84.68 113.77 144.85 235.55Capital and Reserve 349,90 391.99 500.56 654.35Other Liabilities 202,20 294.22 371.47 494q05
Total Liabilities 6066.91 6504.00 7998.70 11323.55I I
Table Ir. 5* CO}4ERCIAL BANKS: -PERCENTAGE DISTRIBUTION OF ASSETS AND LIABILITIES(End June)
1974 1975 1976 1977
ASSETS
Cash 6.2 2.1 6.1 13.0
Notes and Coin (Domestic) 1.9 2.5 2.4 1.9Balances at Central Bank 4.2 4.5 3.6 11.0Notes and Coin CForeignl 0.1 0.1 0.1 0.1
Balances. 5.3 4.1 2.8 3.6
Kenya Banks 3.0 2.2 1.5 2.4Foreign Banks 2.4 1.9 1.3 1.2
Treasury Bills 6.7 6.5 10.2 13.2Bills Discounted, Loans and Advances 64.9 65.2 64.7 54.0Investments 5.2 4.2 3.7 5.5Otber Assets 11.7 12.9 12.5 10.6
Total Assets 100.0 100.0 100.0 100.0
LIABILITIES
Deposits 84.1 82.6 84.0 84.4
Demand 56.1 50.1 52.0 53.3Time 10.2 14.0 14.5 15.5Savings 17.7 18.5 17.5 15.6
Balance Due to: 5.4 5.1 3.3 3.4
Central Bank - 0.4 0.2 -Kenyan Banks 2.3 2.3 1,5 2.0Foreign Banks 3.1 2.3 1.6 1.4
Bills Payable and other Loans 1.4 1.7 1.8 2.1Capital and Reserve 5.8 6.0 6.3 5.8Other Liabilities 3.3 4.5 4.6 4.4
Total Liabilities 100.0 100.0 100.0 100.0
Table II.7:- Comnercial Banks Analysis of Bills Loans and Adva__es( Amount in K sh. million)'
1974 1975 1976 1977Amount (As % of Amount (As % of Amount (As % of Amount (As % ofTotal) Total) Total)Recipient Sector
I. Public Sector 165.15 (.4,0) 297.67 (6.4) 225,25 (4,2) 253,75 (3.5)(a) Government 54.97 (1.3) 113.25 (2.4) 88,90 (1],7) 105,33 (1,(b) Other Public Entities 110.18 (2.6) 184.42 (3,9) 136.35 (2,6) 148,42 (2.1)II. Enterprises 3619.06 (86.9) 3944.95 (84,3) 4531.80 (85,3) 6239,01 (86,4)(a) Agriculture 481.39 (11.6) 736.96 (15.7) 813,18 (15,3) 1087, *90 (15,1)(b) Manufacturing 796.07 (19.1) 838.51 (17.9) 924.01 (17,4) 1225,88 (17.0)(c) Building and Construction 294.07 (7.1) 217.31 (4.6) 296.65 (5,6) 341,72 (4.7)(d) Trade 1179.66 (28.3) 1087.43 (23.2) 1135.04 (21.4) 1525.83 (21.1)
(i) Export 354.38 (8.5) 303,22 (6,5) 314.50 (5,9) 348,93 (408)(ii) Import 302.90 (7.3) 265.52 (5,7) 289,59 (5,4) 338,01 (4,71(iii) Domestic 522.38 (12.5) 518.69 Cll,l) 530.95 (10.0) 838,39 (]1Ii)(e) Transportation 140.17 (3,4) 140,17 (3.1) 178,66 (3,4) 269,31 (3,7).(f) Financial Institutions 137.97 (3.3) 128.02 (2,7) 200,62 (318) 418,69 (5,8)(g) Other 589.73 (14.2) 793.55 (16,9) 983,63 (18,5) 1369,68 (19 01
III. Household Sector 379.00 (9.1) 439.14 (9.4) 557.35 (10,5) 732,42 (10C1.)
TOTAL . 4163.21 (100,0) 4681,74 (100.0) 5314,40 (100,00) 7225,23 (100,0)
SOURCE: Economic and Financial Review,Central Bank of Kenya, Various issues,
13.
A striking characteristic of the pattern of commercial bank
deposits is the strong preference for demand deposits to time and saving
deposits. This preference is common to all owners of deposits. The Frivate
sector held sixty percent of its total deposits in demand deposits: government
enterprises particularly favoured demand deposits, which comprised more
than 80 percent of the total (Table II.6)-
Depositors have shown a growing perference for time deposits
in recent years, although the share of time deposits in the total is still
slightly less than savings deposits. Clearly, the interest rate differential
1/of 0.6 percent7- between time and savings deposits has been insufficient to
attract a larger share of funds into longer-term deposits.
Loans and advances have constituted the major but declining
share of the total assets of commercial banks. During the three years 1974 to
1977, they fell from a 65 percent share of total assets to 54 percent. Almost
half of the outstanding credit has gone to the private sector, with trade and
manufacturing enterprises being the main recipients (receiving 21 and 17 percent
of that outstanding credit, respectively, in 1977) (Table II.7).Agriculture received
15% of the tQtal, compared to 12 percent thre-e years earlier, This share
is, however, below the 17 percent figure stipulated by the Central Bank for
commercial bank credit to agriculture. The balance is presumably made up by
commercial bank loans to agriculture through such intermediaries as AFC, ADC
and the co-operatives. This growth in the share of funds channelled to agri-
1/ End 1976 the interest rate paid on savings deposits was 5.00 percent, thatpaid on 9 to 18 months deposits was 5.625 percent, and that paid on 18 to24 months (min. sh. 500,000) was 5.875 percent. See pp.
14.
culture has been at the expense of the shares going to enterprises involved in
manufacture and export trade. This is particularly true of the latter, which in
1977 received about half the share of commercial bank credit which 4t received
four years earlier.
Further analysis of the type of farmer receiving agricultural
credit and of the maturity structure of agricultural credit extended by
commercial banks is provided in Tables II.8 and 11,9, Commercial banks have
responded to exhortations from the Central Bank to extend a larger share of
1/agricultural credit to small-scale farmers- not by increasing the share of
credit which it extends directly to small farmers, but rather by lending more
to agricultural boards in the belief that such institutions can more effectively
channel funds to the small farmer. Such agricultural boards include the
Agricultural Development Corporation, the National Irrigation Board, as well
as various Marketing Boards. The share of outstanding commercial bank
agricultural credit allocated to this group of institutions rose from 1 percent
at the end of .1973 to almost 25 percent at the end of 1977. (Table II.8).
Small-scale farmers received about the same share in 1977 as four years earlier
2/(23 percent); while the shares received by large-scale farmers- and by the
co-operative societies fell. (Table 11.8).
1/ i.e., individual farmers, groups of farmers (not cooperative societies) andcompanies farming with less than 50 hectacres of land.
2/ Individual farmers, groups of farmers (not cooperative societies) andcompanies farming with more than 50 hectacres of land.
Table IT R Commercial Banks - Agricultural Credit by T4ye of Farmer( amounts in K sh . mnillion )
/3/Small-Scale Farnms l.arge-Scale Fains Cooperative Socities Agricultural Boards TotalAmount (As % of Total) Amount (As % of Total) Amount (As % of Total) Amount (As % of Total)
Outstanding as at end of:
1973 Decemlber 70.5 (24.0) 172.0 (53.9) 66.2 (20.8) 4.4 1 (1.4) 319.119714 Marclh 86.2 (27.0) 172.7 (54.1) 45.2 (14.2) 15.4 (4.8) 319.5June 102.9 (29.8) 186.5 (54.0) 44.9 (13.0) II. I (3.3) 345.7Septemnber 109. 4t (26.O) 200.5 (47.6) 63.8 (15.2) 4e7.2 (11.2) 420.9December 103.8 (22.7) 235.3 (51.5) 62.8 (13.8) 54.7 (12.0) 4156.61975 March 106.5 (241.2) 229.7 (52.3) 80.3 (18.3) 22.8 (5.2) 1439.3June 116.2 (23.2) 260.4 (52.1) 81.1 (16.2) 42.2 (8.4) 4g9.g9September 125.4 (20.0) 316.6 (50.4) 119.6 (19.0) 66.6 (10.6) 628.2December 167.0 (23.41) 363.3 (50.9) 941.2 (13.2) 88.7 (7's4) 713.2
1976 March 159,2 (20.4) 398.8 (51.0) 129.3 (16.5) 94.7 (12.1) 782.0June 199.2 (26.8) 344. 4 (46.3) 103.4 (13.9) 96.3 (13.0) 7 43.3September 197.3 (23.8) 1402.0 (48.6) 78.3 ( 9.5) 149.6 (18.1) 827.8Deceimlber 243.5 (2067) 432.2 (47.3) 85.3 ( 9.3) 152.1 (16.7) 913.01977
961977 Mar ch 241.9 (25.3) 443.6 (46.4) 125.1 13.1 1415.8 (15.2) 9564June 224.2 (21.7) 455.2 (4.)i6o.6 15.1 193.7(1.)037* etme'231(23.6) 417.6 (3.1) 61.9 14.5 274.4(2.)17.Decemnber 307.5 (22.7) 517.4 (38.2) 197.9 14.6 330.1 (24.41) 13r52.9
i/ i.e., individual farmers, groups of farmers (not Cooperative Societies) and companies farming with less than 50 hectacres of laud.
3/ i.e., individual farmers groups of carmers (not Cooperative Societies) and companies farming with more than 50 hectacres of land.
3/ AAgz'icultuual Boards include such statutory insti-tutions as A.D.C., Pyrethirum M1arketing Board, K.I.D.A., Cotton Lint and Seed MarketingBoard, National Irrigation Board, Lands limited, etc.
SOURCE: Economic and Financial Re-vie, Central Bank of Kenya, October-December 1976.
Table II.9: Commercial Banks - Agricultural Credit by Maturity of Loan
(amounts in K sh. million)
S h r t T r m1 2/ L o g T e mT o aShort-Term Credit Medium-Term Credit- Long-Term Credit- / Total
Amount (as % of Total) Amount (as % of total) Amount (as % of Total)
Outstanding as at end of:
1973 December 236.0 (74.0) 60.8 (19.1) 22.2 ( 7.0) 319.1
1974 March 222.6 (69.7) 83.6 (26.2) 13.3 ( 4.2) 319.5June 233.9 (67.7) 98.1 (28.4) 13.7 ( 4.0) 345.7September 272.6 (64.8) 106.0 (25.2) 42.4 (10.1) 420.9December 296.7 (65.0) 149.7 (32.8) 37.2 ( 8.2) 456.6
1975 March 302.7 (68.9) 125.5 (28.6) 11.1 ( 2.5) 439.3June 324.8 (65.0) 112.5 (22.5) 44.7 ( 8.9) 499.9September 431.1 (68.6) 174.9 (27.9) 22.1 ( 3.5) 628.1December 536.5 (71.6) 190.0 (25.4) 2.2.6 ( 3.0) 749.1
1976 March 606.0 (77.5) 141.6 (18.1) 34.5 ( 4.4) 782.1June 538.0 (72.4) 161.4 (21.7) 44.1 ( 5.9) 743.5September 574.3 (69.4) 192.7 (23.3) 60.7 ( 7.3) 827.8December 6&.6 75.01 200.3 (21.9 28.1 3.1) 913.0
1977 March 718.1 75.0 195.4 20.4 42.9 4.5 956.4Ju-ne 766.9 74.2) 166.0 .6AA1 10008 9.8) 1033.7Sept. 858.0 lh.R) 19 .? , 217-7 , hQ.R s- 5- - 1117.1Dec. 988.8 (73.1) 305.7 (22.6) 58.4 ( 4.3) 1352. 9
1/ Short-term credit refers to 0-2 years in.
2/ Medium-term credit refers to over 2 but less than 5 years.
3/ 1Long-term credit refers to over 5 years.
SOURCE: Economic and Financial Review, Central Bank of Kenya, October -December 1976.
17.
The agricultural credit extended by commercial banks is overwhelmingly
of a short-term nature. Around 75 percent of outstanding agricultural credit
at the end of 1977 was of less than two years maturity. (Table 11.9). This
share has changed little over the last few years. Commercial banks are ex-
tending very little long-term credit (over 5 years maturity) and prefer to
lend to an intermediary such as the Agricultural Development Corporation which
specialised in long-term agricultural credit. Medium term credit (over two
but less than five yearst maturity.) has constituted around 20 percent of
commercial bank agricultural credit.
Comparative Ahalysis of the Loan Portfolio of the Three Major Banks:KCB, Barclays and Standard
KCB is the leading commercial bank in Kenya. As of December
31, 1977, its deposits constituted 26 percent and advances constituted 24 per-
cent of total deposits and advances respectively, of the entire commercial bank-
ing system. In an attempt to distinguish itself from the longer-established
British banks, KCB has from its inception tried to avoid being a traditional
commercial bank al6ng the Britishi lines and has tried to be a more Kenyan-orieAite
institution. It is somewhat surprising, therefore, that the sectoral distributio
of its loans and advances differs little from the two major British banks -
Barclays and Stanidard. Barclays, in fact; is lending more to agriculture than KC
both in absolute amounts as well as a percentage of total loans, (Table II.10).
While it is true that export financing receives a larger share of outstanding
credit of Standard Bank than KCB (11 compared to 4 percent), the share
is even smaller for Barclays Bank (0.4 percent). In fact, KCB allocates
a larger share of its advances to trading enterprises than Barclays Bank.
Manufacturing enterprises are a major recipient of Barclays and Standard
Banks, and are much less important in KCB's portfolio. By contrast, the
share of credit going to real estate enterprises and also to other
financial institutions is much higher for KCB than the other two banks.
Apparently, KCB prefers to lend to other institutions which would then on-
lend such funds to enterprises. From the data available it is not possible
to analyse which bank has been the most active in extending credit to the
small-scale sector.
Table I1.10: ANALYSIS OF BILLS, LOANS AND ADVANCES 0F KCB, BARCLAYS, AND STANDARD BANK(Amounts in K. sh. million; as of December 31, 1977)
KCB Barclays StandardAmount As 7% of Amount As % of Amount As % bf
Recipient Total Total Total
1. Government 37.4 (2.4) 40.7 (2.7) 51.0 (3.6)
a. Central and Local Government 9.3 (0.6) 3.4 (0.2) 0,3 7 )b. Statutory Boards 23.2 (1.5) 32.6 (2.2) 50.7 (3.6)c. Other 4.9 (0.3) 4.7 (0.3) -
2. Private Sector 1528.9 (97.6) 1444.0 (97,3) 1373.8 (96,4)
a. Enterprises 1329.1 (84,9) 1308.0 (88.1) 1187.9 (83.4)Agriculture 1/ 211.8 (13,5) 238.5 (16.1) 160.2 (11.2)Mining - C- ) 1.6 (0.1) 0.5 ( -)Manufacturing 75.7 ( 4.8) 257.1 (17.3) 255.2 (17.9)Building and Construction 98.2 ( 6.3) 85.5 ( 5.8) 40.5 ( 2.8)Real Estate 132.3 ( 8.4) 69.7 C 4,7) 36,6 ( 2,6)Trade 313,8 (20,0) 250,4 (16,9) '397,6 (27,9)
Exports 61,1 ( 3,9) 6,0 4 0)4) 152.3 (10,7)Imports 49,0 C 3,1) 43,2 ( 2,9) 69,0 ( 4,8)Domestic 203.7 (13.0) 201,2 (13,6) 176.2 (12,4)
Transport 80.2 ( 5,1) 37.7 ( 2.5) 55,4 C 3,9)F'inancial Institutions . 223.6 (14,3) 132,6 ( 8,9) 117.1 / ( 8,2)Other 193.5 (12,4) 234.9 C1S,8) 125,0 C 8,8)
b. Private Non-Profit Org. 1.3 ( 0.1) 2.9 ( 0,2) 113,5 8.C.)c. Households 198.5 (12.7) 133.1 C 9.0) 72.4 C 5.1)
Total 1566.3 (100.0) 1484,7 (100,0) 1424.8 (1900_)
1/ Includes forestry, fishing and wildlife,
2/ Includes bills discounted of K. Sh, 109.1 m, 1-r C,S,S.,C, and 2,9 m for A,F,Cj
III, PRIVATE NON-BANK FINANCIAL INSTITUTIONS-/
There are currently fourteen non-bank private financial intermediaries
operatin.g in Kenya. They have grown steadily in importance in recent years,
offering an alternative to commercial banks as savings media and as suppliers
of medium - and long-term credit. These institutions can be classified
into three groups on the basis of the purposes for which they extend credit. The
first group comprises those which lend money on mortgage for the purchase or
construction of buildings. These are Akiba Loans and Finance Limited, East
African Building Society Limited, Savings and Loan Kenya Limited, and Housing
Finance Company of Kenya Limited. The second group specialises in the hire purchase
of property other than real estate. These are Diamond Trust of Kenya Limited,
National Industrial Credit (East Africa) Limited, and Credit Finance Corporation
Limited. The third group consists of those involved in merchant banking, such
as the Kenya Commercial Finance Company Limited, Grindlays International
Finance CKenya) Limited, Citibank Finance Company, First Chicago (Kenya) Limited,
and East African Acceptances Limited. Finally, there is the Mombasa Savings and
Finance Limited, which fits into none of the above three categories since it
finances all types of credit purchase.
A majority of these institutions are subsidiaries of commercial
banks or have strong connections with them, and they are licenced under the
Banking Act 1968 to engage in banking business as "specified financial institutions.
1/ This section draws on two surveys in the Economiciai.d financial ReviewCentral Bank of Kenya, October-December, 1972, and July-September, 1975.
2/ The one exception is the East African Building Society Limited which is aregistered society under the Societies Act.
21.
There is, however, an important legal distinction between commercial banks
and "specified financial institutions" in that, unlika the former, the latter
may not accept deposits subject to disposal by cheque. The non-bank financial
institutions are subject to many of the same regulations covering commercial
banks, but there are some sianificant exceptions which have given these
institutions certain advantages. For example, they are allowed to offer a
slightly higher interest rate on deposits;-and so can successfully compete
with commercial banks for deposits. They have also had an advantage in credit
extension in that credit control by the monetary authorities has until recently2/
been more concerned with restraining bank credit than the credit of non-banks.
Non-bank financial institutions have tended to limit their activities
to the main urban centres. As of December 1977, twelve of the fourteen
institutions had only one office, always in Nairobi except for the Mombasa
Savings and Finance Limited Grindlays International Finance Limited had
offices both in Nairobi and Mombasa, and only one institution had any branch
outside these two centres: the East African Building Society which had a branch
in Nyanza Province.
The non-bank financial iriatitutions compete successfully with com-
mercial banks for deposits. They are able to offer slightly higher interest
rates, as well as a wider variety in term-deposit facilities than commercial
banks. Moreover, they generally do not have such high minimum deposit regulations
1/ For details, see Table VII.1 on the Structure of Interest Rates,
2/ For example, the credit measures of 1971/72 were directed to commercial banksonly; credit reatrictions with r;espect to non-banks have primarily beendirected to curtailing the financing of hire-purchase ald factoring typesof business.
Table IIl-.: NON-BANK PRIVATE FINANCIAL INSTITUTIONS SUMMARY BALANCE SHEET.K, Sh- million)
1974 (As % of 1975 (As % of 1976 (As % of 1977 (As % ofTotal) , Total) Total) Total)
ASSETS 1358.74 (100,0) 1497,56 (100.0) 1851.94 (100.0) 2485.62 (100.0)
1. Cash and Balances with Banks 84.38 ( 6.2) 147.31 ( 9.8) 195.41 ( 10.6) 362.91 ( 14.6)2. Balances with Parent or Sub-
Subsidiary Companies 257.53 ( 19.0) 242.75 ( 16.2) 262.26 ( 14.2) 249.15 ( 10.0)3. Investments, Loans and Advances 965.73 ( 71.1) 1047.50 ( 69.9) 1336.99 ( 72.2) 1792.01 ( 72.1)
Public Sector 28.60 ( 2.1) 42.75 ( 2.9) 60.17 ( 3.2) 124.18 ( 5,0Private Sector 937.13 ( 69.0) 1004.751 ( 67.1) 1276.82 ( 68.9) 1667.83 ( 67.1)
Loans and advances 859.97' ( 63.2) 947.09 ( 63.2) 1222.04 ( 66.0) 1615.72 ( 65.0)Investments 77.16 ( 5.7) 57.66 ( 3.9) 54.78 ( 3.0) 52.11 ( 2.1)
4. Other Assets 51.10 ( 3.8) 60.00 ( 4.0) 57.28 ( 3,1) 81.55 ( 3.3}
LIABILITIES 1285.33 (100.0) 1424.58 (100.0) 1771.98 (100.0) 2331.20 (100.0)
1. Deposits 846.56 ( 65.9) 1028.89 C 72.2) 1322.46 (74.6) 1775.74 A 76.2)Demand 14.19 ( 1.1) 22.10 ( 1.6) 103.10 ( 5.8) 40.34 ( 1.7)Time 616.30 (48.0) 807.65 (56.7) 1075.11 (60,7) 1436.51 (61.6)Savings 216.07 ( 16.8) 199.14 ( 14.0) 144.25 ( 8.1) 298.89 ( 12.8)
2. Balances due from Parent orSubsidiary Companies 7.05 C 0.6) 45.87. ( 3.2) 44.08 ( 2.5) 45,51 ( 2.0)
3. Balances Due from Banks 1/ 194.05 ( 15.1) 51.02 ( 3.6) 15.12 ( 0.9) 73.20 ( 3.1)4. Credit from Government 47.86 ( 3.7) 72.86 ( 5.1) 97.54 ( 5.5) 93.96 ( 4.0)5. Capital and Reserves 96.17 ( 7.5) 107.12 ( 7.5) 124.63 ( 7.0) 153.03 ( 6.6)6. Other Liabilities 93.64 ( 7.3) 118.82 ( 8.3) 168.15 ( 9.5) 189.76 ( 8.1)
1/ Includes financial'institutions other than parent or subsidiary companies
- l
23.
as commercial banks and in this sanse, are more appropriate to small
savers than co=mercial banks. The majori;ty of non-bank financial institutions
accept demand deposits, but these are not acceptable as a means of payment,
unlike demand deposits with commercial banks. There is a ceiling on the
amount which can be withdrawn in cash, and any amount exceeding this is paid
on a closed cheque drawn on a commercial bank. Moreover, these institutions
require prior notice of withdrawal, so demand deposits are not, strictly
speaking, withdrawable on demand. As a result, these institutions are required
to maintain a much lower cash to deposit ratio than commercial banks.
The major source of funds for private non-bank financial
institutions is deposits, overwhelmingly in the form of time deposits. In
1977 deposits constituted 76 percent of their consolidated liabilities, a
10 percent increase over three years earlier (Table III.1). These deposits
were mostly time deposits C62 percent of total liabilitiesl with savings
deposits comprising less than one-fifth the volume of time deposits C13 percent
Of total liabilities). Demand deposits were very small (2 percent of total
liabilities). This contrasts with the portfolio of commercial banks, in which
demand deposits far-exceeded time and savings deposits together. In fact, the
volume of time and savings deposits held at the non-bank private financial
1/ Commercial banks mostly require a minimum deposit of K. Sh. 300-500, comparedto a minimum deposit requirement of around K sh. lOOfor non-bank financialinstitutions. -- Fxceptions are the East Africa Acceptance Limited and theNational Industrial Credit Limited which have minimum deposit re-uirementsof K. Sh. 10,000 and cater for the businessThf corporations and semi-official institutions.
Table III.2: NON-BANK PRIVATE FINANCIAL INSTITUTIONS - OWNERSHIP OF DEPOSITS(Amont st KA 1 il4on)
1974 1975 1976 1977
AMuount As %0 o0 Amount As % of Amount As % of Amount As % ofTotal Total Total Total
Public Sector
Central and Local Governments 135.02 (15.9) 9351 9.1) 171.81 (13.0) 229.26 (12.9)
Demand -C-) C ) (-) - (-)
Time 134,59 (15,9) 93,26 ( 9.1) 171,55 (13,0) 228,98 (12.9)Savings 0,43 C 0,1) 0,25 0,26 ( - ) 0,28 ( - )
Other Public Sector; 19,56 ( 2,3) 124,9[J7 (12-1) 294,44 (22,3) 450,08 (25,3)
Demand -( -) - ( -) 1.00 (0.1) 5.00 (0.3)Time 19.56 ( 2.3) 124.95 (12.1) 293.44 (22.3) 445.08 (25.1)Savings -( -) ( -) - ( -) - ( )
Private Sector
Kenya Residents 690.99 (81.6) 808.20 (78.6) 853.82 (64.6) 1094.86 (61.7)
Demand 1,4.19 (1.7) 22.10 (2.1) 102.10 ( 7.2) 35.34 ( 2.0)Time 461.16 (54.5) 587.21 (57.1) 607.73 (46.0) 760.91 (42.9)Savings 21.5.64 (25.5) 198.89 (19.3) 143.99 (10.9) 298.61 (16.8)
Non-Residents 0.99 ( O.1) 2.23 ( 0.2) 2.39 ( 0.2) 1.54 ( 0.1)
Demand -( -) - ( -) - C -) - - )Time 0.99 ( 0.1) 2.23 ( 0.2) 2.39 ( 0.2) 1.54 ( 0.1)Savings - -) - ( -) - C -) - ( -)
*t
TaWle TII.3: NON-BANK PRIVATE FINANCIAL INSTITUTIONS: SECTORAL ALLOCATION OF LOANS( Amounts in K. Sh. million)
1974 1975 1976 1977Amount (As % Amount (As % of Amount (As % of Amount (As % of
of Total) Total) Total) Total)
Public Sector 18.85 (2.1% 23.87 (2.5) 17.94 (1.4) 13.53 (0.8)
Private Sector 859.97 (97.9) 947.09 (97.5) 1222.04 (98.6) 1615.72 (99.2)
Agriculture 68.15 (7.8) 72.05 (7.4) 69.03 (5.6) 94.90 (5.8)Manufacturing 54.47 (6.2) 68.06 (7.0) 80.06 (6.5) 142.87 (8.8)Housing 301.17 (34.3) 374.71 (38.6) 365.27 (29.5) 409.08 (25.1)Trade 65.67 (7.5) 79.00 (8.1) 148.37 (12.0) 222.88 (13.7)
Export 12.37 (1.4) 7.57 (0.8) 6.28 (0.5) 20.61 (1.3)Import 30.94 (3.5) 41.75 (4.3) 45.43 (3.7) 113.87 (7.0)Domestic 22.36 (2.5) 29.68 (3.1) 96.66 (7.8) 88.40 (5.4)
Business Enterprise 184.82 (21.0) 152.00 (15.7) 192.15 (15.5) 226.38 (13.9)Personal 185.69 (21.1) 201.27 (20.8) 367.16 (29.6) 519.61 (31.9)
Total 878.82 (100.0) 970.96 (100.0) 1239.98 (100.0) 1629.25 (100.0)
.i
26.
institutions in 1977 was almost exactly one-half of the time and savings
deposits held at commercial banks (K. Sh. 1735m compared to K. Sh. 3523).
Once demand deposits are.included, then this share falls to one-fifth.
Clearly, in terms of time and savings deposits, the non-bank private financial
institutions are significant mobilisers of private savings.
Non-bank financial institutions appear to have been successful
in attracting the deposits of the large institutions in both the private and
public sectors. While the bulk of deposits are held by the private sector, the
share owned by the public sector has been growing. In particular, the deposits
of Government enterprises have increased markedly in recent years (Table III.2 )
In 1974 Government enterprises deposited K. Sh. 20 million with non-bank financial
institutions, accounting for 2 percent of total deposits of these institutions;
by 1977 deposits held by government enterprises with these institutions had
grown to K. Sh. 450 million or 25 percent of the total. These deposits are
,overwhelmingly time deposits.
The non-bank private institutions are an important source of credit
for the private sector. Unlike commercial bank credit which is predominantly
short-term, these institutions supplement commercial bank credit by supplying
medium- and long-tezm finance. These institutions tend to specialise in
particular spheres of lending such as hire purchase, mortgage lending and
merchant banking. Loans for housing accounted for 25 percent of the total
outstanding credit of all these institutions at the end of 1977 (Table 11.3).
personal loans accounted for 32 percent, and loans for trading enterprises a
further 14 percent.
Table III.4 shows the relative position of non-bank financial
institutions and commercial banks in terms of assets, deposits of non-bank in-
stitutions have grown at a much faster rate than commercial banks in the early
1970's, though over the last few years the rates of growth have been similar,
Table 111.4: RELATIVE POSITION OF PRIVATE NON-BANK FINANCIAL INTERMEDIARIES AND COMMERCIAL BANKS:
ASSETS, DEPOSITS AND LOANS AND ADVANCES
(K. Slh. million)
Total Assets (2)/(1) % Deposlts (5)f(4)% Loans and Advances (8)/(7of of of of of Comm. of
End of Year Comm. Non-Bank Comm. Non-Bank Banks Non-BankBanks Fin. Insts. Banks Fin. Insts. Fin. Insts.(1) (2) (3) (4) (5) (6) (7) (8) (9)
197n 3978.30 306.72 7.7% 1318.04 223.64 17.0% 1738.86 204.42 11.8%
19a 4 6066.91 1358.74 22.4% 5102.70 846.5.6 16.6% 3924.60 878.82 22.4%
1975 6504.00 1497.56 23.03% 5375.18 1028.89 19.1% 4243.05 970.96 22.9%
1976 7998.70 1985.94 23.2% 6716.48 1322.46 19.7% 5171.89 1239.98 24.0%
1977 11323.55 2485.62 22.0% 9556.69 1775.74 18.7% 6119.28 1629.25 26.6%
28.
the ratio of total assets of non-bank financial institutions to commercial
banks stabilising around 22 percent. Deposits of non-bank financial institutions
comprise around 19 to 20 percent of commercial banks, and this share has
changed little since 1970. Loans and advances of commercial banks have
grown at a much slower rate than non-bank financial institutions, so that by 1977
outstanding credit extended by the latter comprised almost 27 percent of credit
extended by the former (Table III.4). ). An important factor accounting for
this is that credit control by the monetary authorities has generally been more
concerned with restraining bank credit than the credit of non-banks.
IV. PUBLIC FINANCIAL INSTITUTIONS
Various financial institutions have been established by the Government
to fill gaps which had emerged in the financial structure and to supplement the
private financial institutions. In the Development Plan of 1970-74 as well
as in the current Development Plan provision was made for substantial government
loans to public financial institutions.
These institutions provide long-term finance for essentially three
types of activity - agriculture, industry and housing. The Agricultural Finance
Corporation, the Agricultural Development Company and the Cereals and Sugar
Finance Corporation provide medium - and long-term finance for the agricultural
sector. Industrial finance is provided by the Industrial and Commercial Develop-
ment Corporation, the Development Finance Company of Kenya and the Industrial
Development Bank; and the National Housing Corporation and the Housing Finance
%(l, 9lY Ll -ptlio lTV '94,1. 41-119 7-L/1. Pti-l VuP-J pD't'?<sh2 ;ttTr:-o %.Di: :c; Z,! z- - .c ,
'lrtU3X ,t O vo-,j-&cdx03 aJ:0l7"-.JT1-. PUV' 4tr?t,',' ':etd = ''':j "- ^' '''-
pUl 'l tJOTj%Ij0dzO3 " ^-)TO-dA l1 IJoI? p'ui -TJ f- 4 ; . G ,r
uoj.3jcdIo3) 1ttIdOtT:.:'Q Ju.-do .XIa T.,i'svi'tt? ;r1 - ' sT ' :s^'..-..- r
Z,U L%2 97 iloa tV 'I,;L 77t C,jO3 Ctl'l ? 1 U9 /$ ti1bI' I.>L-t 0 ;
- ___ - ____ -. -' L : 'Z ~l 9f(. 0111 OtE nl6f ! iitgt 'I ll5 tr'ZJ1*
EJ . < T 3Q.1 q'' 0 L6q - CUflt 6crt t*. -
'- C'-- a - i r?x *7C 5P L' 1. i 9 1t6l'CV %G66A o c9 gU- r
6 Z'6 i O'ct T-: . r
C. *. -i-T- - c.(' S1T - - - -
#*-F t .- ETI otZ z t I CC IV 66 oOtt OVI t6%L , c 09C5' Z: a .-
-- 7 _1 7 T -- 4 ; .*i ,) Zv) Ie 2- -t > U o e t ! t > ̂ t t c r( d t { t 0 9 t T; 8l s
? * i;5-rE l ox.z j C7 C6 59 zL .kl Z t ; Ot 16Z q'i9 i ).6';6 E7 OIT l0.O~ sr tE§; ,i'.qlT ',t Z -
-- tX . 0 ^'Ig L~t,fz pi-E55 Z tE LI/ T'£ tS'%-'50t 60-'Z 6)-19Z 9~L V*i .2 :JtI.t l7 Il C- ' t bv - f--
~ z - , ; t. LI LPZ leCC LVi9 6E- 91 L5-9t 5, r 9'9 qE- 6r.'lt 6~6 9 0 Oi1, zt'ic s:1*'i
TI
30.
Company of Kenya extend long-term credit for housing. In addition the KenyaTourist Development Corporation provides lon7g-tern finance for tourism.
These institutions have been set up as statutory bodies by the Government,and provide credit finance for projects which may not be able to obtain fundsfrom private institutions because of the risks involved or the low profit-ability of the projects. The consolidated balance sheets of the seven public
1/financial institutions- dealing with the agricultural, industrial and housingsectors are presented in Table IV.1, The activities of these institutions harvegrown steadily in recent years; total assets have grown at around 25 percentper annum, together they have provided finance of almost K. Sh 2000 'million(1976 outstanding figure).
-
The agricultural sector has been receiving a steadily growing shareof this finance. In 1976 the Government channelled more investment resourcesinto agriculture than into either industry or housing. This contrasts with afew years earlier, when the housing sector received by far the largest share offunds from these institutions (e..g., in 1974 the share received by the housingsector was almost twice that received by agriculture).
The public financial institutions financed this expansion of theiractivities by increasing their liabilities to the Government. The major sourceof funds for these institutions is the Government in the form of grants andloans; in 1975 Government funds accounted for almost half of the total liabilitiesof these institutions. Only the institutions dealing with housing accepted de-posits, which in 1975 made up 25 percent of their total liabilities.
1/ iAgriculture: AFC and ASCInldustry. ICDC, IDB and DFCKIkHusing: IIIFCK and NHCK
31.
(a) Agricultural Development Finance Institutions
(i) Agricultural Finance Corporation (AFC)
The AFC is the major long- and medium-term lender to agriculture.
Established in 1963, its initial purpose was to take over the credit
functions of the two Boards of Agriculture then serving the scheduled
(European) and Nonscheduled (African) Areas, and to work closely with the
Land and Agricultural Bank. Six years later, the AFC was reconstituted
with wider, additional powers and assumed the operations of the Land and
Agricultural Bank.
AFC's resources have been used overwhelmingly (95 percent) for
making agricultural loans (Table IV.2). Loans have been mostly for land
purchase (87 percent of loans approved in FY75/76). Table IV.3 . The balance of loan:
approved were for the purchase of machinery (5 percent) animals (3 pRercent)
and water and irrigation (2 percent). AFC operates lending schemes for
small-scale and for large-scale farmers. 1/ The small-scale programs
generally provide funds for specific purposes in amounts up to K. Sh. 15,000.
Loans extended under the large-scale schemes are for larger amounts and
finance such enterprises as ranching, dairying, and food and cash crop
production. AFC's large-scale portfolio also includes land purchase loans
which are extended on 3-year terms. Practically all the small-scale loans
are for land and enterprise development and are on terms ranging from about
1/ AFC considers farmers to be small-scale if their income per year isless than K. Sh. 10,000 and large-scale if their income exceeds thislevel. However, this index is difficult to follow in practice, and theoperational definition is based on loan size.
Tall T! ? Agricultural Finance Corporation - Assets and Liabilities
(K Sh. 1000)
19681/ 1969 1970 1971 1972 1973 1974 1975
Assets
Loans 3,753 7,955 8,508 9,653 10,028 11,409 12,325 15,033
Investments 160 1,514 1,472 1,181 1 I62 594 1,037' 1,156
Fixed Assets 64 255 267 292 297 289 291 322
Current Assets 303 708 545 489 624 1,080 1,049 504
Total 4,280 10,132 10,792 11,0615 12111 13,2372 14 17 055
Liabilities
Current Liabilities 862 528 859 1,049 729 584 519 593and provisions
Funds:
Developmerit Capital 1,723
Revolving 1,061 9,102 9,590 10,278 11,128 12,558 13,896 16,338
Agrarian Loans 370 -
General Reserve 247 502 343 288 254 230 287 124
Total 4,280 10,132 10,792 11*615 12,111 13,372 14 )702 17?055
1/
Source: Statistical Abstract, Central Bureau of Statistics, various issues.
tA
Tab] e TiV , Agriciultural Finance Corporation - Analysis of Loans Approved
No. of Total Animnals Fencing Water Farm OtherDate of Approval Loans Amnounlt Land and Machinery Build- Loans
Approved Approved Purchase Irrigation ings Approved
October-1963 - December 1964 546 895.8 - 608.7 26.7 46.2 137.4 10.1 66.4Janiuary- Dccem.ber 1965 579 961.2 - 488.9 48.2 io4.4 225.0 18.9 75.7January- December 1966 432 506.4 - 194.9 27.2 68.3 176.3 12.6 27.1January-Decesiber 1967 258 295.6 - 103.8 14.1 50.5 92.3 12.4 22.6Janiuary 1968 - March 1969 338 46o.6 - 175.8 15.6 45.3 104K7 6.9 112.4April l9o9 - March 1970 3143 1304.8 870.5 206.4 6.8 32.3 53.2 9.6 125.9April 1970 - March 1971 437 1644.3 1090.3 253.6 9.2 41.3 83.9 13.8 152.3April 1971 - March 1972 233 2104,0 1329.5 394.5 13.1 66.5 171.4 17.1 110.3April 1972 - March 1973 111 443.9 33.4 145.3 6.o 49.6 119.2 15.1 170.4April 1973 - March 1974 129 2021.1 1369.5 265.0 17.3 36.0 111.9 2.7 218.9April 1974 - Marchl 1975 198 3174.4 2298,8 329.0 14.5 84.6 246.9 19.9 180.6April 1975 - March 1976 209 2643.3 2308.6 86.4 6.3 55.0 122.4 9.4 55.4
SOURCESOURCE: Statistical Abstract, Cerntral Bureau of Statistics, various issues.
. .)
34.
3 to 10 years. AFC's outstanding credit to large-scale farmers is approxi-
mately seven times that to small-scale farmers, and the share received by
the latter has grown steadily in recent years.
The major source of funds for AFC is development capital from
the government and from abroad. Foreign loans and grants are usually
linked to specific projects, for example, the Kreditanstalt fur Wiederanfban
(KFW) of Germany has funded a smallholder credit project to the K.isii and
Kericho districts. KFW has also provided funds for the establishment of
state-owned animal breeding farms and for the rationalization of large-
scale African farms in the Trans-Nzoia District.
The World Bank Group has also been a major source of AFC funds,
again for specific projects for both small-scale and large-scale recipients.
The Smallholder Project receiving IDA funds was administered through AFC,
and was designed to provide credit for on-farm development and improved
* crop and animal husbandry to selected smallholders located in areas with
at least 25 inches of "dependable"t rainiall annually, and having
registered titles to offer as collateral. The World Bank has also
assisted in funding a major livestock project for large-scale farms.
AFC is currently undergoing a program of decentralization which
should improve the speed and capacity of handling seasonal credit. It is
also making efforts to meet the credit needs of the smallholder, its past
performance having been criticized for concentrating too heavily on the
larger commercial smallholder at the expense of smaller, less commercial
farms.
35.
Minimum Financial Return Scheme
Besides these long-term financing programs, AFC also administers,
on behalf of the government, the Minimum Financial Return Scheme. This
scheme provides seasonal production credit for wheat and maize growers
with more than 15 acres under production. In the event of a crop failure,
then a corresponding part of the advance is waived.. Essentially a crop
insurance scheme, this program was begun as a war time measure to
encourage crop production in the large-scale sector by underwriting produc-
tion risks. The scheme: is funded by thte Cereals and Sugar Finance Corpora-
tion, a statutory board set up in 1955. The AFC acts as agent in disbur-
sing and collecting the funds, and the Kenya Farmers Association (KFA)
participates as buying agent for the Wheat Board throughout Kenya and for
the Maize and Produce Board in Rift Valley Province. A high proportion of
the turnover of this crop insurance scheme passes through the KFA accounts;
advances are often credited to KFA's members' and non-members accounts, and
repayments are deducted by KFA from payments made to participants for crop
deliveries. Until recently, this scheme apparently had serious administrative
problems, mostly because of loopholes in the procedure which permitted
ineligible farmers to receive advances, and because the government failed
to budget enough funds to keep the compensation program current. l/ In
recent years, however, the operation of the scheme appears to have
improved.
1/ See World Bank Report Agricultural Sector Survey - Kenya, Vol. I,Annex 7, pp. 17-18.
36.
Table IV. 4: AGRICULTURAL DEVELOPMNT CORPORATION1/ 2/'
SUMMARY BALANCE SHEET
3972 1973 1974 1975
Assets
Cash and bank balances 8.21 5.80 6.68 6.47Mortgages, loans and advances 15.51 18.23 15.43 15.56IInvestments 61.23 75.94 75.23 171.05Fixed assets 57.44 51.57 60.A4 60.79Other 24.92 35.59 43.05 51.64
Liabilities
Capital and reserve -- -. -- --
Deposits - -- - --Government loans and grant.s 165.82 178.69 201.24 305.51Other --
TOTAL 167.31 187.13 201.23 305.51
11 Includes ADC subsidiairies: Lands Limited and Kenya Poultry DevelopmentCompany, Ltd.
2/ Relates to financial year ending 31 March.
37,
(ii) Agricultural Development Corporation (ADCI
The main function of the ADC is to promote and extend schemes for
agricultural development and reconstruction by setting up or expanding agri-
cultural enterprises. It was set up in 1965, and in terms of asset size, it
is several times larger than AFC (Table IV.4). Unlike AFC, however, it is not
engaged in extending agricultural credit so much as in purchasing and operat-
ing farms. It contributes towards agricultural development by experimenting
with different technologies. It was also entrusted with the execution of the
transfer of farms from European to African ownership. The land Transfer Program
is financed by funds from British Government loans. Under this program,
large-scale farms are bought from British nationals and transferred to ADC
through its fully-owned subsidiary "Land Limited". Occasionally, ADC will
manage these farms until they can be sold or leased to Africans.
The Corporation finances its activities by means of government
grants and loans. Grants and loans generally come from the Ministry of Agri-
culture, through the bulk of these funds have originally come from British
and West German Government loans.
(b) Industrial Development Finance Institutions
The industrial sector is financed through the follDwing public financial
institutions: the Industrial and Commercial Development Corporation (ICDC), and
its subsidiary, the Kenyan Industrial Estates, the Industrial Development Bank
(IDB) and the Development Finance Company of Kenya (DFCK).
(i) Industrial and Commercial Development Corporation (ICDC)
The oldest of these institutions is the ICDC, established as a
statutory corporation in 1955 to promote and assist commercial activities,
with emphasis on transferring businesses owned by non-Kenyans into Kenyan hands.
Table U- zi. INDUSTRIAL AND COMI!IERCIAL DEVELOPMNTCORPORATION SUMMARY BALANCE SHEET
K. sh. million
1973 1974 1975 1976
ASSETS
Cash and Bank Balances 0.13 0.13 9.95 6.89Mortgage, Loans and Advance .145.57 196.76 240.62 264.46Investments 47.86 74.48 96.16 142.14Fixed Assets 23.94 26.29 26.50 26.13Other 51.10 53¢26 100.5$ 128.00
TOTAL 268.50 350.93 472.81 567.62
LIABILITIES
Capital and Reserve 1.11 6.20 6.23 6.30Deposits - -
Govt. Loans and Grants 153.05 199.64 270.61 356.56Other Loans 87.75 103.72 143.48 137.39Other 26.59 41.36 52.49 67.37
TOTAL 268.50 350.92 472.81 567.62
39.
Table IV.6; ICDC: LOANS AND ADVANCES(K. Sh. million)
As at (As % As at (As %June 30 of Total June 30 of Total)
1975 1976
Large and Medium Loans 24.89 (10.0) 29.43 (10.6)
Small Loans 224.66 (90.0) 246.93 (89.4)
Industrial 35.69 (14.3) 36.58 (133.2)
Machinery 24.16 ( 9.7) 31.72 (11.5)
Commercial 77.34 (31.0) 85.32 (30.9)
Share Purchase O.03 ( ) 0.03 ( )
Property 87.45 (35.0) 93.28 (33.8)
Total Loans 249.55 (100.0) 276.36 (100.0)
Source: ICDC Annual Report 1976.
40.
In recent years, ICDC has expanded its operations rapidly. In1976 its total assets were more than twice those of 1973, and its investment
portfolio had almost tripled (Table IV.5). Loans coomprise 47 pe-rcent of ICDC 'stotal assets, and equity investments a further 25 percent. Almost 90percent of ICDC's total loan portfolio was related to small-scale enter-prises, of which 13 percent went to its subsidiary, Kenyan IndustrialEstates (KIE)for lending to the small-scale sector. The -,rtfolio ofsmall loans was dominated by property loans (34 percent of total loans ofICDC) and commercial loans (31 percent). (Table IV. 6). Industrial and riachineryenterprises received much smaller shares (13 percent and 12 percent,respectively). Property loans included the purchase of non-Kenyan ownedholdings to help launch Kenyan businesses
ICDC lends at 9.5 to 10.5 percent, depending on the nature of theoperation, and up to 70 to 75 percent of the project cost. Its maximumcotmmitent is K. Sh. 250,000 for commercial loans, K. Sh. 800,000 for thepurchase of existing or new enterprises, and K. Sh. 300,000 for propertyloans. The minimum maturity is 5 years, but ICDC will lend up to 7 or8 years. ICDC will help by providing technical advice on the projectwhich the loan is financing, and will also provide advice on the financialimplications of the project. ICDC staff will suggest possibilities formarketing the product, although the actual marketing is the responsibilityof the client. The deciding factor in agreeing to the loan is an antici-pated 15 percent profitability (over five years) on the project.
41.
In addition to extending credit, ICDC provides venture (equity)
capital. ICDC has shareholdings in 45 companies as well as in 14 wholly-
or partly-omned subsidiaries, accoun'ting for 25 percent of its total
assets. Among its wholly-owned subsidiaries is the ICDC Investment
Company which acts as a unit trust in the sense thatthe public can pay in
a minimum of K. Sh. 50,000 and the Investment Company will invest it for
them.
ICDC receives 61 percent of its funds directly from the Kenyan
Government, mostly as grants, 11 percent from local commercial banks
(loans), and a further 8 percent from loans from the West German Govern-
ment.
(ii) Kenyan Industrial Estates Ltd. (RIE)
KIE is a wholly-owned subsidiary of ICDC, and one of the most
important institutions in Kenya assisting the development of the small-
scale sector. KIE was set up to promote African-owned small-scale
enterprises by providing finance (mostly for machinery and equipment)
as well as infrastructure and techn.ical assistance. This it has done
primarily through establishing industrial estates. Credit is extended
at ar.ound 8.5 to 9 percent per annum over eight years including a two-
year grace period, and factories are leased to estate participants at
highly concessionary terms. The major source of funds for KIE has been
the ICDC. Itself, and bilateral donors (Sweden and Denmark).
1/ As a result of these activities, ICDC has been criticised for being too
concerned with"empire buildin,;'" Such investments do however, comprise
only one-qua.rter of ICDC's total portfolio (1976 data).
Table IV. 7: DEVELOPMENT FINANCE COMPANY OF KENYA: SIRJMARY BALANCE SHEET(K. Sh million)
1972 1973 1974 1975 1976Assets ____-_
Cash and Bank Balances 0.99 1.85 0.66 3.95 2.21
Mortgage, Loans and Advances - 49.43 63.10 65.08 89.74
Investments 64.33 28.08 31.62 31.94 37.33
Fixed Assets 0.79 0.71 0.75 0.86 0.91
Other -1.82 4.08 9.09 9.30 1.90
Total 64.25 84.15 105.22 111.13 132.09
Liabilities
Capital and Reserve 64.25 84.15 105.22 111.13 132.09
Deposits - -
Gov't. Loans and Grants
Other Loans -
Other 1 - -
Total 64.25 84.15 105.22 111.13 132.09
-..
43.
A particular interesting development of KIE has been its establishmcnt
of six Rural Industrial Development Centres (RIDC). These have been at the
district level, are run by KIE, and try to improve the operations of rural
artisans and encourage new enterprises., They appear to hlave been particularly
successful in demonstrating new techniques and in helping to organize the
production and marketing in the district town and the surrounding area. Their
limited number, however, has been the major constraint on their impact on the
development of rural enterprises.
(iii) Devpment Finarnce CGompany of Kenya (DFCK)
DFCK was established in 1963 and promotesand finances mostly
large-scale industrial enterprises. It is owned by the Kenyan Govern-
mernt, the Commonwealth Development Corporation, the German Company for
Economic Cooperation and the Netherlands Overseas Finance Company - each
holding a 25 percent share in the K E 2 million issued capital. DFCK
provides finance through equity investment and loan capital. At the
end of 1976 its total assets amounted to K. Sh. 132.09 million, and
its investments K. Sh. 127.06 million. (Table IV.7). Its investment portfolio is
well diversified in the following activities: food-processing, wood
products, textiles, hotels and engineering. DFCK has
also participated in various joint ventures with other financial
institutions, especially IDB.
(iv) Industrial Development Bank (IDB)
IDB was set up in 1973 jointly by the Kenyan Government, ICDC
and the World Bank. Its purpose was to provide financing for large-
scale industrial enterprises,, thus leaving ICDC to concentrate on the
small-scale and com.mercial sectors. IDB assists enterprises through
44.
Table . ..1 - INDUSTRIAL DEVELOPMENT BANK - SUMMARY BALANCE SHEETC K. Si- million.)
1973 1974 1975 1976 1977
ASSETS
Cash and Bank Balances 0.02 0.55 2.39 8.73 8.42
Mortgage, Loans and Advances - 8.00 29.07 82.61 124.04
.Investments - 4.39 13.82 28.24 52.07
Fixed Assets 0.17 0.43 0.58 0.71 1.68
Other 17.14 24.20 31.00 27.12 10.19
TOTAL 17.33 37.57 76.86 147.41 196.40
LIABILITIES
Capital ancd Reserve 17.33 29.57 46.65 64. a 83.44
Deposits
Gov't Loans and Grants - - 1.30 4.90 -
Other Loans - 8.00 28.86 78.29 112.96
Other 0.05
TOTAL 17.33 37.57 76.86 147.41 196.40
45 .
long-term loans, equity investments and guarantees. Its loans have
generally been at 9.5 percent to 11.0 percept per annum, althoug,3i
recently IDB has been charging 11.0 percent per annum on all foreign
currency loans and 12 percent per annum on local currency loans. In
addition to interest, IDB assesses a 1.0 percent commitment fee on
undisbursed balances and a progressive appraisal fee of 1/4 to 1
percent on the loan amount, depending on its size. These additional
charges result in an effective spread of 2.5 percent to 3.0 percent.
IDB's portfolio in 1977 was divided into 70 percent loans and
30 percent equity investments, of a total value of K. Sh. 176 million. (Table ITv8).
The sectoral distribution of the loan portfolio is well-diversified
among textiles, agro-industries, engineering, manufacturing and tourism.
Its equity portfolio is heavily concentrated in textiles (43 percent),
with engineering and machinery and food and beverages also receiving
large shares (28 percent and 17 percent, respectively). IDB is
currently scrutinizing its exposure in the textile sector.
IDB has grown rapidly during its five years of operation, and
has reached a fairly efficient scale of operations. Its plans are to
further expand its activities but foresees a shortage in qualified
Kenyan entrepreneurs to successfully manage-theeenterprises and its finances.
(c) Housing Develoment te Institutions
There are two pklic -'inancial institutions in Kenya promoting --
housing: the Housing Finance Company of Kenya Ltd (HFCK) and the National
Housing Corporation of Kenya (NECK).
(i) HFCK is jointly owned by the Kenyan Government and the Common-
wealth Development Corporation. It operates a building society, and
46.
Table IV. 9. HOUSTTG FINANCE COMPANY OF KENYA LIMITED - SUMARY BALANCE SHEET
(K. Sh. million)
1973 1974 1975 1976 1977
ASSETS
Cash and BaTik Balances 1.94 4.74 7.15 2.47
Mortgage, Loans and Advances 157.51 237.43 286.94 331.18
Investments 1.00 1.00 4.25 3.05
Fixed Assets 2.29 5.07 5.73 10e99
Other 8.11 13.22 8.90 13.41
TOTAL 170.85 261.46 312.97 361.20
LIABILITIE$
Capital and Reserve 1.24 1.93 4.49 18.77
Deposits 128.24 144.34 187.18 180.89
Government Loans and Grants 22.36 62.86 71.14 94.21
Other Loans 18.05 52.14 50.16 67.33
Other 0.96 0.19 - -
T JTAL 170.85 261.46 312.97 361.20
47.
performs the dual function of a savings medium for investors, and extending
mortgage loans for house purchases. HFCK has been particularly successful in
attracting deposits, which in 1967 amounted to K. Sh. 180 million, or one-halE
its total liabilities (Table IV.9). The rates of interest HFCK offers on its
deposits is highly competitive with commercial banks, and it also offers a
variety of terms for deposits. The minimum amount on savings account is K. Sh.
100 and the minimum amount on' deposit and fixed term account are K. Sh. 500 K. She
10,000 respectively. Mortgage loans stood at K. Sh. 331 million as of the
end 1976;, which exceeds the volume of outstanding commercial banks for building
and constructio C which stood at K. Sh. 297 million) and is about the same
as housing loans of the non-bank financial institutions (K. Sh. 365 million). In
other words, the total outstanding loans made to the public.for housing (including
some non-residential building loans of commercial banks ) in 1976 was K. Sh. 993
million, and of this, HFCK provided one-third, commercial banks 30% and non-bank
institutions 37%.
(ii) NHCK has a long history (25 years), and extends credit as well
as technical assistance to local authorities for housing schemes. In recent years,
there has been a growing emphasis on the provision of low-cost housing. NHCK
also constructs individual houses for rent or purchase, though these are limited
in number. NHCK finances its activities from government grants and foreign
government loans (Table IV.10).
48.
Table IV. 10: NATIONAL HOUSING CORPORATION OF KENYA: S1ThMARY BALANCE SHEET(K. Sh. million)
1972 1973 1974 1975
ASSETS
Cash and Bank Balances 2.16 5.05 3.81 2.86
Mortgages, Loans and Advances 241.45 269.92 289.26 305.85
Investments 43.51 52.31 83.64 64.74
Fixed Assets 20e46 25.56 26.65 62.49
Other -0.11 - -
LIABILITIES
Capital and Reserve 24.25 25.67 27.66 25.99
Deposits - 2.64 2.14
Government Loans and Grants - - O.79 0.88
Other Loans 278.00 314.09 354.36 386.35
Other 5.36 13.19 17.91 20.58
TOTAL 307.61 352.95 403.36 435.94
- ----
49.
V. FINANCIAL INTERMEDIARIES IN THE PUBLIC SECTOR
(a) National Social Security Fund (NSSF)
NSSF is a compulsory social security scheme, established in 1966, and
?rovides old age and hospital benefits. The average 'rate of contribution
is 10 percent of a worker's wage, half of which is paid up to a maximum joint
contribution of K Sh160 per month. The benefits provided include the following:
1. Age benefit - paid to a member at age 60 or upon retirement.
2. Withdrawal benefit - paid to a member who is at least 55 years
old and has not engaged in paid employment during the previous
3 months.
3. Invalidity benefit - paid to a member who is permanently incapable
of work because of physical or mental disability.
4. Medical benefit - paid upon admission of member or family to a
Government Hospital.
Categories of employees covered by the scheme have expanded rapidly
in recent years, so that as of Jan. 1, 1977 virtually all wage-earners, both
male and female, not covered by Government pension and other public super-
annuation schemes were members.-
1/ Under a phased program, different categories of employers and their employeeswere brought inito the scheme progressively as follows:
Class of Employer Date of Registration Contribution began1. The7Gov't., the EAC Community,
Corporations and Private employersof 500 or more employees 12 Dec. 1965 1 July 1966
2. Private employers of 100-499 employees 1 Feb. 1966 1 Sept. 19663. " " " 50-99 " 1 Apr. 1966 1 Nov. 19664. 10-49 1 June 1966 1 A-r. 19675. " " 5-9 " 1 Apr. 1967 1 Apr. 19686. " " 1-4 " 1 July 19677. All female employees 1 Jan. 1976 1 Jan. 1977
Table V.1: NATIONAL SOCIAL SECURITY FUND
K. Sh. Millions
Assets 1968 1969 1970 1971 1972 1973 1974 1975
Cash and Bank Balances 0.51 4.86 32,58 14.70 26.21 44.75 7.64 24.61
Mortgage, Loans and Advances - - 0.16 - - - -
Investments 226.05 349.63 455.66 619.61 779.95 961.89 1116.42 1486.09
Fixed Assets 0.30 0.58 16.87 7.82 14.27 15.40 16.11 16.41
Other 1.20 2.90 2.20 15.17 18.89 21.36 151.06 41.23
Total 228.06 357.97 497.47 657.30 839.32 1043.40 1291.23 1568.34
Liabilities
Contributors' Fund and Reserve 222.84 341.86 464.55 605.80 748.05 903.23 1076.19 1289.83
Deposits
Gov't. Loans and Grants
Other Loans
Other 5.22 16.11 32.92 51.50 91.27 140.17 215.04 278.51
Total 228.06 357.97 497.47 657.30 839.32 1043.40 1291.23 1568.34
Un0
F
51.
The contrLhutorst accumulated fund has grown substantially, amounting
to K Sh 1290 million as of end of 1975, In terms of financial savings. The addition
to the Fund in 1975 was K, Sh. 214 million, only slightly less than savings through
commercial bank deposits QK, sh 272 million)., and almost twice the volume of savings
through non-bank finiancial instttutions C K Sh. 182 million). Clearly, NSSF is one of
the most important savings instruments in Kenya. Almost 75 percent of the fund is
invested in Government securities and the remainder is in various non-Government
long-term assets.
(b) Post Office Savings BAbk'P0SB)
The P,O.S.B. has a wide geographiical coverage and has played an important
role in the mobilization of private savings since its inception 41 years ago until
the early 1960's. After this time its deposits began to decline relative to those of
commercial banks; in 1960 the POSB held 55 percent of all time and savings deposits
with both commercial banks and the POSB. Bly 1965 this share had declined to 19
percent, and by 1976 had fallen to less than 2 percent,
Among the reasons for this relative decline of the POSB as a savings in-
stitution, three factors appear significant. First, the commercial banks did not
actively compete for deposits outside of the main urban centers until 1960?s, after
which time they successfully competed for private savings in the rural areas by ex-
panding their branch network. Secondly, commercial banks can and do offer a slightly
higher rate of interest on deposits; the differential was considerable until 1968,
when the rate on POSB deposits was raised from 2.5 percent to 3.00, Currently POSB
offers 5.00 percent on deposits. Another important factor is the poor administration
of the POSB, resulting in lengthy delays before withdrawals are materialized, as well
as in incorrect assessment of individual balances-2 losses of savings bank money due
1/ See, for example, POSR Annual Report 1975, p. 3, paragraph 11: "'A number of deposito:accounts reflect wrong balances mainly due to incorrect posting of transactionsin the computer ledger accounts."
52.
to theft, fraud, etc,, has also been a serious problem for POSB; for example, in
1975 these losses amounted to K, SEh. 138 thousand, which was 1.5 percent of the
deposits received in that year.
The POSB. has the most extensive geographical coverage of any other in-
dividual financial institution: in 1975 it had 117 main branches and 59 sub-branches.
Thi's network could be more efficiently utilized and the POSB made more competitive
in mobilizing savings through. a major overhauling of its administrative machinery
to make withdrawals speedier, accounts more accurate, and to reduce the risk of
theft. Thought could also be given to tailorinig deposit schemes more to needs
of clients, for example, by linking deposits to letiding (see recommendation B-7).
53,
Table V.2: POST OFFICE SAVINGS BANK--DEPOSITS AND WITHDRAWALS
(K Sh. million)
Deposits Withdrawals Outstanding TotalBalance Due Assets/Depositors/a Liabilities
1963 63.00 75.66 115.12 n.a.1964 51.36 66.88 102.10 n.a.1965 44.36 52.58 96.16 97.241966 45.66 44.64 99.40 100.381967 45.60 46.96 100.32 101.221968 44.30 45.62 101.56 102.621969 45.44 43.76 103.24 107.121970 50.34 46.90 106.68 114.021971 54.78 52.80 108.62 120.141972 54.52 48.80 116.94 132.161973 73.30 62.40 127.76 144.701974 81.01 69.43 139.35 159,981975 93.98 84.47 148.87 177.121976 112.61 100.06 161.42 n.a,1977 101.84/b 1 30.60b 190.18 n.a.
/a End December figures, including interest accrued; 1977 end November data.
lb Jan-Nov.
Source: Economic and Financial Review, Central Bank of Kenya, Oct.-Dec. 1976,and Statistical Abstract, Central Bureau of Statistics, Ministry ofFinance and Planning, 1976.
54,
Jri. THE COOPERATIVE SYSTEM
The cooperative movement is about thirty years old in Kenya,
and its original purpose vwas to create facilities for marketing pro-1/
duce. This became particularly important after 1963 when small
farmers were encouraged to grow cash crops (the white settlers had
their own marketing system, and since the AFC was designed to cater
to farmers with land title the cooperatives assisted those farmers without
land title or unwilling to surrender it). The cooperatives have
developed into the most important institution in the extension of credit
and technical assistance to small-scale farmers. In 1974 it was esti-
mated that there were 1060 active cooperative societies in Kenya, three-
quarters of w:rhich served rural areas, and the total membership was ap-
proaching half a million. About 600 societies have agricultural mar-
keting societies, most dealing with one commodity such as pyrethrumm,
coffee, cotton and dairy products. An estimated 90 percent of the
pyrethrum, 50 percent of the coffee and 25 percent of all milk sold by
farmers in Kenya is marketed through the primary societies. A recent
development is the expansion of operations into marketing several com-
modities by some societies, as well as expanding their role into activi-
ties other than marketing, e.g. supply of farm inputs, technical advise
and short term credit. These "multi-purpose" societies are growing in
1/ After 1967 the movement gained additional support through the "Nordicprogram" - a sizeable program of technical assistance from a consortiumof Scandinavian countries. The objective of the program was the consol-idation and development of the cooperative movement, and has apparentlybeen quite successful. The program is now being slowly phased out.
55.
number. In addition, approximately 40 District Cooperative Unions have been
set up supporting the primary societies oy providing centralis6d services
of accounting, bookkeeping, storage, credit and savings activities. The
Unions also deal with the marketing boards and the Cooperative Bank, on
behalf of the primary societies.
Besides the primary societies and the unions, several country-
wide cooperative organizations have been set up. One of the most impor-
tant is the Kenya Farmers Association Ltd., which supplies farm inputs
and markets farm products mostly for the large-scale farmers. The mar-
keting and processing of coffee is carried out by the Kenya Planters Coop-
erative Union, in the same way that the Kenya Cooperative Creameries Ltd.
undertakes milk marketing; In fact, it has a near monopoly in marketing
of milk in urban areas. The Cooperative Bank of Kenya is registered under
the Banking Act and provides banking services to the cooperatives. There
is also an apex institution, the Kenya National Federation of Cooperatives
(IKFC) which has wide powers but in actual fact, its role is mostly one
of representing the cooperatives in their relation with the Government.
It could exert a much more significant impact on the activities of the
cooperatives, especially in coordinating their activities, and in setting
guidelines for their credit extension; its role to a large extent has
been taken over by the Department of Cooperative Development.
The Department of Cooperative Development has wide powers to
regulate the cooperatives, covering both their staffing and activities.
It provides the development of cooperatives through various programs for
training their staff; it also audits the accounts of the cooperative unions.
56.
The unions and societies are allowed to change no more than
20% of the value of the farmers' produce handled by the cooperative
organizations (This includes the total overhead costs and commissions
charged, but does not include interest charged on credit supplied). Ap-
parently, some societies have exceeded this limit and the Department
has not been vigilant in correcting this.
The cooperatives assist farmers mostly through two schemes,
the Cooperative Production Credit Scheme (CPCS) and the Cooperative
Thrift Scheme (CTS). The CBCS is basically a credit scheme, granting
loans for agricultural purposes specific in a list of loan priorities
drawn up jointly by the District Agricultural Officer, the cooperative
union chairman and maanager, and the District Cooperative Officer. The
loan can oe for up to three years, and a member may not borrow less than
KSH 100 and not more than two-thirds of the average value of his deliveries
to the society over the preceeding three years, subject to a ceiling of1/
10% of the total amount of loanable funds available to all members.
-No cooperator may receive further CPCS credit until previous loans are
repaid.
One interesting feature of this scheme is that it involves all
levels of the cooperative structure. Members are made aware of existing
credit programs at meetings in the field. They then submit an application
form to the panaging committee of the society for consideration. Upon
approval, the application is submitted to the Union which in turn submits
1/ This is to prevent monopolisation of benefits by a few.
5 7;
a joint application for funds requested by all societies under its
auspices to the major cooperative Bank. The major sorrce of funds
for the Bank is the Government.
The Cooperative Structure
The Cooperative Bank
'ICooperative Union (about 34)
- (members are elected by the societies -
usually up to 9 members)
Cooperative Society (about 1060)- (run by a Managing Committee of 5 to 9
elected members - usually localpeople.
THE COOPERATIVE THRIFT SCHEME (CTS)
The CTS is a savings scheme- for all members of societies participa-
ting in CPCS. It is managed at the union level through those societies
selected by the Department of Cooperative Development, which have proven
capable of operating the CPCS. The scheme functions through members'
operating accounts; members agree to leave funds in their accounts
rather than withdraw in full their profits from deliveries. These de-
posits constitute the savings in the scheme. The minimum balance is
KSH 50 which can be accumulated in KSH 10 from each payout. These savings
can be relent by the Unions back to farmers. This scheme has proven very
attractive for small farmers. Administrative costs are likely to be low,
and there is also an incentive for the farmers to Save, since payments
for deliveries are automatically credited to the cooperators' accounts.
'Thne savings balances of the Union Banking Sectors were KSH 285 million as
of September 1977, were held at 20 unions out of the 34, mostly in
the coffee growing areas. No default guarantees are provided to de-
positors, and the only real supervision is provided by the Department
of Cooperative Development. Some type of deposit insurance would be
useful for this scheme.
59
VII. THE REGULATOR-Y POWERS OF THE CENTRAL BANK
(a) Regulatory Framework
The Central Bank of Kenya's constitutional powers are specified in
the Central Bank of Kenya Act, 1966, and were subsequently widened in
the Banking Act of 1968. These two Acts stipulate the guidelines for
commercial banking operations in Kenya, and also set out the functions of
the Central Bank of Kenya (CBK). These functions include the regulation
of the note issue, credit control, and being the bankers to the Government
and to the commercial banks.
Regulatory powers of the Central Bank are primarily concerned
with monetary policy, involving both qnuntitatnve and quali.tative control
of credit. The Bank acts as a banker to commercial banks, accepting deposits
from and collecting money on account of banks. It also provides inter-
bank clearing facilities. The Bank may also purchase from, sell to and-
rediscount on behalf of banks, bills of exchange, promissory notes and other
credit instruments maturing within 180 days, issued for the purpose of financing
export or import trade, warehousing or industrial or agricultural production.
The CBK can also grant loans oL up to 6 months to banks at terms decided by
the CBK.
(b) Regulatorv Instruments
Under the Banking Act, commercial banks are required to maintain
such minimum holding of liquid assets as the CBK determines. Moreover,
every licensed financial institution must maintain a minimum
liquidity ratio, as specified by the CBK. Liquid assets are defined to
60.
include the following:
1. Notes and coins which are legal tender in Kenya;
2. Balances held at CBK;
3. Balances held at other banks in Kenya after deducting the
balances owed to those other banks;
4. Balances held at banks abroad withdrawable on demand and
money at call abroad;
5. Kenya treasury bills of a maturity not exceeding ninety-
one days which are freely marketable and rediscountable
at the C3K;
6. Such other assets as the Minister may specify.
As of January 1, 1978, the liquidity ratio was raised to 20
percent. Between 80-90 percent of the liquid assets held are treasury
bills and balances held with the CBK.
Under section 38 of the Central Bank of Kenya Act, the CBK has
the power to require commercial banks to maintain a minimum cash balance
on deposit with it against their total liabilities. The maximum prea-
cribed balances under this section. may not exceed 2Q percent, In fact7
the CBK has not prescribed any cash ratio, with the exception of a short
time '.n January 1972 when banks were required to deposit 5 percent of
their net deposits with CBK, This measure was rescinded in February 1972,
(c) Interest Rates
The CBK has fixed the interest rates on commercial bank lending
and deposits since FY74/75, It did this because commercial bank were
operating as a cartel and setting rates themselves, As a result, rates
61,
of interest on savings deposits of commercial banks were increased from:
3 to 5 percent and on time depos.ts were increased from the range 3 to 4.5
to the range 5.125 to 5.875, .depending on maturity and size of deposits
(Table II-1). The maximum rate on time deposits refers to those held for
up to 24 mnnths of a minimum value of K Sh 500,000. No longer-term deposits
are available from commercial banks. The minimum lending rate was also
raised in 1974 from 7 to 8%. In 1976 the CBK waived the minimum interest
rates on commercial lending, apparently in an attempt to stimulate sluggish
credit to the private sector. Following this measure, the interest rate on
commercial lending dropped slightly.
Deposit rates of the Post Office Savings Bank have maintained
their parity with savings deposits of commercial banks, but are slightly
lower than rates on time deposits. Both deposit and lending rates of non-
bank private financial institutions are higher than commercial banks, and
they also offer a wider variety of term. structures of deposits.
(percentage rat~es: as of June 30, 1-0't-l972, andT_c o;f Dec. 31, W193-lcy7f-)
I At ___ 3d9 1(0II 197 19712 i0'r"3 d
Ei11s3 a.. . 41.50 4.00-. 2.00 4.00 1. 60 6.0 oa.00ilsf.. i..5.00 11 1/ 253 4.5J 5-2)9¶*3-
L5.UO 5.00 5.00 5.0 5O .00 5.00 5.53) Z X~6.00 6.00 6.00a 6.o0 6.00 6.00o l. 03 7.00 5
5.50 5.50 5.50 5.50 5.50 5.50 5.50 O.0..'-~6. 50 6.5o 6.50 6.5c~ 6.50 6.50 6.53 7.u 0 ,0 -
-.-. - -- ot.£ 'rtis65 650 6.50 6.50 6 .50 6.5o . .5 x.3
t.r. :.o 5-½.~~000 3.03 3.00 3.00 3.03 3.00 3.00 3.003f -5.255.. .-'at,) '! e 3.25 3.25 3.25 3.25 3.25 3.25 3.25 -2 .1-
izs tLw% Z I-Ot 3.50 3.50 3.50 3.53 3.50 3.25 3.53 5 I 25 5,(2. 1': ) ZV 9 Of.taz5i 3.75 3.75 3.75 3.75 3.75 3.75 3.75 '5.37: I is iq mo.,ti'2 4.00o 4.00o hiO0 4.00 4.00o 4.00a 4.0 5,o3 5.,5 .
h .50 4.50 . 4~ 4.50 4.50 ~ .7 /5-5-3.00 3.00 3.00 3.03 3.03 3.00 3.00 5X
'- ... -7.00 7.00 7.00 7.00 7.00 7.00 7.33)3.-
25 300/ 3.00 3.00 3.00 3.00 3. 033.'
7.-53 7.50 1] 7.50 7.50 7.50 7.50 7.50 .C3 Y
3 oo-'*(~osartrte)-30-6.00o 3.00o-6.00o 3.00-6.00 3.03c-6.0o3 3.00-6.-00 3.0-7.5 5O.3- 5- 10.00-12.00 10.00-12.00 10.00-12.00 10.03-12.00 10.03-22.0 ?.0-12.0 2 0-1.3.-13
Iics *arious timrurities) -. 06.50 4.o.6.s .0-.50 4.5o-'.00 4.50-7.00 5.5-6.5 5.5---.5 .5. -.-.I_Z7.50-10.00 7.50-10.00 7.50-10.00 7.50-10.00 7.50-10.0 7.5-10.0 7.-3 1.0
% -I! I 1 t:~e be1lance of Treau.zury, Bills outstwidinU wLas redeemced by the Treasury.
c.±1LL ol,c;y &agree or. ratLes.
" i.. rat.- aLre clater..unei 1yirndiv dua ak
~.....Z. -. sh. 13Q0,00 to so:r. 2510,003 :uwciaumi.
_u- - ?i.d A r l~ Eiar-k off enya
~iizit:i: ns:ut re;siatered under the Building Soci.tiec Act, but whlose primary ffusctioni is ta Finiance the purcaiLse off property.
J.Ep-,Ce:.tral . ]lar.k off i:.erya, various issues, and Cen.tral Bank off Kenya, a Recno-mic and Financial Revi.ew, various issues.
63.
VTil. A CO{PARSON 'OF TWANSACTION, COSTSOF'FITANCIAL INSTITUTIONS
(a) Trainsaction Cost; of Kceiya Financia1 Institutions
Table III.1 presents the administrative costs and expenses for default
risk of the principle financial institutions in Kenya in 1976. Costs are
presented as a percentage of total assets. Of the commercial banks,
administrative costs were particularly high for the two expatriate banks:
Barclays and Standard (4.9 and 4.5 percent, respectively), reflecting their
relatively high salaries paid to their staff, and also the cost of their extensive
branch network. The administrative zosts of the National Bank of Kenya
are substantially below the average (1.4 percent total assets) due not only
to its relatively lower wage bill (0.7 percent compared to an average for
commercial banks of 2.3 percent), but also to the fact that it has only 4
branches, compared to 36 and for Barclays, 37 for KCB and 32 for Standard
Bank. The administrative costs of KCB are close to the average for all
commercial banks (3.7 percent compared to an average of 3.5 percent),
despite its extensive branch network. KCB does appear to be relatively
efficient in so far as its administrative costs--are concerned.
The default risk expenses (provision for loan losses) of KCB are the
highest of the commercial banks surveyed (2.9%), and as a result KCB's total
transaction costs (administrative plus default expenses) are also the highest.
There should be some trade-off between default expenses and administrative
costs, since the greater the allowance to cover the risk of default, the less
need be spent on project appraisal and implementation, and hence the lower
the administrative costs. This may well be one of the factors contributing
to the relatively low administrative costs of KCB.
64.
As one would expect, the administrative costs of the non-bank private
financial institutions are much lower than commercial banks. They have
virtually no branch network, and their salary and wage bill is a much smaller
percentage of total assets than commercial banks (0.7 percent compared to 2.3
percent). Since they tend to attract the deposits of the larger corporation and
semi - government bodies, the average size of deposit is likely to far exceed
that of commercial banks, and hence the unit cost of administering such deposits
would be lower. Also on the asset side, the scale and type of operations (e,g., a
merchant banking) would tend to reduce the percentage administrative costs.
None of these institutions allocated funds for risk of default, so their total
transaction costs consist of those for administration.
There is considerable diversity among the transaction costs of the
public financial institutions, reflecting primarily their type of operations. The
two agricultural development institutions, for example, have widely different
activities, ADC being mostly an agricultural research type of institution and
ASC being engaged in credit extension to agriculture. Hetice the much higher
transaction costs for AFC (5.3%) compared to ADC (0.9%). Among the industrial
development institutions, IDB has very lot transaction costs (less than one
percent), IDB is engaged mostly in lending to large-scale enterprises, and so
its administrative costs would unstandably be lower than an institution lending
mostly to the small-scale sector. ICDC,for example, has a substantial small loan
portfolio; it has, however, managed to keep its administrative costs relatively
low for this kind of activity (1.6%). ICDC default risk expenses are 2.1%,
again not particularly high given their small-scale lending operations.
65.
b) A Conivarison with Linancial institutions of other LDC's
The transaction costs of Kenyan financial insittitions compare favorably
with those of other LDC's. Table 11.2 presents the adm,inistrative costs for
selected credit institutions in LDC's. These institutions are mostly engaged
in agricultural lending, and so a comparison with A.FC is relevant. AFC's
administrative costs are well below the median for this group of institutions.
ICDC.. also compares favorably with instutions engaged in lending to small to
medium - scale industry (Table II1.3). Its total transaction costs of 3.7%
are among the lowest of the institutions cited in the Table, which range
from 1.9% to 15.1%. IDB and DFCK also compare well with those institutions
engaged in lending medium to large - scale industry. This is particularly
true for IDB: its tran.xsaction costs of 0.9% are among the lowest of this
group of institutions.
The transaction costs of the commercial banks in Kenya are high by
international standards. Administrative costs, found to be 3.5% for all
commercial banks are a full percentage point more than one would usually
find in LDC's. This could be attributed to two factors: one, the high
cost of branching, and second, the relatively high salaries
paid to bank employees in Kenya. It is also likely that a higher percentage
of bank staff are expatriates than in other financial institutions.
Tahl .jJ .TL1. TRANSACTION COSTS OF tIAJOR FINANCIAL INSTITUTIONS IN KENYA(As percent of Total assets: 1976)
Total Salaries Other Admin. Default Risk TotalAdministrative and Wages Costs Expenses TransactionExpenses Costs
(1) (2) (3) (4) (1) + (4)
(5)
3.50 2.30 1.20 1.19 4.681. All Commercial Banks
KCB 3.67 2.41 1.26 2.87 6.55Barclays 4.87 3.36 1.51 0.98 5.85Standard 4.50 3.41 1.10 - 4.50National Bank of Kenya 1.42 0.71 0.71 0.66 2.09
2. Non-Bank Private Financial Institu--tions 1.20 0.55 0.67 - 1.20
3. Public Financial Instituitions
(a) Agricultural DevelopmentInstitutions
AFC (1975) 3.86 n.a. n.a. 1.41 5.28ADC (1975 0.91 0.68 0.23 0.01 0.92
(b) Industrial DevelopmentInstitutions
ICDC 1.63 1.03 0.60 2.12 3.74IDB 0.86 0.48 0.38 - 0.87DFCK 2.21 1.04 1.17 0.34 2.55
(c) Housing Finance Institu-tions
NHCK (1975) 1.02 0.69 0.33 - 1.02
67.
Table VIII.2.:
Administrative Costs for Selected Credit Institutions of LDC's
Annex Table: Administrative Costs for Selected Institutions
Cost as a Cost as aPercent of Percent of
Country Institutions New Loans Total Resources
AfricaGhana ADB 10 10Ivory Coast CNCA 9Kenya *AFC 3.9Morocco **CIJCA 10 3Senegal BND 3Unganda Cooperatives 50
A§iaBangeladesh KTCC 17 10
BKB 3India *LDB 3Indonesia BIMAS (improved) 25Jordan *ACC 30 3Korea *NACF 6 4Lebanon BCAIF 3Malaysia 3BPM 20Pakistan *ADB 3Philippines *Rural Banks 3.7 3.2Thailand BAAC 13 8Turkey SCR 5 2
BAT 6Taiwan Farmers Association 2.5
Coop. Bank (2.5)Land Bank (1.5)
Latin AmericaBrazil ACAR 10Colombia *INCORA 10 7Costa Rica BNCR 7 3El Salvador DAPC 4Mexico ABC 16 11Peru *FONDO 3 1
ADO 6
* Ilstitutions involved in Bank Group Projects.
Sources: Bank Policy on Agricultural Credit, World Bank Report No. 436, May 1,1974 Annex Table 13.
Table VIII. 3:C-Lt-IlSl wstur_ *r ql e U.UiiLud wi4. 1s lk
L; *prar-Loa - p-irccLt - opltol t awa * .r . t tall
AIoa1I.a,r.Ald.. Ca.aL D.it-alt hi.k Tot..1 Tr.W _ _
A. aull Jai.IwsLry
r1v,tLa DIv. Corp. oM 11t WI1I1.psixu 3.0 3.? 6.? -1.9 11.P... 11*aik of 1kw HIill]lj.pia ' 3.0 2.5 5.5 -3.1 2.4.urltlums TDe 1Wt. Uuik of Ulturtlu. *3.0 2.1 15.1 -15.1
D.. H.-e. 1I Welamr-y
Indi: tJuJarat St.to Vloanoclg Corp. 1.:00 0.44 1**Ii 2.55Kareu; Hu4ium TndutsLry Ubnk 3.50 0.L0 4.10 0.20 1140Calhub.hIa; Carpaacalwa Vlm1aIa,r4 Ppuler 6.3 . X 00 10.30 1.20 1140
C. Ua41uaa-'a XalaUtry
haI11pplza 1'rvto l av. Curp. of the aI'lpplv 0 0.2 2.3 2.f 2.3 1.aDtiV. Bukk of tLhe 11i1ilpplhaa 0., 1.3 1.'- 3.3 5.0C-.raial Sh.lks 1.0 1.1 2., 1.9 1i.6Iladle; I'lciubtriac Dcv. iluwkuft 1k41a G11,O o,O 1.60
a .0kokIdcudai,ri1 Credit L laav4t.wait Cuap. of aua41 .o0.*0 - 0.1O 2.60 3.00Kara-e; gort,... Dhv. Ilutauo Carp. 1.70 - 1.70 ia6 . 6.30lAra.., Ott. iack 0.50 0.10 0.60 t.60 1.20WituritiItue uariitu. lucv. Ilatak 0.U4 0.50 1.31 2.65
i1i2lppln. Uital lOata 3,5 1.2 .7-Priv.La hav. iluliks 5.0 3.2 8.2 -1.?Dcv. DiOck or the flllippaulne 3.9 3.*I t.3 -8.5 -I.2Ht uLaacc; Haamrltiu. Dev. Batik 4.2 1.9 6.1 - 3.9
U tLiacaLat. bau.a.4 ou dal. 41r.cL)y a rt... i Li t .. v.irl.s aulutlooaa.
0x
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