Get premium membership and access questions with answers, video lessons as well as revision papers.

The role of Non-Bank Financial Institutions (NBFIs) in Kenya


Date Posted: 4/16/2012 3:41:34 AM

Posted By: sashoo  Membership Level: Silver  Total Points: 382

NBFIs were set up to fill a gap in the financial system and rectify inefficiencies in loan facilities. These specialized financial institutions supplement the availability of finance provided by commercial banks. The NBFIs are both public and private. These institutions mobilize savings, in competition with commercial banks. The savings are then channeled into credit for commerce, agriculture, industry and household sectors.

Kenya continues to develop a wider range of these financial institutions.

In 1980s, (NBFIS) grew rapidly in number, assets and liabilities. This growth mainly reflected some defects in the banking act such as:

• The minimum capital required to establish NBFIS was lower than needed by Commercial banks.

• Unlike banks, NBFIS were not required to maintain cash reserve ratio.

• NBFIs were permitted to impose higher lending rates on their facilities.

• Banks were restricted from undertaking mortgaging lending.

• Banks would only lend the equivalent of 25% or less of their capital to any one single borrower.

The growth of non-banking institutions was a development that was so positive. Initially, they provided financial services that were specialized. This included hire purchase, leasing and merchant banking. The regulatory differences encouraged commercial banks to set up non-banking financial institutions to avoid the restrictions enforced on them and benefit from the higher interest rates. As a result, the restrictions between banks and NBFIs started to lessen with time, causing the competition between them to increase.

The increasing competition forced many of the NBFIs to become unusually aggressive. Some undertook risky lending and mismatched maturities whereby they accepted lower matches. The operation of non-banking financial institutions became unsustainable and contributed to the collapse of several institutions in mid 1980s and early 1990s. As a result, there was a flight of equality depository institutions as most depositors shifted funds from small NBFIs to larger

and more established banks.

The Central Bank, on realizing that NBFIs were no longer complimenting activities of commercial banks, took the following measures:

1. It broadened the definition of money supply so as to include the deposits held at NBFIs.

2. With effect from 1995 NBFIS were required to observe cash ratio requirements at stipulated levels. They were to do this by involving reserves at the Central Bank.

3. It adopted the policy of universal banking in 1995. Since then, the central bank has encouraged NBFIS to convert into Commercial banks and merge where possible - cases where NBFIS are affiliated to Commercial banks. By August 2000, 25 conversions and 12 mergers had occurred, leaving only 11 institutions still operating as NBFIs.

The following institutions are categorized as specified financial institutions because they fall under the regulatory provision of the Central Bank of Kenya Act. They include:

1. Housing Finance of Kenya.

2. Savings and Loan Kenya Ltd.

3. Akiba Loans and Finance Ltd.

4. Kenya National Capital Cooperation Ltd

5. Commercial Bank of Africa Finance Company.

6. The Kenya Commercial Finance Company.

7. Mombasa Savings and Finance Ltd.

8. Industrial Development Bank. (IDB)

• IDB was established in 1973 by the government of Kenya and the ICDC. It is primarily a developmental bank for assisting and promoting industrial development through the provision of long-term loans, direct equity investment, guarantee for loans and underwriting of issues.

• IDB plans to stimulate the capital market by floating shares in industrial development programs. This policy will raise funds for future development and also spread ownership of the companies in which investments are held by IDB.

• IDB is not licensed under the banking act but at as development finance company. It seeks to finance new ventures and refinance existing operations. IDB attracts lines of credit from World Bank, European Investment Bank, African Development Bank among others; it uses the funds to finance long term loan capital and equity in developing industries.

• It gives significant consideration to enterprises to utilize considerable local resources, those which are labor intensive and those which are export-oriented. IDB promotes projects from basic ideas through the final formation of the company, and also the pioneering of new productions.

Functions of non banking financial institutions
-Mobilise savings for development
-Provide advisory services to investors on how to set and run business
-They generate revenue to the government through taxes
-Create employment in the economy
-They carry out feasibility study for potential investors
-Provide investment capital/long term loans to existing and new businesses
-They support investments in those areas that are not supported by commercial banks
-They lend money for specific purpose
-Act as channels for donor funds
-They build confidence in investors i.e insurance companies through providing cover to businesses

Next: Commercial Banks in Kenya and the services they offer
Previous: Agricultural Finance Corporation in Kenya