There are some sectors in the economy that may not secure adequate funds from commercial banks for various reasons.
- May take a long time to realize returns
- High risk associated with such sectors
- Unattractiveness/low returns
- Uncertainty or highly volatile returns
- Require heavy investment in infrastructure
These sectors include:
• Tourism
• Rural housing
• Agriculture
• Rural enterprise
• Small commercial businesses e.g. Jua Kali etc.
• Such sector e.g. agriculture and tourism are essential for a balanced economic growth and development.
The government has thus established financial institutions to cater specifically for these otherwise unattractive but essential sector. They include:
1. Industrial development bank (IDB) – give loans for industrial development in Kenya.
2. Development Finance Company of Kenya (DFCK) – To finance various projects that will spur economic development and create employment.
3. Kenya Industrial Estate (KIE) – this is a branch of Industrial and Commercial development cooperation (ICDC) dealing with industrial development.
4. Agriculture Finance Co-operation (AFC)
5. Post Bank – To mobilize rural savings
6. National Housing Cooperation – for development of houses to ensure shelter for everyone.
7. Kenya Tourism Development Cooperation (KTDC) for promotion of Tourism in Kenya.
Advantages/Functions/Case for Development Financial Institutions
1. They provide venture capital
2. They provide facilities for large lending
3. They provide technical expertise and support emerging projects transferable from other sectors of development economies.
4. They are risk capital providers in areas which are not attractive to commercial banks and other major lenders due to risk involved.
5. They carry out feasibility study to evaluate viability of projects.
Case against Specialized Institutions and Development Banks
1. They are being phased out by Globalization and liberalization where needy sectors can easily get expertise from outside.
2. Commercial banks have now matured up to provide capital for all sectors.
3. They were only useful during periods of foreign exchange restriction
4. They are risk capital providers in areas which are not attractive to commercial banks and other major lenders due to risk involved.
5. They increase government spending.
