in the 21st Century

24 Kenya’s Financial Transformation in the 21st Century
There was an understanding that economic development entailed massive
resource mobilisation, and that these resources could be raised through banks.
There was also the political reality that needed to be addressed – the need
for visible ownership in the Kenyan economy by African Kenyans – and
the government’s stated policy of ‘Africanisation’ was also pursued through
the financial system. The government also established two new banks – Cooperative
Bank of Kenya and National Bank of Kenya – in 1968. Specialised
credit institutions, or development finance institutions (DFIs) – including the
Industrial & Commercial Development Corporation (ICDC), the Industrial
Development Bank (IBD), the Development Finance Corporation of Kenya
(DFCK) and the Agricultural Finance Corporation (AFC) – were set up to
give loans to Kenyans and also to purchase shares in public corporations
(Grosh, 1991). 11
There was also growth of local financial institutions, termed ‘indigenous’
banks. Between 1971 and 1980, one local private bank and nine local NBFIs
were established (Kariuki, 1993). These financial institutions were mainly
owned by African (Kikuyu) businessmen who had built up capital during the
coffee boom of 1976–1979 due to their close links to President Kenyatta, who
was also from the Kikuyu ethnic group (Throup, 1987). The commercial banks
and NBFIs were largely free from regulatory controls, except the stipulation of
lending and deposit interest rates (Brownbridge, 1998). There was a condition
that banks should extend credit to agriculture amounting to 17% of their
deposits, but this requirement was rarely enforced (Kariuki, 1993).
The M2-to-GDP ratio throughout the 1970s and 1980s remained at
approximately 30%. There was some financial deepening, however, as the
loans-to-deposits ratio grew from 64.6% in 1969 to 80% by 1980. The ratio
of financial institutions’ (banks and NBFIs) assets to GDP grew from 28% in
1971 to 40% in 1980 (Ngugi, 2000). 12
2.4 Nyayo: The rise of indigenous and political banks – 1980 to 1990
When President Kenyatta died in 1978, he was succeeded by President Moi,
who was from the Kalenjin community. The watchword chosen by Moi for
his presidency was Nyayo (meaning ‘footsteps’), emphasising continuity with the
11 ICDC was originally incorporated in 1954 as Industrial Development Corporate (IDC) to assist and encourage
medium- and large-scale investment in the industrial sector. In 1973, IDB was set up as a subsidiary of ICDC.
However, ICDC, DFCK and IDB had overlapping and duplicating roles (Grosh, 1991).
12 It should be noted that this ratio is different from the private credit-to-GDP ratio, as it includes public as well as
private lending and also includes liquid assets which are not lent out.