Urgently address manufacturing

Workers prepare roses for export to the European market at the Maridadi Flowers warehouse in Naivasha. PHOTO | REUTERS

Every year, the bankers association publishes statistics that show the banking sector pays a disproportionate share of corporate taxes compared to its contribution to GDP.

According to the latest data, the Kenya Revenue Authority (KRA) collected a record Sh181.2 billion from commercial banks last year as the lenders marked their most profitable year yet.

If you added Safaricom’s contribution to corporate taxes to these numbers, you will appreciate just how this economy has become too dependent on sectors that don’t produce or export tradeable goods.

The data is regularly published as a marketing tool to portray banks as card-carrying members of that prestigious club known as the compliant few who must be celebrated for contributing a disproportionate share of the revenues the government deploys to fund education, health, and roads.

Yet there is another side to this coin. The big profits they made are a sign that the sovereign is borrowing at high-interest rates. Net interest margins have widened. They have made turns of profits from forex trading.

This is fair enough, but another way of looking at it is that our commercial banking sector is not intermediate. Yet the lending mandate given by their licences is as follows: take deposits from the public and intermediate to viable projects in the private sector where you can generate a return.

If they lend money as per the mandate of the licence, this is how the economy grows.

Yet when you look at the disclosures in the books of some of the mass major retail banks today, customer deposits lent to the sovereign come to more than 40 percent of the deposit base. A classic case of what economics text describes as the crowding effect.

The big profits banks are making are also but a sign of how far our economy has become financialised, that is, it is becoming more dependent on prosperity in the area of finance and real estate as opposed to the production of tradeable and tangible goods and services.

Longterm lending

It is like the financial part of the economy is growing to compensate weaknesses of the productive part.

In the immediate post-Independence period, under the policy of import substitution industrialisation, we had a dynamic manufacturing sector.

In those days, complementarity between industries was increasing with considerable forward and backward linkages between suppliers and users.

We were the undisputed leaders in exports of manufactured goods in the Comesa region. Today, we import, kitchen equipment and furniture from Turkey, Dubai and China.

Today, our banks may be rich, but they are incapable of lending long-term because they mainly hold short terms deposits.

Development finance institutions the government created in the ’70s to support manufacturing have suffered crippling capitalisation deficits.

Our capital markets are no longer vibrant; I can’t remember the last time I saw a company going to the capital markets to issue a corporate bond.

I will stop there before I start sounding like an old man wallowing in nostalgia. Until we restore the horticulture, coffee, tea, maize and livestock sectors, the green shoots of recovery policymakers talk about will count for nothing.

The rise in banking’s contribution to the exchequer was widely attributed to the growth of taxes aligned with the industry’s profit.

Over five years, the banking sector’s total tax contribution has nearly doubled, having grown from Sh99.1 billion in 2018.

The writer is a former managing director of The East African.