It would be very worthwhile having your sister speak with his physician, so an appropriate referral for evaluation can be made. Your nephew may just have some difficulty in producing or expressing speech. Although this type of problem can occasionally be traced to a specific underlying factor, it is much less common to identify a "birth defect." I am glad that you think he hears well and is able to follow directions, but I generally would still confirm normal hearing. Help your sister to understand that the earlier something can be identified and treated, the less likelihood for any life-long problem and the brighter the future should be for your nephew.
Two-Year-Old Still Not Speaking
Pediatrics Expert Advice from Henry Bernstein, M.D.