The Cash Runway

Years ago when I worked in banking, one of my earliest critical lessons completely upended my understanding of cash as an asset. The treasurer of the bank was unhappy with the way that the retail team was monitoring the level of cash sitting in the bank’s network at the cashier tills, in the branch vaults and in the ATMs. The treasurer was rightly pointing at that by having physical cash in excess, the bank was holding a dead asset that could otherwise be appropriately sweated in overnight lending or in short term government securities. The excess cash holding was actually a liability from a revenue generating perspective. The discussion then led to a debate about which branches had high cash deposit and withdrawal customer trends and what kind of daily monitoring was ongoing that would ensure the bank was not leaving money on the table as it were.

As I sat in the parking lot at my daughter’s school last week, I watched one of the school’s handymen going about his business fixing a pipe coming out of the kitchen. I recalled a vicious debate on a parent’s WhatsApp group at the onset of the pandemic when some parents were angry at the school’s partial reduction of school fees as it moved towards providing an online platform for the continued education of its students. In those parents’ view, the school fees should have been significantly whittled down since the children were not physically present at the school premises. Discussions between parent representatives and the school had revealed that the school had fixed costs like salaries, loan repayments and building maintenance that continued to accrue even where the students were not present.

But a few belligerent parents were not convinced, partly I presume because they were already suffering reduced incomes themselves and were in survival mode just like many organizations were. The school by this time had made the painful decision, like many other businesses, to drastically reduce salaries of staff with the non-teaching staff like the maintenance guys and bus drivers having to take massive cuts as their labor was not required on a day to day basis. For many parents, the pandemic brought to fore the fact that their school fees payments was what kept the business of the school afloat, where that business went beyond just the teacher-child interaction in class and extended to all the non-teaching staff, the facilities, the buses and everything else within the school universe. The popular buzz word in many organizations at the beginning of the pandemic became “runway”: Do we have enough runway to keep this organization afloat for the unforeseeable future? In other words, does the organization have enough cash, and for how long could the monthly cash burn last with significantly reduced revenue?

What the pandemic did was lift up the skirts and reveal the spindly cash flow legs of many a business. The cash conversion cycle was tight, with revenues being gobbled up quickly in payment of suppliers and salaries, leaving little wiggle room for free cash to be set aside in reserves for a rainy day, or as in this case, a pandemic and its debilitating lock down measures. Years ago, a banking colleague humorously told us a story of a visit she made to a well-known advertising agency where she had a difficult discussion with the founder, telling him that he could not read an income statement and  know the difference between revenue and profit. The founder constantly took money out of the business to plough into personal pursuits and the organization was suffering from huge cash flow difficulties. Within a year of that discussion, the agency folded up and the founder went into his next business venture: politics.

Cash reserves for many businesses are an aspiration given rising costs, competition and thin profit margins.  Just like in the banking industry, idle cash is a liability and is best applied sweating it out either in finished goods or along the service value chain to generate more revenue. But as the Covid-19 pandemic has shown us, having cash reserves is a necessity particularly when it comes to the core of our businesses which is employee welfare. The social contract between employer and employee has been severely tested in the last year particularly as business owners face the diabolical conundrum of whether to lay off or slash wages of employees so as to ensure a longer business survival runway, or keep the employees with no pay reductions and pray that things will take a turn for the better in a very precarious and unforeseeable future. Top of our minds should be our look back reputation: what will employees and suppliers remember us for in years to come when they look back at the pandemic years?

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Twitter: @carolmusyoka

The Dangers of Cross Border Banking

Our neighbors in Uganda have recently provided some very interesting judicial pronouncements that have created clammy hands of fear into the Kenyan banking industry that lies eastward across the Victorian pond. In the most recent case, a Ugandan businessman borrowed a series of loans running in the tens of millions of US dollars from a Ugandan subsidiary of a Kenyan bank, part of the borrowing of which was lent by the Kenyan parent bank. It is fairly common throughout the world for local subsidiaries of banks to draw on the strength of the parent bank’s balance sheet simply because of lending limitations of the subsidiary in its jurisdiction. A bank has legal lending limits that are linked to its capital base therefore it may ask the parent to take on a loan that would breach the subsidiary’s statutory lending limits. Typically these loans would be in foreign currency and would be assessed at the parent bank’s credit committee level. The local subsidiary bank then becomes a collection agent for the principal and interest payments and remits the same to the parent bank.

This kind of lending is not only limited to the private sector. Governments also take on commercial loans from foreign banks in what are known as syndicated loans where a group of banks, some of which may have local presence, provide a loan to the government and appoint one bank as the collection bank. The collecting bank, acting as a collection agent, will receive the loan repayment from the government and then remit the same to the various lenders in the syndicate. Due to the significant size of the loans, more often than not the loans will be placed on the parent bank’s balance sheet as they have the financial liquidity to provide the funds as well as the capital strength to support loans of that size from a single borrower lending limit perspective. Back in the Ugandan case, the Ugandan businessman fell into deep trouble and couldn’t service his loans. After scrambling about unsuccessfully trying to find another lender who could take over the loans from the Kenyan subsidiary and the Kenyan parent banks, he and his lawyers came up with a brain wave of Donald Trump proportions: Sue the banks claiming that attempts at collecting the loan repayments were tainted with fraud and, wait for it, that the Kenyan parent of the bank was not licensed to conduct the business of a financial institution in Uganda by the regulator Bank of Uganda, and therefore the loan from the Kenyan parent was illegal from the onset. Moreover, the law suit also claimed that the Kenyan parent bank required explicit authority from the regulator to appoint its Ugandan subsidiary as an agent to collect the loan repayments.

A pretty bizarre argument given the fact that at the point where the loan was approved and disbursed, the Ugandan businessman quite likely smacked his lips in pure glee, popped a bottle of champagne and proceeded to withdraw the money with no qualms about the licensing capacity of the source of funds.

The judge presiding over the case took no prisoners in his 7th October 2020 judgement and issued a stupefying ruling that beggars belief. He ruled that indeed the Kenyan parent bank did not have the legal license to conduct business in Uganda and therefore the loan was invalidly issued, secondly he ruled that the Kenyan bank did not have authority from the regulator to appoint its Ugandan subsidiary as a collecting agent and then he ordered that all the properties that had been mortgaged as securities by the businessman be released back to him forthwith. Further, the judge ordered that all the monies that the bank had recovered from the borrower in the course of trying to enforce payment be reimbursed.

The judgement sent the Ugandan banking association into a tearful tizzy, with its Kenyan counterpart holding up tissues in support. It put into grave danger a whole series of loans that Kenyan and South African banks with Ugandan subsidiaries had provided, but also inadvertently called into question syndicated commercial loans that had been given to the Government of Uganda by local and foreign institutions. The Bank of Uganda (BoU) Governor issued a statement a week later on 14th October 2020, essentially taking the high court judge to school on what the definition of a foreign bank conducting business in the Ugandan jurisdiction was as per the relevant law, as well as what that same law defined as an agent bank, both of which the high court judge had misinterpreted. The Governor also explained what the BoU’s regulatory reach was as far as foreign banks that were undertaking lending or non-deposit taking activity in Uganda. In simple words: Judge, get a life!

Anyway, the Ugandan subsidiary and the Kenyan parent bank rushed to court  to get a stay of execution on the high court judge’s order pending appeal, which was mercifully given. In the stay of execution judgement dated 2nd November 2020, the judge gave a zinger of a parting shot: “Before I take leave of this matter, I was flabbergasted by one of the parties sending emissaries to me with financial proposals in order to influence my decision. This is disgusting to say the least.” Well, I leave it to you to guess who might be the party so unnamed.

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Twitter: @carolmusyoka

IFRS 9 knocks the wind out of banks

[vc_row][vc_column width=”2/3″][vc_column_text]Banks just can’t catch a break, can they? In December 2015, Honorable Jude Njomo introduced a bill to ostensibly tame obscene profits that banks in Kenya were deemed to be enjoying. Having appealed to the hearts and pockets of his fellow legislators, who had unfettered and exclusive access to their own parliamentary low rate mortgages with a Kshs 20 million limit, free car privilege for the first car and Kshs 7 million low rate loan for the second car, the interest rate-capping bill sailed through and was signed into law in August 2016.

The mischief that the legislators should have sought to cure was the undifferentiated risk pricing that banks were levying on borrowers. A borrower who had a long history of taking loans and repaying them successfully would be charged at the same rate as a new borrower with zero credit history, which was in the range of 19 to 30 per cent depending on the bank.

What Honorable Njomo had no idea was the double whammy that banks were going to get once the International Financial Reporting Standard 9 (IFRS 9) replaces the International Accounting Standard 39 (IAS 39) with effect from January 2018. IFRS 9 aims at helping banks become more rigorous and prudent in the management of their existing stock of loans by setting an even higher standard on the amounts they must set aside as provisions for those loans, what accountants call impairment. While the previous standard IAS 39 required banks to make provisions only if the client started to demonstrate loan repayment stress, in other words reactively, IFRS 9 requires banks to look ahead, anticipate repayment stress and start making the provisions from the first day that the loan is booked.

What does this mean? Say John has a credit limit of Kshs 1 million issued on 1st January 2016. Under the previous standard of IAS 39, if he did not demonstrate any repayment stress then there was no requirement to set aside a provision for his loan. However, at the first sign of stress, say for instance he was retrenched and missed a payment that was due on 30th April 2016, the bank would be required to assume a probability of default of 5% from May 2016 and a provision would have to be made. Under IFRS 9, that probability of default has now been increased to a mandatory 10% in the first year of the loan whether or not the customer has demonstrated repayment stress. It doesn’t end there. There is an assumption that if John has a loan limit of Kshs 1 million but is only currently utilizing half of that, the unutilized portion of that loan is also included in the calculation for impairment. Thus the mandatory provisions for all loans regardless of their performance, as well as the inclusion of unutilized facilities means that the provisioning can go up to three times or more of the amount required before IFRS 9 standard was applied. This therefore applies to customers with credit card facilities or for those business borrowers who have working capital facilities like overdrafts or revolvers that tend to have fluctuating amounts during their lifetime. It gets even better. Even unutilized off balance sheet items like letters of credit and guarantees largely used by business borrowers, which previously did not need to be included in the calculations for provisions will now be required to be incorporated in the total calculations.

Simply put, banks will have to set aside income to create a bigger buffer for the loan stocks they have on their balance sheet, whether that committed loan is fully drawn or not. Setting aside that income can only be mitigated either through pricing, reducing availability of undrawn limits or both. Whatever the case, the current interest cap at 14% ensures that the pricing option is simply unavailable on most existing facilities. The danger that now lies on the horizon come January 2018 is that even overdraft and trade facilities that were previously being enjoyed by the privileged few business borrowers that survived the Njomo chop, will now either be removed or renegotiated as to be available on application rather than on available on standby as is currently the case.Trade is the oil that drives the economic engine of a country. When the instruments that enable that trade such as overdrafts, letters of credit and guarantees are imperiled, we can no longer make banks the whipping boys of our warped sense of social injustice.

[email protected]
Twitter:Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Banks have to go mobile to stay relevant

The 2016 FinAccess Household Survey – published in February 2016 by Financial Sector Deepening (FSD) Kenya – provides the most recent data of Kenyan behavior around consumption of financial products and services and is a treasure trove of information for any banking strategist.One key finding was the use of credit. In what reflects the wealth distribution within the Kenyan population, 57.3% of the survey respondents in the research reported that they take credit to meet their day-to-day needs. The second highest need for credit was to pay school fees at 21.5% and only 15.8% were using credit to generate wealth in the form of business loans.

Having a customer who has insatiable credit needs is banking nirvana. The question is how to do so in a manner that will be cost effective with minimal loan loss potential. The FinAccess Household Survey should be read together with yet another FSD research paper titled the Financial Access Geospatial Mapping Report launched in October 2015. The report essentially tracks access to financial services across the Kenyan geography, using data from Kenya National Bureau of Statistics, with unsurprising results.

Answering the question as to how many service access points exists per 100,000 people, the report finds that there are 3 banks, 1.5 ATMs and 32 bank agents serving that population. It gets more interesting as you start to look at the extent of mobile money penetration. Mobile money access points are 54 times that of banks at 163 with mobile money agents growing from approximately 48,000 locations in 2013 to nearly 66,000 locations in 2015 which is a 37% growth. Meanwhile, population within 3 kilometers of an ATM remained stagnant at 23% in the two years. Bank branches grew a paltry 1% from 26% to 27%, while bank agents grew from 53% to 60% in the same radius.

What is the data saying? The average Kenyan uses credit heavily to support his basic lifestyle and is nearer a mobile money access point than to a bank. The growth of mobile money agents demonstrates very low barriers to entry and should inform a bank’s decision on whether to purchase an ATM – whose price ranges from Kshs 2 million to Kshs 4 million depending on whether it has deposit taking capabilities – or whether to invest in deepening its mobile banking platform to deliver products through a wider customer delivery channel (at no cost to the bank) that is growing exponentially year on year.The interest rate capping on loans may have curtailed bank appetite for formal unsecured lending, but the two mobile loan products of KCB Mpesa and Mshwari continue to enjoy unfettered demand and have survived the interest capping law due to their fee based rather than interest rate based pricing which the average borrower is apparently indifferent to. The lesson here for the proponents of the interest capping law is that the average Kenyan who is trying to survive is more interested in access to credit than in the actual cost of that credit. The growth of mobile access points demonstrates that it is the preferred mode of not only transferring money but also storing that monetary value.
The critical question bank strategists should be asking themselves is how to piggyback off the cheap mobile agent network to provide loans and take deposits. The evidence already points to the need for smaller branches, fewer ATMS and greater use of historical mobile use data to generate personal credit ratings. Developing mobile banking applications for the average Kenyan is what will separate the chaff from the rice in the future banking industry.

Too Big To Fail-A Lesson From Deutsche Bank

[vc_row][vc_column width=”2/3″][vc_column_text]“We enable our clients’ success by constantly seeking suitable solutions to their problems. We will do what is right—not just what is allowed.” That is the classic statement of values from the Deutsche Bank website. In case you missed it, one of the world’s largest and oldest financial institutions has been lurching from scandal to scandal over the last few years and hammering a rusty nail into the coffin that is the “too big to fail” theory. The scandals have occurred largely in the last ten years of its nearly 150 year history and range from artificially propping up housing prices in the 2007-2008 financial crisis to participating in the notorious Libor scandal, to covert spying and espionage of its critics, to doing dollar denominated business with the US sanctioned countries of Burma, Libya, Sudan, Iran and Syria.

There’s not enough space or regulator imposed penalty dollar signs that can efficiently cover those malfeasances on this page, so I’ll focus on just one that makes short shrift of their statement of values. In the early days of 2015, an internal investigation dubbed Project Square that was looking into Deutsche Bank’s Moscow office trades revealed that a 36-year-old American trader Tim Wiswell had overseen over $10 billion of mirror trades that helped siphon cash out of Russia and mainly into London.

The concept was beautiful in its simplicity. An online article on Bloomberg titled “The Rise and Fall of Deutsche Bank’s ‘Wiz’ Kid” outlines the grab-a-bag-of-popcorn-for-the-drama narrative of how Tim Wiswell – Wiz to his friends – brought down the Moscow investment banking unit of Deutsche Bank. Wiswell’s desk, which never had more than a dozen or so employees, carried out thousands of mirror trades over a four year period. The size of the trades would be not too high as to raise an inordinate amount of eyebrows, somewhere in the range of $10-15 million per transaction.
Wiswell, who was promptly fired once Project Square was released, sued the bank for wrongful dismissal and lost. He claimed that at least 20 of his bossed and colleagues, including two supervisors in London, knew about the trades because they were carried out openly. The counterparties were also taken through “strict vetting” by the sales team using a compliance framework that was reviewed in both Moscow and London if any issues were identified. They all passed muster.
But how long had the compliance teams within Deutsche Bank been sticking their heads in the sand? The August 29, 2016 issue of The New Yorker magazine provides a well-written investigative piece on the $10 billion scandal. According to the article, on one day in 2011, the Russian side of a mirror trade, for about $10 million, could not be completed as the counterparty, Westminster Capital Management, had just lost its trading license. The Federal Financial Markets Service in Russia had barred two mirror trade counterparties, namely Westminster and Financial Bridge, for improperly using the stock market to send money overseas. The failed trade was a problem for Deutsche Bank, the New Yorker argues. It had paid several million dollars for stocks without receiving a cent from Westminster. The episode should have raised serious suspicions – especially given the revoking of Westminster’s license – but apparently it did not. The failed trade was resolved over a year later in November 2012 when Westminster repaid Deutsche Bank and the mirror trades continued.

But the patterns of suspicious activity were wagging their tails for the average compliance eye to pick up. Clients of the mirror trade scheme consistently lost small amounts of money: the differences between Moscow and London prices of a stock often worked against them and clients had to pay Deutsche Bank a commission for every transaction. The apparent willingness of counterparties to lose money again and again should have sounded an air raid alarm that the true purpose of the trades was to facilitate capital flight. The counterparties for the mirror trades were not owned by Russian oligarchs. They were brokerages run by Russian middlemen who took commissions for initiating mirror trades on behalf of rich people and business eager to send their money offshore, the New Yorker reveals further. A businessman who wanted to expatriate money in this way would invest in a Russian fund like Westminster, which would then use mirror trades to move that money into an offshore fund. The offshore fund then wired the money, in dollars, into the businessman’s private offshore account. An internal research report by Deutsche Bank titled Dark Matter, and which was totally unrelated to the unraveling scandal in Russia, revealed that Britain had significant unrecorded capital inflows. Since 2010, wrote the research duo of Harvey and Winkler, about a billion and a half dollars arrived in London every month and a good chunk of it was from Russia. “At its most extreme, the unrecorded capital flight from Moscow included criminal activity such as tax evasion and money laundering.” A month after this research report was released to much media debate, the $10 billion scandal broke out, revealing exactly how another department within Deutsche Bank played a big role in that economic anomaly. Of the eighteen billion dollars that the researched had estimated was flowing into the UK each year, about 20% had arrived there as a result of the trades made at their own bank. Deutsche Bank is now facing billions of dollars in penalties, at the last count they were fighting off a $14 billion penalty from the Department of Justice in the United States for mis-selling mortgage securities in the run up to the 2008 financial crisis. This is against a provision that they have made for $5.6 billion for legal costs related to all the scandals they are currently facing. The share price has of course tanked and analysts are concerned about its viability as a going concern if these penalties are exacted, as they’d have to go back to shareholders to raise the cash for making the penalty payments.
I’ve written about Deutsche Bank’s value statements today, and Wells Fargo value statements a few weeks ago. I’m sure if we dug deep within the bowels of Imperial, Chase and Dubai Banks locally, we would find a value statement or two posted proudly at the head office reception. I’m starting to build a healthy cynicism for value statements of any kind. If anything, banks should have a uniform statement globally: “We’re here to take your money, use it, make our money and hopefully give you a return. Someday”

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

British Banking Reforms Make for Tough Directors

[vc_row][vc_column width=”2/3″][vc_column_text]A friend of mine who heads the compliance department of a multinational bank recently drew my attention to the stupefying impact of the United Kingdom’s Financial Services (Banking Reform) Act 2013. Following the impact of the global financial crisis in 2007-2008, in June 2010 the United Kingdom government established the Independent Commission on Banking to inquire into the structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. After slogging through numerous details and nail biting horror stories from members of the public on the favorite whipping boy of human beings: banks, the Commission made its recommendations in September 2011 which resulted in the Financial Services (Banking Reform) Act being published, debated in the UK Parliament and assented to by December 2012.

The fairly righteous indignation of the British public and their parliamentary representatives against “Big Banks” provided the much needed wind assistance for the speedy conclusion of the inquiry and the conversion of their recommendations into law within 15 months. A key outcome of the Act was the creation of a new regulatory framework for financial services which including the abolishment of the Financial Services Authority and creation of the Financial Conduct Authority (FCA).

Please note the nomenclature used in the new entity: “Conduct”. The global financial crisis and the Libor crisis in the United Kingdom a few years later were primarily the result of misconduct on the part of errant bankers. Conduct has become the catchall phrase for addressing the shortcomings and trying to fundamentally shift behavior within the banking fraternity. According to Wikipedia, the FCA mandate includes the power to regulate conduct related to the marketing of financial products and it is able to specify the minimum standards and to place requirements on products. The FCA has the power to investigate organizations and individuals as well as the power to instruct firms to immediately retract or modify promotions that it finds to be misleading and to publish such decisions.

But this is the point that has made many senior bankers as well as banking executive and non-executive directors sit up and take notice. One key objective of the FCA is protect consumers and while the caveat emptor (buyer beware) principle that consumers are responsible for their decisions is maintained, if the consumer’s decision is made as the result of advice then the advisor should be responsible. So in March 2016, a new accountability regime was established called the “Senior Managers Regime” for both the banking and insurance industries. According to the press release on the FCA website, the new regimes will hold individuals working at all levels within relevant firms to appropriate standards of conduct and ensure that senior managers are held to account for misconduct that falls within their area of responsibility.” The thought process behind this regime change is that while there have been numerous occasions of banks being found guilty of flouting conduct rules, there have been very few cases of individuals being held to account.

According to a Deloitte UK publication explaining the Senior Manager Regime, “As there has previously been no requirement to determine who is responsible for what in a bank, it has been possible for individuals to claim that it was someone else’s responsibility, or ‘individuals seeking to protect themselves on a ‘Murder on the Orient Express” defense (It wasn’t me it could have been anyone)’ as noted by Martin Wheatly the former CEO of the FCA.”

Now if I were a senior manager at a UK bank, this is right about the time I would be having a candid chat with my line manager about decisions within my pay grade, with the option of a downgrade in title, but not salary being a viable option. Because the thrust of the new senior manager regime is one: ‘You can delegate tasks but you can’t delegate responsibility.’ The FCA then puts its mouth where its money is and proceeds to produce a lengthy document subjecting its own organogram from the board of directors through to management to demonstrate who has senior management responsibilities as well as prescribed responsibilities and overall responsibilities. The aim of this diagrammatic self exposure is to establish to the public how it expects financial institutions to identify who a senior manager is and where the overall responsibility of their decision flows up the organization’s chart all the way to the chairperson of the board.

It’s a very complicated way to arrive at the conclusion that the buck stops at the chairperson of the financial institution’s board, as one key responsibility that he has been given is quite simply put: “The responsibility for the allocation of all prescribed responsibilities.” In other words: The Big Dog, The Big Cahuna, or He-Who-Shall-Never-Sleep-Well-At-Night.

But all is not lost for chairpersons of financial institutions. The new regime now clearly identifies each senior manager and the scope of his or her responsibilities. In the event of a breach, it’s easy to have that most unfortunate conversation: “One of us has to take one for the team, and it’s certainly not me.” Or in relationship speak: “It’s not me, it’s you who is the problem.” As the Deloitte paper aptly puts it, the increased focus on individual accountability removes the regulators away from the time consuming task of having to determine who is accountable for what, to a position of determining whether the individual(s) responsible took reasonable steps to control their areas effectively and to comply with all relevant regulations.

Given that a large part of our jurisprudence and regulatory frameworks are borrowed from the United Kingdom, it would be interesting to see if this will eventually flow into East Africa in which case bankers should girdle their loins in anticipation.

However, if this regime was in force in the United States, the current refusal of the Wells Fargo CEO John Stumpf to resign for the misconduct of his team in opening fake accounts for purposes of driving up revenues would be difficult to maintain.

[email protected] Twitter:@carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

A Short History of Banking in Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]A lobbyist on his way home from Parliament after a Parliamentary Enquiry into Trading Practices by Britain’s leading bank executives is stuck in traffic. Several of the former Bank Executives and CEO’s have agreed to return their extravagant Pensions. Noticing a police officer, he winds down his window and asks: “What’s the hold up Officer?” The policeman replies: “The Chief Executive of the U.K.’s largest Bank has become so depressed he’s stopped his motorcade and is threatening to douse himself with petrol and set himself on fire because of the shame of what he has done.”
“Myself and all the other motorcade police officers are taking up a collection because we feel sorry for him.” The lobbyist asks: “How much have you got so far?” The Officer replies: “About 40 litres, but a lot of officers are still siphoning.”

It’s not that hard to find bad banker jokes these days, they are the most vilified professionals after tax collectors. But malign them as we will, the banking industry has been a key driver of the economy through provision of working capital facilities for businesses, unsecured loans for individuals and employment for many Kenyans, not to mention a safe place to keep our funds. The attached table demonstrates the phenomenal growth that has taken place in banking in the last thirteen years.

Kes Millions Dec 2002 Dec 2015
Government Securities 100,458 658,361
Net Advances 172,169 2,091,361
Deposits 360,642 2,485,920
Shareholder Funds 50,540 538,144
Interest Income 41,495 359,493
Non Interest Income 17,367 97,317

*Source: Central Bank of Kenya Banking Supervision Report 2002 and 2015

It’s evident that there has been exponential growth in banking, all driven by Kenyans contributing to economic growth and generating more capital. Deposits have grown by a factor of almost 7 while loans have grown by a factor of 12. Look at what the Central Bank (CBK) said in 2002 while reporting about the state of the industry: “Traditionally institutions in the local market have relied on interest income on loans and government securities as their major source of income. In the last few years, there has been a shift to government securities owing to lack of borrowers due to the depressed state of the economy. In the last one-year, the Treasury bill rates have been falling dramatically, thus compelling institutions to look for alternative sources of income to meet their operational costs and report profits for their shareholders. Some of these sources, especially increased fees and commissions have placed them on a collision course with the public. In an attempt to reduce their costs, some institutions have initiated restructuring programs that include staff retrenchment and rationalisation of their branch network. These measures have met resistance from the general public and trade unions.” A few years later CBK legislated that banks required their approval before introducing new fees in a bid to reduce the collision course so identified.
The result is that as the economy took an upswing following the Kibaki administration’s fairly successful macroeconomic policies, loans ended up being an easier way to grow the bottom line. In 2002, interest income of Kes 41.5 billion (which includes interest from loans, government securities and placement of funds with other institutions) made up 70% of the banking industry’s income. In 2015, the interest income of Kes 359.5 billion made up 78.7% of the banking industry’s income. Put it another way, innovation has been the furthest thing on the minds of bankers over the last decade. With the requirement to seek approval for new fees as well as the voracious appetite for loans, lending in this country has been a no-brainer for years.
But Kenyan banks are also responsible for a fairly broad financial access, at least compared to its neighbors. The CBK Banking Supervision Report 2015 reports as much by quoting a joint study with FSD Kenya and the World Bank titled “Bank Financing of SMEs in Kenya” that was published in September 2015: “A) Involvement of Kenyan banks in the SME segment has grown between 2009 and 2013. The total SME lending portfolio in December 2013 was estimated at KSh. 332 billion representing 23.4 % of the banks’ total loan portfolio while in 2009, this figure stood at Ksh. 133 billion representing 19.5% of the total loan portfolio.
B) The preferred source of financing for a large number of SMEs is overdrafts despite the fact that banks have introduced several trade finance and asset finance products designed for the SME market. C) The share of SME lending relative to total lending by commercial banks is higher in Kenya (23.4%) compared to other major markets in Sub Saharan Africa like Nigeria (5%) and South Africa (8%). According to a study quoted in the report, this ratio is at 17% in Rwanda and 14% in Tanzania placing Kenya as the leading country among the five countries referred to in the study.”
SMEs are the cogs that move the wheels of this and many emerging market economies. They cannot survive without bank funding and the interest rate regime change is very likely to upset the status quo and roll back the gains made by Kenya in deepening financial access to this critical sector of the economy. This is largely because SME lending has typically been collateralized to mitigate the risks. A reduction in the interest rate without a reduction in the corresponding credit risk of the SME borrower, together with no improvement in the legal framework for realizing collateral from defaulted borrowers is a recipe for reduced SME lending appetite.
However as a bank CEO said to me a few days ago, “I asked my staff today: is there no other way to make money apart from loans?” and all he got were blank stares in return. The ground is shifting under the feet of banks, not only legislatively but even technologically with the entry of Fintechs in the same lending space that banks have traditionally played in. We might very well be standing on the cusp of a financial innovation wave in Kenya.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Disruptive Forces Needed In Banking

[vc_row][vc_column width=”2/3″][vc_column_text]Mark Zuckerberg came, saw and conquered. Kenyan social, print and television media was alight with highlights of his visit and for good reason. Our hotbed of innovation is presumably a key driver for choosing the country in his Africa tour. And given the rate at which banks are submitting themselves to the interest rate capping law, financial innovation should now be a logical outcome of the compressed margins and resultant lower profitability within the banking industry.

But let’s park that aside as this was all about Mark and his globally transforming social media platform that has now become a rapidly growing business tool. I first heard about the disruptive use of Facebook as a credit scoring mechanism at a G20 financial innovation conference in Turkey last year. A panelist from the American online lender Kabbage Inc. informed participants about how their credit lending algorithm went beyond the traditional, historical and fairly outdated banking industry credit assessment mechanisms. They used a borrower’s online persona to determine ability to repay using a variety of parameters and one of those parameters was the borrower’s activity on Facebook.

In a Forbes Magazine article titled “The Six Minute Loan: How Kabbage is upending small business lending” the genesis of the growth of Kabbage is well articulated. “The seeds of Kabbage, founded in 2008 and based in Atlanta, were sown by Rob Frohwein, an intellectual property lawyer. Now CEO, Frowhein saw how much data was becoming accessible via the cloud and that companies like eBay and PayPal were providing application programming interfaces that a lender could use to get real-time access to a business’ customer transaction data. Kabbage, Frohwein says, put the two concepts together. One reason Kabbage has been able to attract capital is its loan default rate. Even though it can assess applicants in minutes and never demands a personal guarantee, Kabbage says its loans are as likely to be repaid as those of traditional banks, which routinely take weeks to make a decision.”

Now this is a very interesting concept. While interest rates are coming down rapidly within the banking sector, loan approvals for unsecured personal and SME loans will not necessarily increase in tandem as the risk profiles of customers is not in any way changing. Yet these borrowers need a source of financing and Kenyans are about to wake up to the often beaten, but much ignored, drum that pounds the message: borrowers are as indifferent to rates as they are as desperate to get a loan approval. Back to the Kabbage story from Forbes, “Frowhein says Kabbage targets established businesses rather than startups, with its automated model assessing three factors: capacity to repay, character and the consistency or stability of the business. ‘We believe we get to know a small business better by being connected to their data sources electronically than any loan officer can do by sitting down at a desk with the borrower,’ says Frohwein. He says Kabbage incorporates nontraditional metrics such as a company’s Twitter or Facebook followers, as well as the online reviews of its customer’s posts as a way to round out an applicant’s story. ‘You won’t get a loan because you have 7,000 likes on your Facebook page,’ he says. ‘But we might increase the cash available to you if you have an active social media following because it establishes the credibility of your business with its customers.”

Now for all the banter I saw on social media about the number of countries that have interest caps, with some pundits including the United States in that category, this will come as a surprise. The average annual percentage rates (APR) of Kabbage’s loans to its American small business customers are 40%! The same article quotes Frowhein as saying “the rates range form 1.5% to about 20% for the first two months of the loan, depending on a variety of risk factors and how long the cash is kept, and then drop to 1% for each subsequent month.”

Yes. I see you. I see the wide saucers that your eyes have become. Let me provide you with the definition of APR: An annual percentage rate is the annual rate charged for borrowing and is expressed as a percentage that represents the actual yearly cost of funds over the term of the loan. This includes any fees or additional costs associated with the transaction. So your Kabbage borrower is someone who has been unable to get a loan approval from a bank for whatever reason (more often than not a poor credit rating score, or worse, no credit rating score as the borrower has not built enough of a credit history) and will take what’s given since it is approved in six minutes, rather than weeks and does not require collateral such as a log book or title deed. In case you’re wondering whether Kabbage is a two-bit flash-in-the-pan player, it’s not. Since it launched in 2009 the company has lent more than $750 million (Kshs 75 billion) to small businesses and expected to lend $1 billion (Kshs 100 billion) in 2015 with revenue exceeding $100million (Kshs 10 billion).

The winner of this interest rate capping law is not the individual or SME borrower. Their risk profiles are such that they will be unattractive to lend unless a secure mechanism for quickly collateralizing and liquidating fixed and movable assets is put in place in Kenya. Such a system has to be backstopped by an efficient and incorruptible judiciary that will allow realization of securities to occur thereby reducing the drag currently endured by banks in liquidating bad debt. The true winner will be the fintechs that can very quickly dis-intermediate the banking system by providing credit to individuals and SMEs a) without collateral and b) within minutes. Timing is key in business, as it enables quicker turnover leading to conversion of goods into cash that is used to pay off the high-interest loan and put debt free funds into the pocket of the borrower.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

The Unintended Consequences Of The Banking Amendment Act 2015

[vc_row][vc_column width=”2/3″][vc_column_text]Wednesday, August 24th 2016 will go down in history as the day Kenyans collectively chose to wet their whistles prematurely, in celebration of the Presidential assent of the Banking Bill (Amendment) 2015. But who can blame their souls that were weary from years of punitive interest rates in a regime where demand for credit by far outstripped supply?

Let me begin from the beginning. Banks take your deposits and in turn lend these out to borrowers who range from individuals borrowing unsecured loans on the back of a salary check off program, to small, medium and large businesses borrowing to finance their working capital needs or capital expenditure purchases, and who secure these facilities with a piece of property or equipment. But the Central Bank of Kenya (CBK), like any good regulator who wants to protect depositors, sets out the amount of capital that the shareholders of the bank need to maintain, in order to lend to these various types of borrowers with varied risk levels. The requirement for capital is literally to ensure that banks have “skin in the game” effectively causing banks to exercise caution in lending out customer deposits (which then become assets on the bank’s books) to entities that have demonstrated the ability to repay.

So the next time you throw a cursory glance at your bank’s financial statements, cross over to the bottom, a fairly innocuous section called “Other Disclosures” and particularly the section titled “Capital Strength”. This, good people, is where the rubber meets the road. There’s one line, usually section (f) titled Total Risk Weighted Assets. CBK requires banks to allocate capital to all the assets on their books. But different assets attract different amounts of capital. So, for instance loans to the central government via treasury bills and bonds attract a zero capital charge. The same applies to loans guaranteed by the central government as well as OECD governments. If the regular borrower, Wanjiku, also wants to give 100% cash collateral for her loan, that attracts a zero charge as well.

By the way I’m quoting from the CBK Prudential Guidelines, a document whose detail is so technical that it is recommended reading for anyone having trouble falling asleep at night. The flip side is painful: lending to anyone else – be they an individual who’s provided their Sunday best clothes as security or a corporate whose provided a prime Mombasa road property as collateral – attracts 100% capital charge. So a bank has to allocate 100% of its capital (on a weight adjusted basis) which as you know is a finite and fairly expensive resource, for your loan. It may interest you to know that mortgages which are well secured and performing only attract a 50% capital charge. Why you ask? Shelter features fairly high under Maslow’s hierarchy of needs, therefore risk of default is much lower.

Because of how much capital a bank has allocate to a loan, it’s much easier to simply place deposits in government paper. But low risk means low returns and banks have therefore taken the fairly lucrative business of lending to individuals, SMEs and corporates which are higher risk, require higher capital charges but which capital charges are resoundingly compensated by high interest returns.

However, let’s call a spade a spade. Banks in Kenya have been smug and lazy. Since demand outstrips supply, they have chosen to treat all borrowers the same. Wanjiku who has borrowed 20 loans in the last thirty years, servicing all of them well without a single default, is charged the same 19% rate as Paul, who just got his first job at a government parastatal and can use his payslip to get a check off loan to buy furniture for his new apartment. The insurance industry is willing to give Wanjiku a no-claims bonus, which is a reduction on her annual insurance policy for her car as a reward for not having any accidents in the past year. But the banking industry wants to treat Wanjiku as if her good repayment record doesn’t deserve a reward. The reduction in interest rates will force banks to do one of two things: move out of higher risk rated assets as the returns will not be commensurate with the capital charge and secondly, begin to provide much needed granularity in the way they have chosen who to lend to based on positive credit reference bureau ratings. I’ve beaten that granularity drum before, but I’m not about to get tired. Good borrowers do not warrant the high interest rates that are currently being charged to cover (lazy) banks from bad borrowers. Enough said.

In these dying column minutes let me draw your attention to one thing: the Banking (Amendment) Bill 2015 was horrendously drafted and has as many holes as my grandmother’s favorite crochet table cover. Section 33B (1) and (2) refer to a base rate set by Central Bank of Kenya. The media is using the Central Bank Rate which is a rate used by CBK to loan to banks and is NOT a base rate for lending to the public. Of course this can be cured when the CBK publishes the regulations required to operationalize the Act, by creating such a base rate which can be set wherever CBK feels is the right point including aligning it to the Kenya Bankers Reference Rate. Secondly, Section 33B (2) refers to “minimum interest rate granted to a deposit held in interest earning to at least 70% the base rate”. There seems to be a missing word there after interest earning, perhaps the drafter meant to put the word “account”. Whatever the case, the regulations will now have to prescribe what a “deposit” means for purposes of Section 33B (2). Chances are that to enable stability in the banking sector, a deposit will have to be an amount placed for a contractual period rather than just any amount in an interest bearing account (such as a savings account). The result is that banks will set up minimum amounts for which they are willing to enter into “deposit” contracts, perhaps from Kes 50 million and above to justify that high interest rate payable. Finally, if banks move to lending to GoK rather than to Wanjiku, the treasury bills and bond rates will decline dramatically and institutional investors such as pension funds will see a significant drop in their returns, meaning their pensioners will also suffer. Such are the unintended consequences of this Bill.

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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

A Day Long and a Dollar short for Imperial Shareholders

[vc_row][vc_column width=”2/3″][vc_column_text]To understand the recent actions by Central Bank (CBK) in appointing third parties to manage Chase and Imperial Banks, a little history is required. In 1986 the Moi Government decided to get into the 20th financial century and created the Deposit Protection Fund Board (DPFB), which was only operationalized four years later in 1989. The purpose of the DPFB was twofold: To create a fund to offer protection to depositors in Kenyan banks and to take on the role of liquidator for failed banks. Between 1989 and 2012 DPFB had managed 24 banks in liquidation, the earliest being Inter Africa Credit Finance which was put under liquidation on 31st January 1993 and the latest being Daima Bank on 13th June 2005. There is no documented successful revival of any bank in those 26 years of the DPFB’s existence since the prevailing regulatory framework provided for statutory management leading to liquidation. The results speak for themselves: 24 banks in question had Kes 22 billion in deposits of which only Kes 1.5 billion were protected deposits. (Remember that the law provides insurance of up to Kes 100,000 per depositor). The DPFB in that period managed to pay out Kes 1.1bn or 74% of the protected deposits by the end of the financial year June 2012. It is noteworthy that the DPFB has an excellent record of publishing its accounts via its website since 2003, which accounts are audited by KPMG on behalf of the auditor general. The organization has been profit making from inception and by the end of FY June 2012 recorded a surplus of Kes 5.1 billion. Cash was certainly not what prevented DPFB from making 100% payment to protected depositors. One conclusion that can easily be drawn therefore is that the 26% protected depositors that weren’t paid simply didn’t make a claim for their money. Now let’s take a look at the loan recovery. In the same period the 24 banks had Kes 41.1 bn in loans outstanding, of which DPFB managed to recover Kes 6.4bn or 15.5% of the loan stock. Either DPFB was very inefficient or they quite simply couldn’t make the offending borrowers repay their (insider) loans and couldn’t find quality securities that would realize some value to extinguish those debts. My money is on the latter reason. As a result of clawing back a little in the form of loan repayments, DPFB managed to pay some depositors over and above the statutory minimum of Kes 100,000/-. Referring to this as “dividends” in their annual report, up until FY 2012 DPFB had paid only 28% or a total of Kes 5.6 bn cumulatively to depositors out of Kes 19.9 bn in unprotected deposits. In light of this less than stellar history of recovering the distressed assets and liabilities of the banking sector, the Kenya Deposit Insurance Act 2012 was enacted, which replaced the DPFB with the Kenya Deposit Insurance Corporation (KDIC).

KDIC-with-power-foam was created to make whites whiter and colors brighter. This piece of legislation gave the new institution far more operational discretion and a solution driven approach to managing failed banks than its predecessor. KDIC was now motivated to breathe life into failed banks rather than play the lugubrious mortician role of its predecessor. Through Section 53 of the Act, KDIC is given a tight timeframe – 12 months to be precise with a window to extend for a further 6 months- to either cure the bank of the matters that caused it to go under receivership or put the bank in liquidation. Twenty six years of experience had also led the former DPFB team to realize that perhaps the solution to keeping a bank open is to outsource receivership to a third party (with the necessary operational capacity) who would be nimbler in putting the structures in place to begin assessing loan viability and recovery thereof in order to pay suffering depositors and creditors. We have a different perspective now on how to manage failed banks, a perspective that allows for industry experts to step in and help KDIC execute its mandate. A perspective that allows for employees to continue working, borrowers to continue paying and depositors to receive funds over and above the historical statutory minimum.

The aim to maintain a going concern would be an unprecedented win for CBK as it would stabilize jittery depositors, calm foreign investors who were now having doubts about the wisdom of investing in Kenya and allow legitimate borrowers to continue utilizing much needed working capital facilities that were the lifeblood of their businesses. The first trial of the KDIC’s going concern experiment was with the appointment of KCB in April 2016 under S. 44 (2)(b) (iii) of the KDI Act that essentially allows KDIC to appoint a third party to manage the assets, liabilities and affairs of the institution. That KCB has a fully-fledged debt recoveries department that can land on errant borrowers like a ton of bricks is without question. This is business as usual for them. It is only through the active management of the loan book that depositors and creditors will get paid, and, hopefully a going concern is maintained. More importantly, the credit risk team at KCB should also be able to actively manage the performing loan book with a view to ensuring that businesses are not starved of the loan facilities that are needed to keep their businesses afloat. Providing mirror loan facilities on KCB’s own books provides an obvious solution to legitimate and well performing businesses. Operational capacity and deep industry experience is what third parties appointed by the KDIC under S. 44 (2) (b) of the Act bring to the table. But it’s a day long and a dollar short for the shareholders of Imperial Bank when energetically stating righteous indignation at CBK’s actions to appoint third parties to help recover the bank’s assets. Those energies should have been better placed keeping a tighter lid on the co-shareholder who led them down the rabbit hole of fraud in the first place.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Credit Reference Bureaus Destroy rather than support credit

[vc_row][vc_column width=”2/3″][vc_column_text]Two weeks ago, I published an opinion on this page highlighting my experience with an erroneous report that was submitted by my bank to the credit reference bureaus (CRBs). The article generated some interesting feedback from some kindred spirits. Augustine M shared as follows: “I have also experienced a similar issue like yours. A standing order that I had closed 5 years ago, but apparently the bank continued to surcharge and penalize for 4 dark years, only came to my attention when I needed that CRB Credit Report. What made me mad was why my bank, which I understand has rights of set-off to enable them recover from your other accounts with them and clear you, goes ahead to issue a damning report. Yet I had all along another well performing loan with the same bank.”
Well dear Augustine, a major assumption that you are making is that your bank has a universal view of your accounts. Whereas you have a universal view of the bank in terms of all the products and services that you are consuming from them, your bank may have as many separate records of you, as there are services you are consuming. These records are in different databases that don’t talk to each other because they are in different departments. Asking your bank to set off from one account to another, well…that’s just asking for too much efficiency. I mean do you know how many internal approvals have to be sought to get that process approved? You’ve got to be kidding man! Now your bank might be a manyanga bank, meaning it has a supercalifragilisticexpialidocious 21st century operating system and therefore your national identity card number can generate a universal view of your accounts. But then it requires someone to initiate that query. And there’s hundreds of thousands of other retail clients like you. Moreover that would require a rather high level of efficiency. So hang tough bro, they’re just not that into you. One more thing: can you imagine the number of negative reports that the CRBs have of ordinary wananchi who have minor charges on accounts that have failed to be closed? And are now dragging a millstone around their creditworthy necks in the name of credit reporting? Another writer Andrew F had this to say:

“Hello Carol, as soon the CRBs were authorized commercial banks submitted 800,000 negative credit reports! Needless to say, the commercial banks neglected to comply with the new law by notifying the 800,000 account holders who were having their credit histories trashed! Too expensive? It really makes no difference; our commercial banks are out of control and our friends and associates **** (edited out as this is a family newspaper) us royally in plain sight. You knew who to contact which only leaves 799,999 others being trashed without legally required notice.”
Dear Andrew: Are you aware of how many Kenyans must have been temporarily employed during the process of issuing 800,000 negative credit reports? During that period, the unemployment levels for the country took a significant dip and the banks were awarded with the highest Pay As You Earn award from our veritable tax collectors. In fact the bigger issue for me is that by ignoring Section 50 (1) (b) of the Credit Reference Bureau (CRB) Regulations 2013, which requires banks to “notify each customer, within thirty days of the first listing, that his name has been submitted to all licensed Bureaus,” the banking industry deliberately scuttled efforts by Postal Corporation of Kenya to grow its profits through sale of regular postage stamps on the 800,000+ reports that should have been mailed out.
Finally, JK weighed in with these words: “Just thought I would point out great article today in Business Daily, the system is absolutely flawed. In South Africa they forced all bureaus to delete all their information and have all banks resubmit because almost the entire country was listed for one reason or another. I was listed because I owed a bank Kshs 200 for not closing my account with them. I’m surprised a class action has taken this long in Kenya.” Dear JK, thanks very much for reaching out to this pained sister. I have tried to research your point about what happened in South Africa and actually found that in 2005 the South Africans published a National Credit Act which stipulates the type of information that credit bureaus can keep on consumers, how the information is obtained, used, and for how long that information may be kept on their records. More importantly, the Act aims to ensure that credit bureaus keep accurate records on consumers. In a bid to cure the mischief of erroneous credit reporting, the Act in Section 72 gives consumers the right to access and challenge information held by a credit bureau. A key extract of that section provides that a consumer can challenge and request proof of the accuracy of information held by a credit bureau. Should a credit bureau fail to provide the consumer with proof of accuracy of information that the consumer disputes, it is compelled to remove the disputed information from its records. The same section also gives the consumer the right to be advised by a credit provider before certain adverse information about that consumer is passed onto a credit bureau and to receive a copy of that information on request. As we often say in Kenya, it’s not a dearth of laws that we suffer from; rather it is the enforcement of existing law that is the problem. The Credit Reference Bureau regulations in Kenya do protect the consumers, but the protection mechanisms are not being enforced by the banks, either through sheer laziness and ineptitude or utter contempt for the impact of their actions. I like that the South African legislation puts the burden of proof for veracity of information on the credit bureau, which means that a layer has been added for ensuring that consumers are protected from lazy bank processes.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

What everyone needs to know about borrowing in Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]A few weeks ago I received a random text message from a credit reference bureau: “URGENT: This is to notify you of some NEW information on your CREDIT BUREAU records. Send URGENT to 21272 to check now.” (Sic).

It certainly got my attention, and I did exactly as I was exhorted to. I received the credit report on email and discovered that erroneous information had been sent by my bank to the bureau. Did I say erroneous? It was downright wrong. The report related to a six year old dispute on a credit card that in my view had been resolved and forgotten about two years ago. But somehow the dispute resolution slipped through the cracks and 2 years later my name was sent to the credit reference bureau as a defaulter. I bristled in anger. A negative report meant that my personal credit rating would be affected and this would impact on any future borrowing that I may consider undertaking. It also meant that any position for which I would be considered for that requires a positive credit report would be compromised. (A negative credit rating is a mortal sin right below being an adjudged bankrupt in the ten commandments of self-respecting citizens.)

The vein on my right temple throbbed furiously as my legal training kicked in: Never go to a gun battle armed with a toothpick. I googled and found the Credit Reference Bureau (CRB) Regulations 2013, issued by the Cabinet Secretary for the National Treasury and gazzetted on 17th January 2014. A slightly lengthy document that isn’t your staple bedside reading, but one that is certainly pertinent for anyone who uses banking services in Kenya. The regulations were created to provide a legal framework for the provision of critical information on the financial behavior of individuals and businesses in the country. The regulations extensively provide guidelines on how credit information should be shared. Why should this interest you? As a consumer of banking services, your bank holds in its puissant hands the power to destroy your reputation with one flick of a button: SEND. A bounced cheque, a defaulted loan or credit card, an account on an overdrawn status., the examples are numerous. But the bank is well within its rights to let its industry brethren know that you are not worthy of the fake leather shoes that you are strutting about in pretending to subscribe to the ten commandments hereinabove mentioned. As a consumer, you are also well within your rights to know who is sending information about you, and the nature of that information. And since the regulations were most likely drafted by ordinary mortals who have experienced the aftermath of a financial peccadillo or two, they took care of that exact fact under Section 50 (1) which reads “ An institution shall (a) notify the customer within one month before a loan becomes non-performing that the institution shall submit to a Bureau the information on the loan immediately it becomes non performing.” I bet you’re sitting at the edge of your seat waiting for me to tell you that I received that awe-inspiring letter from my bank. Well, hang on to your hats a little bit. Section 50 (1) (b) highlights my bank’s obligations to me even further by saying that it should “notify each customer, within thirty days of the first listing, that his name has been submitted to all licensed Bureaus.” Can you hear that? Exactly! What you hear are chirping crickets, because I received absolutely nothing. If it wasn’t for that CRB’s urgent message – of which I have no doubt was motivated to ensure I sent a highly priced text message to request for a “free” report – I would never have known that I was in trouble.

But this story does indeed have a happy ending. Since I knew who exactly needed to receive a sweetly worded missive reflecting my umbrage at the misinformation that was now circulating at CRBs, I got to typing my slight displeasure (please apply sarcasm font as you read this part). A few calls and emails later, my bank quickly rectified the situation and sent a delete record request to the CRBs followed by a profuse apology for which I am grateful for the kind attention that they gave. But they did it because I knew exactly who to send flowery emails to. Not everyone else does.

Two years ago a company that had borrowed funds from a bank, against which a close friend who we shall call Jane had signed personal guarantees as a co-director, underwent some financial distress. The loan was eventually repaid in full. A full year after that loan was repaid, said bank sent a report to the CRBs that succinctly stated that while there was no loan outstanding, Jane had a history of default. Not the company, mind you, Jane specifically. There was zero communication from that bank that they were sending a negative report, and I can’t say I blame them. How do you draft that letter? “Dear Jane, remember that loan for Company X that you signed a personal guarantee for? It was repaid in full last year. But our grubby fingers are itching to hit the SEND button so we feel now is a good time to let all the CRBs in Kenya know that a company you are associated with underwent stress, but the loan was repaid in full. Please don’t catch feelings, it’s never that serious. Yours truly, Totus Ignoramus.”

The next time you see a message titled URGENT from a CRB, it’s not from the thoroughly bored chaps over at Kamiti Maximum Call Centre. It needs your urgent attention. Your bank is talking about you behind your back. Assuming they are doing what the above two banks are doing, it’s likely that they are not informing you. Girdle your loins and ask for your report. Then brace yourself for what you might find.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Banking Crisis in Africa

[vc_row][vc_column width=”2/3″][vc_column_text]A few weeks ago, I quoted extensively from a speech given by the former Nigerian Central Bank Governor, Lamido Sanusi, in February 2010 where he was explaining, with painful honesty what had gone wrong in the Nigerian banking industry following the global financial crisis which impacted the Nigerian economy hard. He could have been describing the Kenyan industry in many ways. Do we have a problem in Africa? Do we have a problem distinguishing customer deposits, from revenue? And further, distinguishing revenue from profits? The fact is that banks have only one product: cold, hard cash. That’s all that they deal with, and therefore a great responsibility is placed upon them as that cash, with the exception of the capital that shareholders put in, is largely from our pockets. Our sweat, blood and tears in the form of salaries, business revenues and savings is what we place in the hands of total strangers, believing with every fibre of our native beings that they will make it available to us as and when we need it. We trust that the management of these banks will make the distinction between what belongs to us and what belongs to them. A distinction that is clearly difficult to make once a rogue management crosses to the dark side. Sanusi explains the Nigerian experience thus:
“The original title of this paper was “Transformative Disruption: Relocating theNigerian Banking Crisis from the Economic to the Social.” The choice of title
was informed by a strong desire to articulate a correct narrative, in an
environment in which we are confronted by a multi-vocal opportunism
determined to subvert history through the fabrication of false narratives.
Among these, is the assertion that the actions taken by the Central bank are
part of a grandiose “northern” agenda against southern Nigeria. Or that
perhaps it is an “Islamic” agenda being pushed by a Muslim fundamentalist.
There are also other subtler and more sophisticated-albeit just as
opportunistic-narratives. For example the new claim by public officers and
politicians that there is really no corruption in the public service, that
politicians are not corrupt, and that the real corruption is only in banks.
What we have done in the Central bank, is to fire the opening salvo in what could potentially be a revolutionary battle against the nexus of money and influence that has held this country to ransom for decades. This would not be the first time banks
collapse nor are brought to the brink in our national history. And it will certainly
not be the last. But this time there is a difference.
In previous crises we said some banks had failed a passive and complicit
phrase that masked a gross irresponsibility and crass insensitivity. “The bankhas failed”.

……And that is exactly what happens when we refer to “failed banks” as if the
bank itself, some impersonal structure made up of branches and computers,
somehow collapsed on its own. By using-or abusing- the term “failed bank” we
are able to mask what is almost always a monumental fraud. But it is a
deliberate act of prestidigitation. Thousands of poor people, who have kept their life savings in the bank, lose it. Children’s school fees, savings for retirement, medical bills, gone into thin air. And who is to blame? No one really. Or maybe the poor people who were foolish enough to keep their money in a bank that “failed”.
How many people have died of heart attacks due to this tragedy? How many
honest businessmen have been rendered bankrupt? How many people have
committed suicide? How many have died because they were unable to pay
medical bills as their monies were trapped in these institutions? How many
children have dropped out of school? We do not know. Because we live in a
society in which they do not matter. They are anonymous. They are poor.
What we do know is that we have today, among those parading themselves
as role models in society, people who profited from failed banks. Owners and
managers who go on to become governors and senators. Bad debtors who
are multi- billionaires, having taken the money belonging to those poor dead
souls and not paid back.
So here is the reality. The owners and managers of banks, the rich borrowers
and their clients in the political establishment are one and the same class of
people protecting their interest, and trampling underneath their feet the
interest of the poor with impunity.
So this time we turned the tables and said “enough is enough”. The banks did
not fail. They were destroyed and brought to their knees by acts committed by
identifiable people. Do not say that government money has been
stolen. Name the thief. And so, in keeping with that tradition, we did not say
that banks had failed. We named human beings-the management that stole
money in the name of borrowing, the gamblers that took depositors funds to
speculate on the stock market and manipulate share prices, the billionaires
and captains of industry whose wealth actually was money belonging to the
poor which they “borrowed” and refused to pay back.
Fortunately, the President, Umaru Musa Yar’Adua, understood from the first
day that this was an ideological choice we had to make. We could side with
the rich and powerful, and say the banks had failed. Or we could side with the
poor and save the banks but go after the criminals. And we chose the latter.”

That KCB has swung in to provide much needed stability in the wake of the Chase Bank fiasco is nothing short of a miracle pill engineered by Kenya’s Central Bank Governor. But this is not the time to exhale from a dodged bullet. There’s blood in the water and significant public goodwill to see the elite “financial accounting wizards” get what they deserve. A nice room with enough light that will allow them far more time to sit and reflect on the distinction between deposits, revenues and profits.

[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Chasing The True Numbers

[vc_row][vc_column width=”2/3″][vc_column_text]Last week I started reflecting about the key issues that were driving the current turmoil in the banking sector, and concluded that both the regulator’s banking supervision unit as well as the guilty bank boards were culpable. Today, I want to take a closer look at the financials of one of those banks, Chase Bank, as much was written last week regarding the disputed audited financials that gave rise to the run it experienced that led to its closure.

I began by pulling up what they published on their website as the audited financials for the year 2014. I then looked at what was published in black and white, tucked into the back end, classified section of the Standard Newspaper on Wednesday, April 6th 2016. I will refer to these as the gospel truth accounts. This was a good six days after a full set of color financials had been printed in the Nation newspaper on March 31st 2016, which was the last date that a regulated financial institution in Kenya could publish their full year audited accounts. A few items clearly stood out as having been restated in the 2014 audited accounts. What do I mean? The 2014 audited accounts that were published in 2015 did not have a qualified opinion (I will refer to these as the chameleon accounts). However, when the gospel truth 2015 accounts were published on April 6th 2016, a few items in the 2014 numbers had been restated, which begs the question: what caused the chameleonic changes? Let’s begin at the top. In the published 2014 chameleon accounts, customer loans had been booked at Kes 53.8 billion. In the gospel truth accounts, customer loans for the same 2014 financial year were now reflected as Kes 64.4 billion, a difference of Kes 10.6 billion. Evidently in the 2015 audit, the auditors decided to treat certain assets differently, and found Kes 10.6 billion worth of new loans in the 2014 financial year, which had previously not been picked up in the 2014 audit that had been passed. But a balance sheet doesn’t just change dramatically; the movements on one line have to balance with movements on another. So I dug a little deeper and found the offending items. In the 2014 chameleon accounts, “other assets” were booked at Kes 11.9 billion. This is where the Islamic financing assets were said to have been parked. In a sudden change of heart (likely caused by missing documentation to convince the auditors that the other assets were indeed booked appropriately as Islamic financing products) the 2014 numbers restated “other assets” as Kes 3.4 billion, suddenly yielding up Kes 8.5 billion as the corresponding surprise entry in loans into the gospel truth accounts.

But that means that I needed to find Kes 2.1 billion in order to balance the figure of Kes 10.6 billion in new loans that appeared in gospel truth accounts. The only other significant movement that I found was that 2014 chameleon accounts showed that cash held at the Central Bank was Kes 7, 105, 986 by December 31st 2014. The gospel truth accounts reflected a different position of Kes 4, 953,180 by the same December 31st 2014, a difference of Kes 2.1 billion. Now that is a remarkably curious finding to which I have no answer. How does the same auditor convert funds that are reflected as held at the Central Bank in one year into customer loans the following year?

I bundled on some roller skates and slid into the profit and loss statement, as this was becoming an interesting ride. The 2014 chameleon accounts reflect a total staff cost figure of Kes 1.9 billion while gospel truth accounts restate this amount to Kes 1.7 billion a difference of Kes 200 million. The auditor, come the 2015 review, clearly did not accept some staff costs. What did the auditor discover that was different? I guessed that the answer was sitting in the other operating expenses line as it had moved by a similar Kes 200 million, from Kes 2.3 billion in chameleon accounts to Kes 2.5 billion in gospel truth accounts. Someone had tried to park Kes 200 million worth of expenses as staff costs, and while the auditor bought that story in 2014, he clearly wisened up in the 2015 audit process and restated the 2014 numbers accordingly.

That was just a cursory view on the 2014 numbers, as much attention has been paid to the 2015 full year numbers without looking at the significant restatements of key areas of the 2014 results. This restatement was a key contributor then to the growth of two numbers: the gross non-performing loan (NPL) numbers in 2015 as well as insider loans to directors, shareholders and associates. Gross NPLs moved from Kes 3.1 billion in 2014 to Kes 11.3 billion in 2015, an increase of Kes 8.2 billion and a figure quite close to the movement in the other assets line stated above. Insider loans grew from Kes 1.3 billion to Kes 10.5 billion in 2015, an increase of Kes 9.2 billion. This would mean that includes Kes 8.2 billion of “other assets” plus an extra Kes 1 billion that has emerged as new loans. Insiders had a few busy years clearly! The challenge for the receiver or for any new investor were the bank to be sold, will be to realise the securities held against these insider loans, assuming of course, first that the insiders do not have the capacity to repay these surprise loan entries and secondly that the true realizable value of the securities is reflected. If the insiders do have the capacity to repay, then that’s another story. Public focus has largely been on the insider loans, but the rubber will meet the road when proper due diligence is undertaken on the existing loan book, a large part of which sits as un-amortizing over drafts. Therein lies the true challenge in establishing capacity to repay.

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Banking Crisis in Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]The Kenyan banking sector is in turmoil with vicious rumours swirling about the health of many banks and discerning where the truth is sandwiched between various shades of grey is remarkably difficult. It would be remiss to discuss a few banks without looking at the whole industry to begin with, and the macroeconomic environment that they are operating in that has led to the current state of dire illness in some banks. Mariana is a businesswoman. Since 2011, she has been running a small security guarding company, providing guards to small businesses. In 2014, she was encouraged to grow her business using the preferential supplier incentives that the government was providing for women and youth. She bid and successfully won a tender to supply guarding services for a government ministry that had multiple installations that required security. All of a sudden she had to recruit two hundred new guards and purchase uniforms and boots for them. She approached her bank and showed them the government contract against which they provided an overdraft facility for her, using her retired parent’s house as security. In the beginning, the cash was good, Mariana was paid on time and she was able to pay salaries and slowly start reducing the overdraft. But in 2015, her invoices to the Ministry started taking three to four months to be paid, and she increasingly turned to the ballooning overdraft facility to pay her guards’ monthly salaries. Within 3 months she had reached her limit on the facility and the bank was reluctant to increase it. She was desperately in trouble: hundreds of salaries to pay, an overdraft facility to reduce and her parents’ house in jeopardy. Mariana is not alone. This story is replicated hundreds of times at both national and county government level. Small business owners who have provided goods and services to national and county governments but experienced the sharp cash crunch that occurred in 2014 and 2015 which meant that their payments were significantly delayed. Some of these businesses had been responsible, cash was received and ploughed back into the business’s working capital cycle to pay for the goods and purchase more. Some of these businesses were irresponsible, and buoyed by the huge payments in their accounts for the first time in their lives, diverted some cash into non income generating assets like cars and land. Whatever the case, many businesses had used commercial bank loans to fund the sudden expansion caused by a large buyer of their goods and services. The slowdown in government spending has hit these businesses hard, and invariably impacted their ability to repay their loans. This is very apparent in the growth of the non-performing loan book amongst the banks as well as the reduced profitability of most of the banks judging from the 2015 end year financials.

Now let’s take a step back and look at the role of the regulator. That the government had slowed down its spending has not been a secret. The role of a banking regulator is to constantly monitor the financial and operational health of the banks under its watch. Basic economics: a slow down in money supply will cause the economy to contract and for businesses to start exhibiting financial stress. A basic prudent requirement therefore is for a central bank to require their licensees to undertake stress testing of their loan books for a number of reasons, key of which is to determine if the banks are making adequate provisions for the deteriorating loans as well as to establish how much of their loan book is exposed to the key economic metric that is causing the stress, in this case reduced government spending. In so doing, the regulator quickly establishes exactly what percentage of the banking industry’s assets are likely to be of a diminishing quality, what impact that will have on the respective banks’ balance sheets and whether discussions regarding additional capital injection need to be had with bank managements.

Do we have rogue banks? The recent events point to the fact that we do. The existential crisis that is emerging is that the regulator’s banking supervision unit is not on top of its oversight game. But it’s not only the regulator on the spot here. The audit committees of some of these banks have clearly not been holding their internal auditors to account. The internal auditors, who, together with the credit risk teams, are supposed to be regularly reviewing the credit quality of their loan books and have a duty to raise the flag on non-performing loans, or insider loans that do not have the appropriate documentation and requisite securities against which banks have recourse in the event of default. Some clever institutions know exactly how to manipulate the bank system so as not to reflect the poor servicing of bad loans at month end. They also know how to suppress non-performing loans by keeping them as overdrafts whose deteriorating quality is difficult to discern, as there are no monthly amortization repayments that would indicate non-serviceability. Section 769 of the new Companies Act 2015 requires shareholders of quoted companies to appoint members of the audit committee. The mischief that this is supposed to cure is to ensure that the shareholders take ownership of who is providing appropriate governance over the books of the company. Shareholders must ensure that the audit committee members are not only financially literate individuals, but, in the case of quoted banks, at least one should have some commercial banking operational experience and therefore know how to identify where dead bodies are being buried. The Central Bank prudential guidelines require bank audit committees to be chaired by independent non-executive directors. What is becoming crystal clear is that the oversight capacity of these audit committees is seriously wanting as there seems to be a lack of knowledge on how internal systems can be manipulated to hide bad loans. Nobody is blameless in this crisis at both regulator and board director level.
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Banking scandals are not unique to Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]In October 2010, I wrote a piece in this newspaper about a lady called Cecilia Ibru, the disgraced former CEO of Oceanic Bank in Nigeria. Prior to August 2009, Mrs. Ibru had been the Chief Executive Officer and Managing Director at Nigeria’s Oceanic Bank International Plc since 1997. Cecilia Ibru, at sixty three years of age, was regarded as the First Lady of banking in Nigeria since she was the first female leader to raise her bank’s equity to N25bn, (approx $203m in 2010), the first female to head the 5th largest bank and the 9th largest company quoted on the Nigerian Stock Exchange and in the year 2000, the first female CEO to post over N1bn profit ($8m in 2010 value terms) in a financial statement.
Her sterling career came to a less than illustrious end in August 2009, when the Nigerian Central Bank Governor Lamido Sanusi fired the CEOs of five of the country’s largest banks, including Mrs Ibru, for massive irregularities in corporate governance and lending. On the 7th of October 2010, a Federal High Court in Lagos sentenced Mrs Ibru to 18 months imprisonment without an option of fine for abuse of office and mismanagement of depositors’ funds. Mrs Ibru was also ordered to forfeit assets worth N191 billion ($1.5bn) comprising of 94 prime properties across the world including the United States of America, Dubai and Nigeria to the Assets Management Corporation of Nigeria.
It’s useful to put context to what was going on in the Nigerian banking sector at the time. In 2005 the Central Bank of Nigeria initiated one of the most ambitious regulatory policies to date: an increase in the capital base of banks from 2 billion Naira (about US$ 12.5 million at the time) to 25 billion Naira (US$156 million) in order to improve their competitiveness in the international market. This led to a consolidation in the banking sector from roughly over 80 banks to just 24 banks. The global financial crisis of 2008 impacted the Nigerian economy hard, as international investors pulled out of the stock exchange to plug in gaps resulting from losses in other developed markets. By pulling out of the markets, local investors in the Nigerian stock market were left holding shares that had significantly lost value due to the fire sale activities of international investors, a fact that exposed the vulnerability of how those local investors bought the shares in the first place: through shaky, unsecured loans from a few unscrupulous banks. Nigeria subsequently suffered from a financial crisis of its own. Governor Lamido Sanusi, in a February 2010 speech at the Convocation Ceremony of the University of Kano, gave a bare knuckled synopsis of what went wrong: “The huge surge in capital availability occurred during the time when corporate governance standards at banks were extremely weak. In fact, failure in corporate governance at banks was indeed a principal factor contributing to the financial crisis. Consolidation created bigger banks but failed to overcome the fundamental weaknesses in corporate governance in many of these banks. It was well known in the industry that since consolidation, some banks were engaging in unethical and potentially fraudulent business practices and the scope and depth of these activities were documented in recent CBN examinations.
Governance malpractice within banks, unchecked at consolidation, became a way of life in large parts of the sector, enriching a few at the expense of many depositors and investors. Corporate governance in many banks failed because boards ignored these practices for reasons including being misled by executive management, participating themselves in obtaining un-secured loans at the expense of depositors and not having the qualifications to enforce good governance on bank management. In addition, the audit process at all banks appeared not to have taken fully into account the rapid deterioration of the economy and hence of the need for aggressive provisioning against risk assets.
As banks grew in size and complexity, bank boards often did not fulfil their function and were lulled into a sense of well-being by the apparent year-over- year growth in assets and profits. In hindsight, boards and executive management in some major banks were not equipped to run their institutions. The bank chairman/CEO often had an overbearing influence on the board, and some boards lacked independence; directors often failed to make meaningful contributions to safeguard the growth and development of the bank and had weak ethical standards; the board committees were also often ineffective or dormant.
CEOs set up Special Purpose Vehicles to lend money to themselves for stock price manipulation or the purchase of estates all over the world. One bank borrowed money and purchased private jets which we later discovered were registered in the name of the CEO’s son. 30% of the share capital of Intercontinental bank was purchased with customer deposits. Afribank used depositors’ funds to purchase 80% of its IPO. It paid N25 per share when the shares were trading at N11 on the NSE and these shares later collapsed to under N3. The CEO of Oceanic bank controlled over 35% of the bank through SPVs borrowing customer deposits. The collapse of the capital market wiped out these customer deposits amounting to hundreds of billions of naira. The Central Bank had a process of capital verification at the beginning of consolidation to avoid bubble capital. For some unexplained reason, this process was stopped. As a result, we have now discovered that in many cases consolidation was a sham and the banks never raised the capital they claimed they did.”
Subsequent Central Bank of Nigeria Governors, following Sanusi’s tough stance, have done a lot to restore the confidence in the banking sector. It is both noteworthy and admirable that Sanusi took a view of full disclosure of massive fraud in the industry rather than endorse the cover up tendencies of his predecessors thereby receiving international acclaim for his willingness to drag Nigeria’s financial industry through the mud in order to restore sanity, stability and much needed confidence.

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That used to be a bank over there

[vc_row][vc_column width=”2/3″][vc_column_text]A woman visits a fortuneteller who tells her, “Prepare yourself to be a widow. Your husband will die a violent and horrible death this year.”

Visibly shaken, the woman takes a few deep breaths, steadies her voice and asks, “Will I be acquitted?”

In the last couple of weeks, I’ve been focusing my column on disruption and its effect on society. This is for no other reason than I have been assailed with data, real and anecdotal, on the same. So it is with great interest that I continue to write about the death of banking, as we know it. This is not because I am a sadistic fortuneteller, but because of the fact that banks are caught between heavy financial regulation on the one side and nimble fintech innovation, bereft of legacy issues plus clunky physical infrastructure on the other. Charity (not her real name) is a specialist, providing specialized advice to a wide range of clients since 2013. Her clients pay her using cash or Mpesa. Due to the runaway success of her product, she began to consider expanding her business. Coincidentally, KopoKopo approached her early 2015 to advance her funds based on her Mpesa payment receipts. A little about KopoKopo first: This fintech acts as an intermediary to help streamline payment collection for businesses using the Mpesa platform. It works for SMEs that have got multiple sales points as it consolidates the payments and gives a platform to enable the business to bank their collections. It provides data analytics to help the business owner identify sale trends, peaks and troughs and average transaction sizes. It also provides the client a web based, secure interface that permits not only the monitoring of customer payment collections, but enables payments to suppliers using EFT or Mpesa as well. To quote Charity: “In mid 2014, KopoKopo launched “Grow Cash Advance” for their clients. When I clicked on it, it said I qualified for an advance of a certain amount. They had prequalified me based on my till turnover. Several clicks later and I had my first advance. You choose the amount you want and what percentage of till inflows then can take to pay themselves back – up to a maximum of 50% of inflows, which matches the highest amount you are eligible for. A commission is worked into the total amount payable.” By this time, Charity had my rapt attention as I mulled over the intelligent use of data analytics to anticipate and pre qualify client needs. She continued. “Terms and conditions are just one click and then a day later you receive the advance in your till and can then transfer the funds to your main bank account. No other requirements. This year, they introduced a new requirement for a board resolution and ID copies of the company directors.” Alright then, Know Your Customer documentation check as well as legal appropriateness for borrowing done. Tick! She went on. “Once you have drawn down you can choose to repay the loan from the balance in your till or repay faster by upping the percentage they retain from 50% all the way to 99%. Once you pay back, they refresh your new limit based on the turnover in your repayment period. And so on and so forth.” Charity has accessed Kshs 5 million since the product started, an amount she says that her bank “scoffed at” following her request. Charity’s needs have been met, without her ever asking. Someone (or something) analyzed her turnover and predicted her needs for borrowing and her capacity to repay, for a business that had been in existence for two years!

Which is why I was tickled pink when I received my weekly article that I subscribe to from the McKinsey & Company website. The article, dated February 2016, is titled “The Future of Bank Risk Management” and articulates 5 future proof initiatives for banks to build the essential components of a high performing risk function in the year 2025. I won’t highlight all of them, just the first two that say: “1. Digitize core processes. By 2025, the risk function will have minimized manual interventions. Modeling, simplification, standardization and automation will take their place, reducing non-financial risk and lowering operating expenses. To that end, the function should push to digitize core risk processes such as credit application and underwriting by approaching business lines with suggestions rather than waiting for the businesses to come to them.” Cough, cough. Charity’s example above is dated 2015. Not 2025. Just in case you missed it. The second McKinsey future proof initiative states thus: “2. Experiment with advanced analytics and machine learning. Risk functions should experiment more with analytics, and particularly machine learning to enhance the accuracy of their predictive models.” Again, Charity’s example above refers. Data analytics helped to provide the pre-qualification for her loan. In 2015, not 2025. Remember I did start by saying that banks do have legacy systems and clunky infrastructure. As do their advisers. If banks wait until 2025 to do this, they will be dead in the water and cremated in the kiln.

At the danger of repeating what I wrote last week, banking compliance is horrendously expensive. And the Basel 3 rules only seek to tighten capital and liquidity based ratios following the basket case of bank balance sheet inadequacies that surfaced after the global financial crisis of 2008. Granted that the implementation of Basel 3 has been pushed 3 times from 2013, to 2018 to 2019, it only gives rise to fintechs to increase their scope of lending beyond just small businesses to medium and large corporates. The cost and administration of borrowing will significantly grow globally in line with the increased capital and liquidity requirements that will accrue for banks once Basel 3 is implemented. Can banking truly survive this regulatory and fintech onslaught? Fintechs may be the black widow that kill it.

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Banks are the new slaves of technology

[vc_row][vc_column width=”2/3″][vc_column_text]$300 billion. Let me translate that into Kenya Shillings. Roughly, Kshs 30 trillion. Now let me put that into perspective. The Kenyan Government budget for the current financial year 2015/2016 is Kshs 2.1 trillion. So about 15 times that number. What is this $300 billion I’m going on and on about? That is the size of penalties that had been levied since 2010 to global financial institutions by June 2015 as reported by the Financial Times. These included fines, settlements and provisions for various levels of misconduct some of which is related to the global financial crisis of 2008. The culprits read like a who’s who on the red carpet to punitive pain: Bank of America, JP Morgan Chase, Standard Chartered, Citigroup, Barclays, Deutsche Bank, HSBC, BNP Paribas and on and on.

And the natural reaction for all these institutions is to tighten controls, seal loopholes, grow the compliance function and generally create enough bottlenecks internally to ensure regulatory compliance. The winners: audit and compliance teams who rule the roost over every single non-compliant new customer onboarding and new product approval process. The losers: the concept of the big, global monstrosity bank that straddles continents like a financial ash cloud. Compliance is expensive. Non-compliance is astronomically expensive. So it was with great interest that I listened to a talk by a renowned futurist called Neil Jacobson last week.

Neil paints a bleak future for the traditional global bank citing six reasons why there is a perfect storm in the global financial industry. First off, there is trust crisis. Even with pedigree board members, highly experienced (and paid) executives in management as well as world class operating systems and processes, many banks clearly can’t get the back end right. The chase for profit trumped controls many times. Secondly he cites the security and regulatory firestorm. I don’t need to harp on it as the number is clear: $300 billion and counting. Regulators are licking their chomps at the highly lucrative knuckle rapping that they have been undertaking. If nothing else, it’s a back alley way to raising more taxes. Thirdly is a technology tsunami. You don’t have to throw a stone very far today before it lands on a code writer, developing one app or the other as there are so many financial technology companies (fintechs) willing to throw money to anyone who comes up with the best app to help provide access to credit or money transfer. The classic thing is this: with the Internet, it doesn’t matter if that developer is sitting in a bedsitter in Kayole or a one bedroom flat in Silicon Valley. The one with the best solution wins. Visit iHub on Ngong road and see what I’m talking about. Facebook, as a matter of fact, is already running app competitions in Kenya. The demonetization of transactions such as matatu fare, paying for food at a restaurant, receiving payment for supplying milk or vegetables is very quickly democratizing the role of money movement beyond the traditional banking space. And banks are too clunky and too heavily regulated to make the quick changes that fintechs are able to exploit. Which brings me to the fourth reason for the perfect storm: an explosion of new, different and rude competitors who are not members of the “old boys club” (which requires academic and professional pedigree) and are alternative thinkers. At this point Neil introduced the audience to the acronym GAFA -which acronym derisively originates from French media – that stands for Google, Apple, Facebook and Amazon. None of which, with the exception of Apple, existed twenty five years ago and together virtually own the technology space. Three of these powerhouses got together in November 2015 under the auspices of “Financial Innovation Now”. Together with Intuit and PayPal, the other three giants Amazon, Apple and Google put together the coalition to act as a lobby that would help policy makers in Washington D.C. to understand the role of financial innovation in creating a modern financial system that is more secure, accessible and affordable. This is where it gets interesting as they twist the knife into the back of traditional banks, “Financial Innovation Now wants policymakers to understand how new technologies can help solve today’s policy challenges.” In other words, we need lawmakers not to be bottlenecks as we help sort out critical voter issues like access to financial tools and services as well as helping voters to save money and lower costs. Win-win for everyone, except the banks.

Once lawmakers start to understand the benefits of low cost, secure financial solutions that do not require deposit taking mechanisms, it is likely that they will apply a much lower prism of regulatory restrictions that are currently straitjacketing the financial industry. You don’t have to go far: look at the Mpesa functionality and the strict segregation of Mpesa funds from Safaricom deposits which was the regulatory compromise for accepting the service in the first place. Neil’s fifth reason for the financial perfect storm is that pressure from customers, staff, regulators and all stakeholders is growing. And his final reason was the ultimate challenge for all businesses beyond the financial industry: Customers are changing. A study presented at Europe’s Finovate 2015 showed that 30% of today’s workforce is made up of millenials, 85% of who want banking to be disrupted. Have you seen those young people whose eyes are constantly glued to their devices and would rather starve than not have data bundles? The solution is hand held and your solution had better dovetail into their solution.

Closer home, the impact may be less harsh. For now. But our homegrown financial institutions are morphing into regional powerhouses and it won’t be long before a few float to the top of the pan-African heap. The successful ones will be the ones that grow their customer base on the back of technological innovation rather than bricks and mortar. To quote Larry Page, one of the founders of Google: Companies fail because they miss the future.

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Bankers are business people too

[vc_row][vc_column width=”2/3″][vc_column_text]A distraught investor called his financial advisor. “Is my money really all gone?”
He wailed. “No, no,” the advisor answered calmly. “It’s just with somebody else!”
I need to disabuse some readers of the notion that banks are charitable institutions. The amount of energy spent chanting dirges about how “banks are out to fleece us” or the more recent, “banks want to finish Kenyans with interest rates” is energy better spent understanding that a bank is a business like the neighborhood kiosk, providing a service of convenience. The less than palatable solution to the purveyors of negative energy is this: put your spare cash under your mattress and go borrow your financial needs from the knee-cap breaking shylock two streets down the road from your house. Enough said: if you’re mildly irritated at my incendiary introduction, let’s keep rocking and rolling as I explain why you need to get over yourself.

The months of September and October 2015 were difficult ones for the Government of Kenya. Cash flows got mismanaged as more money was being paid out than was being received and they had to come to the domestic market to borrow funds to meet their obligations. Bank treasurers as well as savvy institutional investors smelt blood in the water. They had already done a quick back of the envelope calculation on the use of the proceeds from the now infamous Eurobond and figured out that the government had come up short when there were multiple domestic as well as international obligations to be paid. These things really don’t require a rocket scientist, after all, housewives have been calculating and balancing kitchen budgets for years. Word soon spread that the government needed money, and banks as well as institutional investors were happy to step up to the plate. But remember that banks place your deposits in two places: in loans to businesses and individuals or in loans to government via treasury bills and bonds.

Two things will always happen when the government suddenly becomes exceedingly thirsty for cash and dips its beak into the private sector. Firstly, the arbitrage sharks that are always looking for an opportunity will strike. If an individual or corporate with a good credit history at their bank can borrow at 12% as was the case with some, then they will borrow and take the money to the government via the T-bill auction that was giving rates above 22%. That 10% spread is easy money. So easy that the bank’s initial reaction will be to raise interest rates to reduce the arbitrage opportunities that it is providing to some of its clients. Which then leads to the next question, why should the bank be the only one allowed to make money from government borrowing? Well, the fact is, everyone who was flush with cash and spotted the opportunity jumped into the high interest rate bandwagon. Large depositors demanded that the banks give them double digit interest rates or they would withdraw their funds and open CDS accounts at the Central Bank themselves in order to buy government paper. I know an individual who got 19% on his large deposit at a multinational bank in September this year. Now if you recall, I did say that banks fund their loans from customer deposits. When a large number of deposits start to re-price, the obvious impact will largely be on the future loan book that will be funded from the re-priced deposits. There is also an impact on the existing loan book because a bank is constantly trying to manage the profitable bridge between interest received (from loans) and interest paid (on deposits). The net interest income will obviously be impacted from the re-priced deposits. And banks are accountable to shareholders you know, the owners of the business who are demanding a return on their heavily regulated capital.

A final point to the business of banking: contrary to popular belief, it is not all champagne and roses when banks have to consider raising interest rates. The credit risk director will typically sit through that Assets and Liabilities Committee -ALCO meeting (assuming he’s invited) with a furrowed brow and a sinking feeling in the pit of his stomach. Why, you ask? The credit director knows very well about the elasticity of the borrower’s pockets. There is only so much stretching a borrower can do before he decides to throw in the towel and default on a bank loan that is causing more grief and sleepless nights than a private developer’s illegal boundary walls coming down. A borrower has typically submitted cash flow projections to his banks demonstrating that he can comfortably make the principal plus interest repayments over the lifetime of the loan. A minor rate increase will cause some level of digestive discomfort. A major rate increase will cause cardiac level discomfort. Which is why banks ask individual borrowers for their pay-slips and information about other borrowings so that they can tell what the “debt service coverage ratio” is for the individual borrower. How much of her disposable income is going towards servicing loans? The rule of thumb is that it should not be beyond 30% of one’s net income which allows one to pay rent, buy food and basically live decently rather than skating on the edge of financial despair. The same applies for business loans, as there is an ideal leverage ratio for businesses that are in the manufacturing or in the service industries (manufacturing businesses are permitted higher leverage ratios due to their propensity to use loans for purchasing capital equipment).

Therefore it’s not an easy ALCO decision to raise interest rates as the bank will be balancing a need to maintain the net interest spread while managing the increased risk of borrower default. Since the escalated government borrowing had cooled down in November, the banks last week could thus start to yield to the Central Bank Governor’s exhortations to stop loan interest rate increases. Total relief in sight for distraught borrowers!

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Devolution, piracy and banking meet in Mombasa

[vc_row][vc_column width=”2/3″][vc_column_text]I spent the better part of last week down in Mombasa and arrived at three conclusions: firstly, devolution works. Secondly, banking, as we know it in Kenya will have to change or it will die. Thirdly, the ghosts of the Indian Ocean piracy rackets roam freely in Mombasa’s environs.

My visit to Mombasa was primarily to see the market and the distribution of a particular fast moving consumer good (FMCG) that I will hereafter refer to as product X. Since devolution shifted a hitherto unknown sum of money to the coastal counties, there was more money in circulation, as county governments became direct buyers of goods and services within counties. Of course the providers of those goods and services then have more cash with which to hire employees or buy supplies both of which activities means that funds are moving further down the food chain. Employees, for example, now have cash with which to pay rent, buy food and clothing items as well as not-so- discretionary items like airtime. Suppliers of biros, wheelbarrows or condom dispensers to the county governments have to purchase them from a wholesaler, or perhaps a supermarket and more funds go into the system. You catch my drift, I’m sure. Anyway, movement of product X (and many other FMCGs) has grown in the last two years since devolution occurred simply because there’s more cash in circulation. Now how that cash gets into circulation is another story, whether it is through a legitimate procurement or inflated “tenderpreneurship”. The upside is that Nairobi’s position as a primary market becomes increasingly diluted and greater revenue diversification occurs for the manufacturer. In short, it is not only members of county assemblies (MCAs) that have benefitted from devolution funds. Legitimate private businesses have found 46 wider markets within which to focus on. Devolution, from a business perspective, must stay. It is also noteworthy that the movement of product X has moved deeper into the coastal interior following the tourism downturn. As many of the hotels have been closed and the staff laid off, there has been an urban to rural migration that has led to demand for “urban” goods deeper in the coast interior. Distributors have therefore had to reconfigure their distribution routes to follow the market demand.

Which leads me to my second conclusion: the ever growing disruption of banking as we know it. Tracking the coastal distribution of this product in the last 8 weeks, the team found that cash payments had moved from 75% in the beginning of September 2015 to 37% by the beginning of November. Conversely, mobile payments on the Mpesa and Equitel platforms have moved from 17% to 54% in the same 8-week period. The reason? The core distributor had chosen to absorb the mobile payment charges as these were found to be eating into the razor thin margins of the downstream retailers, hence their resistance to using the Mpesa and Equitel payment platforms. If you have ever paid someone using your mobile phone and they tell you the now ubiquitous peculiar Kenyan lingo “na utume ya kutoa” you will know what I am talking about. During the same period, payments using the banking system remained flat at 8%. In short, retail business in the economy has been and will continue to be quick on the uptake for mobile payments as its incredibly safer due to zero cash handling and leaves an electronic trail that can be used to build an indelible, legitimate cash flow history for future borrowing needs. The obvious evolution will be for the absorption of the mobile payments cost further and further up the value chain, ending up at the manufacturer. With these costs absorbed as distribution costs, mobile payment systems will become the primary methodology for movement of money in the FMCG space and the winners will be the banks sitting on the Mpesa float accounts, currently numbering not less than ten as well as Equity Bank.

Finally, to my third conclusion: Driving through Nyali, specifically Links Road that has morphed into the commercial superhighway of a formerly quiet, upmarket neighborhood, one is shocked by the concrete jungle that has emerged. An architectural travesty has arisen, with tall, dull colored buildings juxtaposed with short, squat faceless structures that have numerous “For Sale/To Rent” signs hanging forlornly on their shiny fences. Anecdotal evidence points to proceeds of Somali piracy being used to put up the buildings. It is a clear case of “if you build they are not guaranteed to come.” There are even more empty apartment blocks in Shanzu, standing tall amongst the many boarded up beach hotels and curio shops that have called it quits during Kenya’s devastating tourism downturn.

Real estate continues to provide the fastest way to launder large cash based criminal proceeds. Buying land, then the building materials and labor costs are all cash intensive initiatives that gladly suck liquidity out of the hiding place at the bottom of the criminal’s mattress. Buying finished buildings is even faster. But the music stopped playing on the piracy routes, almost exactly at the same time as the terrorist attacks stepped up in Kenya leading to the economic downturn at the coast. It’s important to note that I am not saying all the buildings that have come up were funded via illegal proceeds, but those that were just added to the grief of the legitimately funded buildings: No tenants.
Which gets me thinking about why the same is not happening in Nairobi. Why does the commercial and residential building stock continue to grow? Outside of insurance type corporates flush with liquidity, and Chinese contractors importing cheap borrowed funds from their banks, who or what is fuelling additional building stock using cash rather than borrowing? It bears noting that overpriced wheelbarrows, biros and hospital gates continue to gain traction and if our the music ever stops playing in the corruption concert, the specter of empty buildings standing forlornly in Nairobi’s mid to upmarket addresses will undoubtedly follow.

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Twitter @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

Banks and Corruption make for strange bedfellows

[vc_row][vc_column width=”2/3″][vc_column_text]On April 13th this year, I opined quite loudly about the role being played by the banking sector in Kenya’s institutionalized corruption culture. In case you missed it, my observations were as follows:

“Picture this scene: Mr X has been banking at Bank Y for the last 10 years. His account turnover is about an average of Kshs 250,000 on a monthly basis. The account suddenly begins receiving deposits and withdrawals ranging from Kshs 20 to 100 million, which moves his average monthly turnover to about Kshs 50 million. The Anti Money Laundering officer, usually a skinny, bespectacled recent university graduate, flags these movements to his boss the Compliance Manager. The Compliance Manager flags it to his boss, the Risk Director. The Risk Director walks over to the Retail Director and shows him the transactions as he’s a smart chap who doesn’t want to put anything in writing, just yet. The Retail Director, who is royally chuffed that his liability targets are constantly met since his team’s successful senior civil servant recruitment drive last year, rubbishes the report and dares the Risk Director to take it higher, “Weeeh, even the Managing Director knows we have these accounts, can’t you see how they are helping our deposits to grow?”

Well, in my typical smug armchair analyst fashion, I have been unequivocally vindicated. Far be it for me to say I told you so, but the Sunday Nation on July 5th reported some interesting court findings. An article titled “Suspended city official deposited Sh 1 bn in two years” written by Andrew Teyie caught my eye. In it tells the story of an extremely industrious public servant who allegedly deposited close to a billion shillings in nine accounts spread in five local banks within two years. This information is sourced from documents tabled in court by his accusers, the Ethics and Anti-Corruption Commission (EACC). First off, I have to doff my hat to the industrious public servant for mitigating concentration risk by opening accounts at five different banks. Baba attended risk assessment 101 and passed with flying colors. It is never advisable to put your eggs in one basket, spreading them to three is wise and to five is brilliant. It also helps to reduce the risk that in case one of the five banks cottons on to what you are up to and reports you, there are four other banks to keep fooling.

According to the court documents, industrious public servant had declared his income at Shs 831,840 (although it doesn’t quite say to whom the declaration was made) yet deposits were being made on at least twice weekly ranging from Sh 1 million to Shs 13 million. Yet the banks are required to have established Anti-Money Laundering (AML) processes to capture abnormal transactions. An abnormal transaction would be anything that goes against the norm for the type of activity a customer has been registered as undertaking. So for example a salaried customer would be expected to have a one major credit into the account, followed by a slew of debits as he withdraws his salary in dribs and drabs over the course of the month. If the salaried customer has multiple credits, especially those that significantly exceed his stated salary, this would typically raise a flag.

A way around this, for the experienced money launderers, is to open a hotel, restaurant or casino. All these businesses deal with cash such that an inordinately high number of deposits would hardly raise anything other than a bored eyebrow over at the compliance team in the bank who never quite get off their cushy behinds and go look at the actual customer turnover within these joints.

Now it is highly likely that an enthusiastic compliance officer raised the flag, drew compliance manager’s attention who drew risk director’s attention who cast a baleful glance at retail director before heroically blowing the whistle to the Central Bank team who then ran pell-mell in the direction of Integrity Centre with the file in hand to knock the sky and our expectations open with the news of this chap’s accounts. Somehow I don’t think you believe that, which is quite funny because neither do I. Truth of the matter is that industrious public servant is one of the small fish that can be pan fried in the rather tepid fight against corruption and he laid himself wide open by not covering his standard gauge tracks when banking his proceeds. He relied, quite safely, on his banks that did not report the suspicious transactions to the regulator. He also unwittingly relied on a regulator that was snored quietly on the sidelines as these AML breaches happened, and continue to happen, on their watch.

A couple of paradoxes that arise from this case are noteworthy. First off, that the Kenya Revenue Authority appeared and decided swoop in for the tax evasion kill is nothing short of comedic. How do you tax corruption proceeds of a public servant? A public servant in many cases is only taking what are public funds hence it beggars belief that one can tax what one has already collected as tax and has been misappropriated by public officials. Is that not taxing the tax that’s been taxed? The second paradox is the sand that is being thrown in the public’s eyes. Industrious public servant is a tiny little goldfish in an enormous fish tank. The EACC has demonstrated publicly that they can get historical data on the banking activities of public servants. So why isn’t the Central Bank’s supervision unit being used to assiduously partner with EACC to hunt down these nefarious characters? EACC knows where all the corruption proceeds are. Our Central Bank knows (or can exercise a tiny bit of supervision to find) where all the corruption proceeds are. You and I are foolish pawns who lap up the piddling little stories of corruption arrests. Meanwhile the big fish don’t do their banking in Kenya: it’s too pedestrian.

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Our Banks Are Laundering Corruption Proceeds

A man walked into a Swiss bank and whispered to the manager “I want to open a bank account with 2 million dollars.” The Swiss manager answered, “You can say it louder, after all, in our bank poverty is not a crime.”

As the sun set on the month of March 2015, there was cause for much reflection by the various civil servants who found themselves on the “List of Shame” that read like a who’s who in Kenya’s enterprising and highly lucrative public service. I can only imagine how many folks in the civil service girdled their loins in preparation for battle as they poured over the list with bleary eyes that were bloodshot with the previous night’s spiritual indulgence, fervent in the hope that their names didn’t appear.

Well, there were no public gasps of shock or righteous indignation; Kenyans have truly become immune to lists of shame. As a Nigerian friend recently told me, it only makes news in Nigeria when a public official has stolen over $100 million – Kshs 91 billion . Anything beneath that is deemed verily normal. However, there seemed be a lot of skepticism as to what the definition of “stepping aside” truly meant and whether it would conform to the Kenyan precedent of lying low like an envelope for three to four months followed by a quiet slinking back into office under the cover of media darkness.

Good people, we are talking about hundreds, nay, billions of shillings that have been corruptly acquired. This is not an amount that can fit into your Little Red suit pocket, or tied into the corner knot of Mama Mboga’s khanga. These funds have to be moving within and around the Kenyan banking sector. Yes, the banking sector that has remained grossly silent and unapologetically mum about the billions in liability windfalls that have dropped miraculously from the sky. Picture this scene: Mr X has been banking at Bank Y for the last 10 years. His account turnover is about an average of Kshs 250,000 on a monthly basis. The account suddenly begins receiving deposits and withdrawals ranging from Kshs 20 to 100 million, which moves his average monthly turnover to about Kshs 50 million. The Anti Money Laundering officer, usually a skinny, bespectacled recent university graduate, flags these movements to his boss the Compliance Manager. The Compliance Manager flags it to his boss, the Risk Director. The Risk Director walks over to the Retail Director and shows him the transactions as he’s a smart chap who doesn’t want to put anything in writing, just yet. The Retail Director, who is royally chuffed that his liability targets are constantly met since his team’s successful senior civil servant recruitment drive last year, rubbishes the report and dares the Risk Director to take it higher, “Weeeh, even the Managing Director knows we have these accounts, can’t you see how they are helping our deposits to grow?” The Retail Director has been considering opening a branch for High Net Worth Individuals on the 10th floor of a new building in Westlands with a dedicated high speed lift from the basement, primarily to enable senior civil servants come and go easily without being noticed.

This scene is quite likely replicated across some of Kenya’s banks today that have “flexible” anti-money laundering (AML) rules and ill defined Know Your Customer (KYC) policies. Because if you Know Your Customer as per the Central Bank of Kenya guidelines, you should know your customer’s source of funds and be in a position to flag suspicious inordinate account activity on a real time basis; technically. The Central Bank inspectors who come round every so often, should also be able to pick up on this activity since they have access to the exception reports on account turnovers; technically. But does this happen? Let’s take a look at how developed markets penalize offending banks. In July 2013, Europe’s largest bank HSBC was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of US dollars from HSBC Mexico, American prosecutors said. The bank was criminally charged with failing to maintain an effective anti-money laundering program, failing to conduct due diligence amongst other charges. Bloomberg Business reported that court filings by the US government indicated that lack of proper controls allowed the Sinaloa drug cartel in Mexico and the Norte del Valle cartel in Colombia to move more than $881 million through HSBC’s American unit from 2006 to 2010. HSBC was fined over $1.8 billion in penalties as a result.

Along more familiar bank territory, Standard Chartered agreed to pay $300 million to New York’s top banking regulator for failing to improve its money laundering controls, reported the BBC in August 2014. The Bank was also banned from accepting new dollar clearing accounts without the state’s approval. The penalty arose from a clear lack of learning as the bank had its AML problems identified in 2012 which had still not been fixed by 2014. The 2012 problems had led to the bank being penalized $340 million for allegedly hiding $250 billion worth of transactions with the highly sanctioned country of Iran. The banking regulator required that an independent monitor be installed at the bank and the monitor discovered that Standard Chartered had failed to detect a large number of potentially high-risk transactions.

At the risk of sounding judgmental, it’s quite likely that the banks in Kenya operating under international jurisdictions are applying their KYC and AML screws very tightly on what are termed as Politically Exposed Persons (PEPs) for no other reason than to avoid international notoriety of “chicken-gate” proportions. Actually, the corruption proceeds are more likely to be found in some of our local banks, mingling merrily amongst the hard earned proceeds of sweat generating wananchi.

Poor senior civil servants don’t exist in Kenya. They bank alongside the wealthy, productive citizens of this beloved country. Our banking industry knows them quite well.

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Twitter: @carolmusyoka

Young Entrepreneurs That Walk The Talk

Entrepreneurship is the last refuge of the trouble making individual. ~ Natalie Clifford Barney

Ted* came to work in my team as an intern in early 2007. Back in those days, working in a financial institution such as Barclays was the alpha and omega of a professional career. He was a stroppy 22 year old, with hair that was at least 3 inches too long and shirts whose cuffs that were at least 3 inches too short of the wrist line. He was a breath of fresh air in an environment of monumental performance pressure underpinned by a staid, insipid office culture. About a month before the first anniversary of his employment, as he had successfully transitioned into a full time job, he came to talk to me about taking a few months off to tour the United States.

“What?” was my incredulous reply. “Yeah, I want to just go around the States, maybe I’ll go to Mexico as well. I just want to figure stuff out,” he said nonchalantly. “But what about your career, I mean, you’ll have this inexplicable black hole in your CV which can’t be addressed with the words ‘backpacked through the United States for the sake of it’ as a line item,” I whined. It didn’t matter. Ted left for the United States, and threw in a couple of months backpacking through Europe as well. When he got back, he decided to start up a business doing websites for companies, as he was now crystal clear that he never wanted to work for anyone again.

Last week, I spent a morning in the offices of Kevin*, a twenty six year old entrepreneur whose business it is to collect electronic data from the online community, make sense of it and then help businesses make strategic decisions by distilling the information into language that decision makers can understand. Kevin has travelled around the world in the last two years providing insights at global conferences as a leading voice on African social media tactics and tips.

For two straight hours I sat with Kevin and two of his team members, getting completely blown away by the quality of data that they are able to collate using people’s Instagram, Facebook and Twitter feeds as sources of what would look like rubbish data to the untrained eye, but is actually valuable information on the experience of products and services by Kenyan consumers. Kevin only has one permanent employee in his office. The rest of his team work on contract from wherever in Kenya that they can link up to a fast internet connection. His clients are multinationals and top tier local corporates who are now starting to understand the benefits of getting unsolicited real time customer experiences to improve on their product offerings.

In a classic serendipitous twist, Kevin’s landlord is Ted, who has now become the consummate entrepreneur. At twenty nine years old, Ted now has 26 employees providing web design, branding and social media marketing solutions to multinational and local organizations in the banking, FMCG and not for profit sectors. I walked through Ted’s offices, where young fellows with 5 inches of Afro, cuff less shirts, loud blaring music and a completely relaxed, colorful environment created extraordinary client solutions on large Mac computers. It turns out that Kevin needed space to set up his business, and Ted gave him a corner desk and unfettered access. “It’s all about how we work together, Kevin thinks differently and thinks big, as a result he has helped us on some of our work and we’ve done some projects together,” Ted told me later. In his playbook, having different people share his rented office space provides opportunity for getting different perspectives on how to do business. Paul is another twenty something entrepreneur sharing Ted’s space. “We liked his vibe and he liked ours so we gave him space as well,” Ted says of Paul. There is a refreshing openness in the way Ted operates with his sub-tenants and a strong culture of leverage from synergistic relationships within the workspace. His big break in providing customized Facebook pages for clients came through a famous Kenyan musician who had come to see his previous music industry production tenant. Ted and his team were trying out their new product and offered it to the musician who had nothing to lose. The marketing manager of a large FMCG multinational saw the page, loved it and commissioned Ted’s company to do one for them. The rest as they say is history as their highly visible work sold itself off its virtual platform.

There are many Ted’s and Kevin’s in Kenya. They have chosen to buck the trend that our education system has tried to force down our collective throats which trend says that cramming, passing exams, going to university and looking for a job is the ultimate route to Canaan. These young men, and the people that they work with are making a big difference in the way that their corporate clients are doing business and understanding a client demographic that is both fluid and fickle. They are providing a service on their own terms, not constrained by the astoundingly boring confines of office environments that stifle creativity.

For every Chicken-gate, Angloleasing-gate and Maize-gate tenderpreneur we have in Kenya, there are at least ten thousand young people who want to make an honest living doing what they are madly passionate about. They fight a system that has conditioned our society into thinking it’s all about passing a standard eight sieve into a smaller form four sieve into an even smaller university sieve that spits out graduates expecting to be absorbed into a small workforce. The chaff that remains at the top of the sieves is browbeaten into defeatism and a self-fulfilling prophecy of doom. I’m glad that Ted bucked the trend and walked out of employment despite my pathetic exhortations against his mad ideas. 26 employees are happier for it.

*Not their real names
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Twitter: @carolmusyoka