Posted on

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!

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

Posted on

The ticks and fleas of Kenya’s economy

[vc_row][vc_column width=”2/3″][vc_column_text]Have you ever been to the Masai Mara to watch the annual wildebeest migration? It is an awesome sight to behold. My best part is watching as a large herd of wildebeests gets to the point where they have to cross the Mara river, which is teeming with crocodiles. A patina of pregnant expectation fills the air as the wildebeest mill around the steep embankments, mulling the treacherous but inevitable crossing. The crocodiles lick their chomps in readiness. But what is interesting to observe is that it takes a long time before the lone nut, the valiant self appointed leader of the wildebeest takes the suicidal leap into the waters. The few seconds when the first hooves sail in the air is all it takes for the other animals mucking about on the sides to mobilize themselves into a frenzied march of followers. The river then becomes a battlefield filled with thousands of animals cleaving the riverbed for traction and trampling on crocodiles as they cross en mass to the promised land on the other side.

I would be remiss if I failed to talk about the ongoing teacher’s strike which is much like watching wildebeests at the Mara River crossing. The teacher’s union and its members are the lone nuts, the valiant, self appointed leaders of Kenya’s public work force who have decided to take the first jump. They have entered into an unpleasant face off with the government, akin to entering a gunfight armed with a toothpick. The President fired the cannonball last week: “Can’t pay, won’t pay” but the teachers have stayed put. The government’s point remains extremely valid that there’s not enough money to go round. The government recognizes that if it gives in to the teachers, then the other public officers will also want to jump behind them: doctors, nurses, police, civil servants all following the courageous fight demonstrated by the teachers on how to cross the river to the promised land.

But what should worry us more was the headline in last Wednesday’s Daily Nation: “Former councillors demand Kshs 18 billion”. These chaps want to be paid a one off gratuity that comes to Kshs 18 billion and a monthly pension of Kshs 30,000 per ex-councillor which comes to about Kshs 4 billion annually. Listening to the sycophantic soundbytes on radio for support of the councillor’s proposals from two senators who previously held cabinet positions in the Kibaki administration, I realized that our collective sanity as a country fell off the precipice of normalcy when we signed the new constitution. Somehow the new constitution seems to have us all in a catatonic state of hypnosis where we cannot connect the dots between what goes into the government coffers and taxes collected from blood, sweat and tears of production. The same state of hypnosis allows us to view government revenue as a line item of self-entitlement; one that is fair game for all of us to take a swipe at given whatever opportunity presents itself.

But let’s step back to the idyllic wildebeest scene at the Mara River. Wildebeest, like many wild animals, are often crawling with ticks and fleas. The problem with these parasites is that they survive by sucking blood from their very unwilling hosts. The ticks and fleas today are in the form of retired legislators and God knows which other retired constituency who are watching the unfolding teachers drama with relish. The timing of the councilors absurd request for remuneration is suspect and is in complete and utter disregard of the capacity of the government to pay existing public officers.

The teachers have every right to demand for their salary increase. It’s nothing short of appalling to see what a teacher who changes the lives of students earns in a month and compare it to the Kshs 1.3 million monthly remuneration of senators and MPs whose impact on us is, well, let me plead the fifth on my views. A monumental battle has emerged and the battlefield has innocent children as its pawns.

But a crisis should never be wasted. In order to make a fire, you must burn wood. This is a good opportunity for the government to force dialogue on the wastage of resources at both central and county level. The Kshs 100,000 wheelbarrows, Kshs 2 million facebook pages, Kshs 7 million hospital gates, numerous MCA tourism jaunts you name it, we’ve got it. The Kenyan public needs to become angry. Frothing-at-the-mouth-like-a-rabid-dog kind of angry. We need to start connecting the dots between what the government raises in revenue in taxes and what is being embezzled and wasted in the form of high salaries and endemic corruption.

The children twiddling their thumbs at home and the national exam candidates who are currently rudderless in their final countdown to exams will force these conversations to happen at mwananchi level. The dialogue needs to focus on the need for austerity, on the need to bring our collective madness and parasitic greed for government resources to a screeching halt. Sadly this fire of austerity that needs to be created will use our children as the wood to burn itself.

So dear Government of Kenya: Don’t waste this crisis. Ride this crisis tiger. Let it buck and sway as it tries to throw you off. Let the public get angry with you, send out your mouthpieces to start throwing views on the need for austerity and flip that script rapidly to turn the anger on the source of high recurrent expenditure. Wheedle the public to come out of their houses and into the streets to demanding for the end of high salaries to fat cat legislators and an end to the endemic corruption at central and county government level. Let the public wail and gnash their teeth each time parasites like former councilors emerge, demanding to eat from the perceived bottomless feeding trough. Stoke the conversations about ending the power of legislators to define their own salaries. An angry public will support you.

[email protected]

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

Posted on

Kenya Airways needs another shot in the arm

What do Britam, Kenya Tourism Federation, Independent Electoral and Boundaries Commission, Strathmore Business School, MTN Business Kenya, Kenya Commercial Bank and British American Tobacco Kenya Limited all have in common? Absolutely nothing. Except that senior executives from these organizations were present in Kigali last month, more precisely on May 26th for various business reasons that were not only mutually exclusive, but it is quite likely that many of these executives never crossed each other’s paths. But they crossed my path. The serendipitous points of confluence were the Kigali airport and at the Serena Kigali where many of us were staying. Most of the executives had come in using the Pride of Africa, Kenya Airways, which is the lifeblood of business travel in the East, Central and Southern Africa region. A tiny fraction had used Rwandair, the national carrier for that beautiful nation state nestled in the bosom of the East African Community.

There is massive trading of goods and services occurring across the five East African Community members. Pivotal to that business is the travel that the business owners and their managers have to undertake to make that business happen or monitor its performance. Pivotal to that travel is Kenya Airways like the critical aorta in the East African cardiovascular system. It hit me, after saying hello so many times, that I was starting to think I was at a diluted version of the Kenyan Company of the Year Awards. Kenyans are doing business aggressively in the region and any problems facing Kenya Airways are problems that will have far reaching impact on business in the region. Board meetings will be missed, conferences will be delayed, workshops will be remiss without key trainers, performance appraisals postponed just if the airline had one daily hiccup.

So it was with the deepest regret that I told my workshop organizers in April that they had to book me on Rwandair for the May workshop that took me to Kigali. I am proudly Kenyan and fiercely loyal to Kenya Airways, so much so that I take deep umbrage whenever the airline is trashed in any gathering. The golden handcuffs called frequent flyer miles also don’t allow much in the form of adulterous predilections with competitors. You are penalized heavily via ego bruising downgrades by the Flying Blue program, of which Kenya Airways is a member, for not maintaining a rigorous flight schedule annually. I was in the tiny fraction that flew the competition simply because the anecdotal evidence of missed and delayed regional flights by our national pride were starting to take their toll on the brand’s promise of reliability. I ended up being vindicated for my decision as my colleague who chose to fly the airline did indeed have his morning flight to Kigali cancelled. It is also noteworthy that Kenya Airways is the only decently reliable airline flying to Tanzania and Uganda respectively directly from Nairobi. It therefore has a captive market well sewn up in this region.

The airline has monumental goodwill and plays an undeniably enormous role in flying the country’s flag high. As one of only four African national carriers that are of global significance (the other three being South African Airways, Ethiopian Airways and Egypt Air) Kenya Airways’ financial problems are Kenya’s problems. They merit scrutiny and concern in equal measure, if for no other reason than we cannot, as a proud nation, permit this symbol of nationalism to fly into headwinds as my media colleagues like to infer.

In November 2012, I raised an eyebrow in this column regarding the motive for the rights issue that Kenya Airways had undertaken 6 months earlier:

“The timing of the rights issue in April this year was ostensibly to raise the equity for the airline and improve its debt to equity ratios for the further leveraging the airline needs to undertake to grow its fleet for its future expansion. However, looking at the airlines’ statement in changes in equity, if the rights issue had not happened when it did, Kshs 6.2 billion would have been wiped out from the equity arising from the operating losses as well as losses from the cash flow hedges that have caught the airline on the wrong side of the very necessary derivative bet for a few years now.”

Looking at the Half Year 2014 results released by the airline, the total comprehensive loss of Kes 13.2 bn pretty much almost halved their equity to the position of Kes 15 bn from a starting position of Kes 28.2 bn at the beginning of the financial year in April 2014. Cash was down to Kes 4.5 bn at half year as well from Kes 11.2bn at the beginning of the period. The airline is burning through cash at a high rate driven by high loan and interest repayments and basic operational expenses like salaries while grappling with labor relations that are a key cause of the delayed flights across the region.

The recently announced Treasury cash bailout of Kes 4.2 billion will be swallowed within the airline’s operational bowels without the pleasure of a satisfactory burp. That will also be putting an Elastoplast over a gaping wound that needs the kind of suturing provided by a massive capital injection that will be very apparent when they release their full year results for the period ending March 2015. Some feverish calls will have to be made or are probably being made to the key shareholders GoK and KLM to pony up certainly much more than the Kes 4.2 bn that has been put in Treasury budget estimates.

If GoK can consider injecting capital into a moribund, badly mismanaged train smash of a sugar miller like Mumias, it goes without saying that an injection into the national carrier is not only inevitable, but it is imperative. If it doesn’t happen the unimaginable impact will extend beyond Kenya Airways stakeholders: It will impact how business is done in the East African region as a whole.

[email protected]
Twitter: @carolmusyoka