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Black Tax

Decades ago, I did not go to Alliance. I did however attend the University of Nairobi’s law school where I met those very few who went to Alliance, sharing in the rarified air of their intellectual presence. Mosocho was my classmate and together with about 160 others, we were one of the pioneers of the government’s new increased student loan system. The system gave us direct cash amounting to about Kshs 7,000 per academic year as well as about Kes 42,000 indirectly which was remitted to the University instead to pay for our tuition. To be honest, I blew my “boom” as it was fondly referred to on the good life. The very soft life of a university student who needed clothes to look good and money to party. Mosocho, I later came to discover in my second year of university, was an orphan and was the eldest of six siblings. He used his boom to pay their fees throughout our time at campus.

Mosocho was my first unknowing encounter with the concept of “Black tax”. The term originated in South Africa and is defined by Investopedia as the financial burden borne by Black people who have achieved a level of success and who provide support to less financially secure family members. The monetary transfers are made by middle class and wealthy black people to relatives who are struggling to make ends meet. Investopedia further explains that the term not only defines the movement of funds, but more importantly includes the toll that it takes on the financially able family member who may be unable to build wealth in the same way as their White peers who don’t share the same financial obligations.

Historical racial injustices aside, Black tax is actually a continent wide phenomenon. Due to the high unemployment rates and economic disparities for most Africans, we endure Black tax under almost daily circumstances. From paying school fees for siblings, cousins and village mates to paying for hospital bills, rent, funeral expenses and daily subsistence for relatives, friends and former colleagues. Unless you live in an African Mars equivalent, you have to have paid Black tax in some shape or form in the last month.

Consequently, this is one of the leading determinants of the slow growth of African middle class wealth as there are multiple, unbudgeted financial pressures on largely static incomes. While it is virtually impossible to quantify the amounts paid locally, a more visible manifestation of Black tax is apparent in the form of diaspora remittances. In sub-Saharan Africa, the top five recipients of remittances in 2021 were Nigeria at US$ 19.2 billion, Ghana at $4.5 billion, Kenya at $3.7 billion, Senegal at $2.7 billion and Zimbabwe at $2.0 billion.

The more illuminating numbers are the ones that show just how impactful those dollar inflows are to the local economies. According to the World Bank press release, the top three sub Saharan countries where the value of remittance inflows as a share of GDP is significant are the Gambia at 27%, Lesotho at 23% and Comoros Islands at 19%. The senders of those remittances may or may not have achieved the middle class dream of owning their homes and living debt free. But they do partake (whether willingly or unwillingly) in the African spirit of Ubuntu which recognizes that the individual exists in a microcosm that is actually part of a larger community thus cannot survive without helping others.

Unfortunately it is this very concept of Ubuntu or its Swahili equivalent “utu” that leads to the insidious social fallout of Black tax. Diasporans have numerous nightmarish stories of money sent to close relatives to buy plots or construct homes which are only bought or built in the lofty corridors of the sender’s mind. Frequently the recipient diverts the funds to other personal uses. One frailty of the human condition is to confuse charitable largess with entitled, guaranteed income and consequently view the socially respected “rich” relative as a perpetual ATM. The subsequent family fallout is usually as spectacular as watching migrating wildebeest cross the Mara river. It never ends well for some.

The government’s push to Kenyans to seek more jobs abroad is an indirect way to ensure that this key source of attractive foreign exchange grows thereby diversifying our reliance on agricultural exports for global currency. Meanwhile, Mosocho became a very successful lawyer and is currently a senior partner at a leading law firm. Black tax does get its just rewards!

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Black Economic Empowerment in the Kenyan Context

“Each of us is as intimately attached to thesoil of this beautiful country as are the famous jacaranda trees of Pretoria and the mimosa trees of the bushveld – a rainbow nation at peace with itself and the world” Nelson Mandela 1994

With a 2017 estimated population of 56 million who call the place home, it is not hard to see why Mandela referred to his country as the “Rainbow Nation”. The 2011 South African national census found that 79.2% of the population was of African extraction, 8.9% were categorized as White, 8.9% were Coloured and Asian were at 2.5% of the population. A category called “Other/Unspecified” was found to occupy 0.5%.

In the decades before South Africa achieved democracy in 1994, the apartheid government systematically excluded African, Indian and Colored people from meaningful participation in the country’s economy. The Broad Based Black Economic Empowerment Act of 2003 (B-BBEE) was created to “situate black economic empowerment within the context of a broader national empowerment strategy, focused on historically disadvantaged people and particularly black people, women, youth, the disabled and rural communities.”

Institutional mechanisms were later set up for the monitoring and evaluation of B-BBEE in the entire economy including independent verification agencies that would issue certificates of compliance. In 2007 new Codes of Good Practice were gazzetted by the South African government to definitively establish ownership, management and control, employment equity, skills development, preferential procurement, enterprise development as well as socioeconomic development.

The unintended consequence of the B-BBEE program has been to create “black privilege”. As much as “black” was anathema in the apartheid regime, not having enough“black” in the current regime presents an economic disadvantage to companies looking to do business with government agencies or get licenses in regulated sectors like mining, banking and telecoms. The beauty of the B-BBEE program is that it is far reaching beyond just the companies that do business directly with the government. It looks at the wider planet, capturing not only the owners but also the employees, suppliers and service providers of those companies to ensure that the economic benefit envisaged cascades beyond just the boardroom to other stakeholders that would ordinarily not have the opportunity to be employed or to participate in the procurement process.

To be considered black, one has to be a black African, Indian or Colored and have been a citizen of South Africa before 1994. Consequently, non South African African professionals working in South Africa, whether male or female, are given the same ranking as white male South Africans due to the provisions of the Employment Equity Act of 1998. This act requires firms that employ more than 50 people to annually report on their progress towards having “blacks” as identified by the B-BBEEframework at every level of the organization and face financial penalties for not meeting set targets.
The result of that black privilege has been a brain drain of skilled South African white professionals who now face undisguised glass ceilings in the work place as the legislative regime rewards a decision to hire or promote a black person, where black means black African, Colored or Indian, than a white person, where white means South African white or non South African professional.
In Kenya, the recent calls for secession of some counties who have not enjoyed the economic benefits of past political regimes needs some sober rumination. Beyond the rabble rousing antics of politicians lies a significant group of Kenyans who do feel excluded from basic employment and procurement opportunities, notwithstanding the programs to push for youth, women and persons with disabilities. The question is: Can legislation on the manner in which corporate Kenya hires workers and procures from its suppliers and service providers jumpstart the equilibrium that is being sought? The definition of corporate Kenya could be extended to any entity within the public and private sector that employs more than 50 people. The challenge to applying such a legislative regimehowever, would be twofold: first we would have to ensure a strong, independent verification and certification mechanism. Secondly we would haveto take into account existing demographics around actual tribal numbers that will set a basis for determining what our workforce should reflect from a representation perspective, and then permit a phased approach to achieving those goals in the medium to long term. The last thing such a legislative regime should do is to create a “minority privilege” that eventually shuts out the “majorities” from employment and doing business in Kenya.
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Twitter: @carolmusyoka

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Shadow Directors

Maneno Ltd is a Nairobi Stock Exchange Listed company in the business of manufacturing consumer products. The founder, Michael Monga, was a well-respected businessman with multiple interests in various industries some of which interests have led to obvious potential conflicts. As Monga was quite alive to the effect of negative publicity on his business interests, he often appointed proxies to the boards of companies in which he was a substantial owner. Maneno Ltd had three such directors, who were senior employees in Monga’s other companies. Monga, being a very shrewd player, was also careful to select independent non-executive directors that could be prevailed upon to play ball where required.
Due to a fairly loose enforcement regime, cheap imports of the same consumer products that Maneno manufactured had started to flood the Kenyan market and management were spending valuable time firefighting with the relevant government agencies. Prudent past management had ensured that a significant amount of cash had been set aside and invested in money market instruments in anticipation of a strategic plant expansion that had been planned in the 5 year strategy. Monga instructed his three directors to support the Managing Director’s board paper recommending an interim dividend. That seemed strange as the financial projections indicated that the company was going to make a loss that year due to shrinking sales. The paper was approved and a special dividend was paid. The company went ahead to make losses and the following year a hefty final dividend was declared that essentially wiped out the healthy cash reserves that Maneno had been holding. As sordid stories go, within no time Maneno was bleeding cash, as management was unable to stem the effect of cheap imports versus their own locally manufactured products in an aging plant with high labor costs. The company filed for insolvency within two years of the final hefty dividend payout.
What potential remedies exist for the minority shareholders who were held at glorious ransom by the corporate shenanigans of Michael Monga? Both Kenya and Uganda have recently revamped their company laws from the archaic 1948 UK Companies Act that formed the basis of local company law. Uganda passed the Companies Act 2012 and Kenya followed suit with the Companies Act 2015 both of which laws essentially aligned company law with modern norms such as the concept of a shadow director. Company law defines a shadow director as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
If you’re struggling to picture one, think of a multinational company in Kenya, whose board is regularly instructed by “group” via the managing director, on when to declare dividends or when to postpone making critical provisions on their financial statements. It can also be the finance director of a Kenyan company that has regional subsidiaries and demands the same financial behavior of the subsidiary boards. [It bears noting that the Tanzanian Company Act 2002 does not expressly define shadow directors.] It can be a cabinet secretary who regularly issues instructions to the board of a limited liability company with significant government ownership. In the Maneno Ltd example, Michael Monga is a classic example of a shadow director. Not only was he giving express instructions to the non-executive directors, but he also ensured that he indirectly controlled the board through the appointment process. For all intents and purposes, Monga was the board.
Company law recognizes that while de jure directors (directors by law) have fiduciary duties to the company including the duty to act in the best interests and promote the success of the company, de facto directors (directors in fact) also owe the company fiduciary duties and can therefore be held accountable for their acts in the same vein as the directors on record. This premise was established in the 2013 landmark United Kingdom case of Vivendi SA and Centenary Holdings Ltd versus Murray Richards and Stephen Bloch. In the case, as succinctly summarized on the Helix Law website, a shareholder of a company in trouble used his influence to make the sole director of the company pay him a salary and other money from the company, without providing any benefit or services back. These payments were made while the company was insolvent. The company went into liquidation and its receiver claimed compensation from the shareholder claiming that a) he was a shadow director b) a shadow director owed the company fiduciary duties as if he had been formally appointed as a full de jure director and c) the shareholder had breached those duties. A Burges- Salmon blog on the shadow director subject matter summarized the court’s findings thus: On the first issue, the court found that the sole director was accustomed to acting in accordance with the shareholder’s instructions and therefore the shareholder satisfied the test for shadow directorship. On the second issue it was found that in giving instructions to de jure directors, a shadow director assumed responsibility for a company’s affairs. However while a shadow director’s duties were not statutorily provided for, the consequences of being found to be a shadow director must evidence Parliament’s perception that a shadow director could bear responsibility for a company’s affairs. The court also observed that a shadow director’s role in a company’s affairs might be just as significant as a de jure director, and that public policy pointed towards statutory duties being imposed on shadow directors.
What does this mean for Michael Monga and many like him?
Company Law now provides extraordinary personal consequences to the shadow director including: a liability to contribute to the company’s assets following the company’s insolvency, disqualification from being a director of any company in Kenya following the company’s insolvency as well as criminal sanctions and personal liability for violations of director’s duties.
As a parting shot, while de jure directors may rely on Directors and Officers insurance cover, the shadow director is most definitely not covered under the same. If you sit on a Kenyan or Ugandan board, now would be a good time to look over your shoulder and find those shadows.
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Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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

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Profiting From Dangerous Driving

[vc_row][vc_column width=”2/3″][vc_column_text]Many years ago as a masters student in the United States, I needed to renew my student visa and in those days, you needed to apply for the visa outside of the country’s borders. I therefore had to drive 946 kilometres, from Washington DC where I was living to Montreal, Canada where I had booked my visa appointment. Driving in a northeasterly direction through New York State is about as stimulating as watching yellow paint dry on a concrete wall. The highways are well patrolled by State Troopers who are always looking out for speed offenders breaching the 65 miles per hour (105 km/h) speed limit, and you could be busted at anytime as they had a knack of hiding on embankments and behind grassy knolls on the highway. So I drove the rental car sedately until the Canadian border, where the speed limit changed to the metric system, and was set at 100 km/h. By this time I was ready to slit my wrists in boredom, noting with consternation the number of cars that zoomed past me at extremely high speeds. (To assist your supercilious judgment over my choices, I was young and foolish at that time so speed was the most tempting way to kill the boredom). Having nothing better to do than observe what I thought were brave, foolhardy souls, I realized that the drivers would suddenly drop their speeds at certain sections, and sure enough I’d see a police cruiser parked surreptitiously over a brow or under a bridge, prowling the highway for its traffic offending prey.

These daredevils had speed detector kits (illegal in the US but not banned in Canada at the time) and would therefore drop to within the speed limit in time to daintily saunter past the unsuspecting cops. Never one to let opportunity ceaselessly knock on my forehead, I latched onto the next daredevil, hugging his bumper for dear life and together we danced the speed detector waltz all the way to Montreal. I must have shaved off an hour on that trip, arriving breathless and exhilarated at having dodged not one but several police traps. On my way back, I hadn’t even left the Montreal city limits when I foolishly choose to follow what I thought was another speed detecting daredevil. It turned out that he didn’t have the detector. But this is the clincher: he got away while I got the much dreaded “wiiiiuuuuw” sound followed by the even more heart thumping red and white flashing lights in my rear view mirror. The Canadian cop was a gentleman. He got me to park my car on the side of the road, hop into the back of his Bat-mobile and drove me to an ATM machine at a nearby strip mall. I had to pay $250 Canadian dollars as a speeding fine. That was the entire salary I had earned in the month of June and July working as a research assistant for a professor in law school and, mercifully, I had just been paid the day before. I limped back to the Canadian border at 90 km/h and never looked back again. I’m still smarting from that traffic fine which completely changed my driving habits thereafter. This story came back to mind when I, and many Kenyans, woke up to the news of yet another mind boggling family decimation at a road accident in Salgaa some days ago.

The definition of insanity is doing the same thing over and over again and expecting a different result. Except we don’t seem to be doing anything, let alone over and over again at notorious accident black spots. We know our traffic police force have a penchant for enforcement, the kind of enforcement that misdirects on-the-spot penalties into non-government coffers. This may be the time to introduce quotas in our traffic department. Each traffic officer is given a target to raise a certain amount of money in the form of penalties from dangerous driving (all one has to do is stand beside any single Kenyan roadside for 3 minutes and he’ll be spoilt for choice, in fact he’ll probably bust his daily budget within an hour), driving without seatbelts, overlapping, overtaking on a continuous yellow line, driving without indicating and the mother of all mothers: driving above the speed limit. The income from the fines can and should be used to train the police to become 21st century law enforcement officials as well as provide the police with modern law enforcement equipment including patrol cars and on board computers linked to individual identification and motor vehicle national databases.

I did a little research and found the use of traffic ticket quotas in Australia and the Netherlands. However, in the United States where ticket quotas have been widely used in the past, a number of state legislatures have passed laws to remove the quotas as they are viewed to be exploitative of motorists. In Florida for example, the state legislature passed a law in July 2015 making traffic ticket quotas illegal. The law requires the police to submit reports to the state legislature if their traffic ticket revenues cover more than 33% of the costs of operating their agencies. The agencies may also be audited and face investigation by the state attorney general. But these are first world problems, in jurisdictions where law enforcement is credible and extremely visible.

It cannot be that we look at our own lives as mere transactions, transitory on this earth until extinguished desultorily. We have become completely inured to the rusty, twisted metal scraps that occupy pride of place on many of our highways, an attempted reminder by road safety authorities of the horrific outcomes in death and maiming. We see through these grim reminders the way we see past the drudgery that cakes the feet of our accident tired national psyche. Perhaps looking at prevention of loss of lives as a lucrative revenue source is the ethically challenging mindset shift that we need.

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