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

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Angel Investors as Key Drivers of Entrepreneurship

An angel appears at a board meeting and tells the chairman that in return for his unselfish and exemplary behavior, the Lord will reward him with his choice of infinite wealth, wisdom, or beauty. Without hesitating, the chairman selects infinite wisdom.
“Done!” says the angel, and disappears in a cloud of smoke and a bolt of lightning.
Now, all heads turn toward the chairman, who sits surrounded by a faint halo of light.
One of the directors whispers, “Say something.” The chairman sighs and says, “I should have taken the money.”

Earlier this month I attended the G-20 Global Partnership for Financial Inclusion, which held a workshop on Financing Entrepreneurship Innovative Solutions in Izmir, Turkey. Turkey currently holds the G20 Presidency and therefore its government played a pivotal role in the organization of the successful of the workshop. One of the panelists was a well-known Turkish entrepreneur, angel investor and author, Baybars Altuntaş, who impressed the audience with his vocalization of tax incentives that the Turkish Government provides to angel investors. I pulled Baybars to the side during a coffee break and asked for more details. Once a person has registered as an angel investor, he is allowed to net off up to 75% of his investment in the start up company against his income tax payable in the year. In other words, a tax holiday of up to 75% of your investment! Baybars added that angel investors tend to get together and pool their funds to reduce the risks as the success rate for their investments was only typically 10%. “Why would one invest money in start ups if only 1 in 10 initiatives succeed?” I quizzed. Baybars smiled the smug smile of the wealthy and responded, “Because the returns from that 10% will make you more money than the losses on the 90%!” I walked away, scratching my head and realizing why my risk aversion would leave me a pauper for the rest of my life.

Angel investment is the provision of financial capital to newly established or growing companies which have novel business models or technologies with high potential for growth and profit but are unable to find eligible financing resources to realize their investments.

Recognizing the inherent benefits that angel investors would provide through entrepreneurial seed capital support as well as stimulating economic growth through job and value creation, the Turkish parliament passed the “Regulation on Angel Investment” law in June 2012 and the Treasury promulgated the enabling legislation in February 2013. The rationale behind the law is to promote the financing of small enterprises and entrepreneurs by providing tax incentives to angel investors. According to a PwC Turkey Asset Management Bulletin, in order to benefit from the tax reliefs provided in the law business angels first have to obtain a license from the Treasury. The business angel cannot directly or indirectly be a controlling shareholder of the qualifying company that it wishes to invest in, neither can the qualifying company belong to his relatives. A qualifying company should, amongst other criteria, be a registered company in accordance to Turkish company law with a maximum of 50 employees and net assets of not more than TRY 10 million (Kshs 354 million). If the business angels participate in qualifying companies whose projects are related to research, development and innovations then the applicable tax incentive is 100% instead of 75%. This is where it gets interesting. In order to get 100% tax relief those activities have to have been supported in the last five years by the Scientific and Technological Research Council of Turkey, Small and Medium Enterprises Development Organization and the Ministry of Science, Industry and Technology. The tax reliefs are applicable until the 31st of December 2017 making it a 5-year program, but the Cabinet can authorize the extension of the date by another five years. Shares acquired by the angel investor have to be held for at least two years and the minimum investment is TRY 20,000 (approximately Kes 700,000) and a maximum of TRY 1,000,000 (Kes 35 million) annually.

So let’s bring this concept home. Imagine if the Kenyan government picked four key economic areas that they wanted to drive with the help of the private sector. Let’s say agriculture, health, technology and education. Then the government wakes up to the fact that they can’t be all things to all people, and that they need to leave the business of business to the best people suited to do it: business people. They then assume that it’s far better to allow a business person to take a risk on an entrepreneur as the business person has a) a much better nose for sniffing out and recognizing good opportunities, b) years of experience in making and losing money therefore an appreciation for and recognition of risk, c) business experience the kind of which they don’t teach in business school leading to mentorship and d) his very own money which defines his skin in the game. The same Kenyan government would then ensure that the business angels’ interests are aligned to the strategic objectives of the relevant ministries for the four key areas. Rather than allocate funds in totality to the Women and Youth Funds, re-route a portion of those funds to backstop a tax incentive program for Kenyan business angels. The benefits hardly merit articulation due to their sheer obviousness. The Government will distribute the risk of repayment from their annual budget allocations to the Women and Youth funds by providing an alternative mechanism for reaching those same stakeholders in a credible, efficient manner that provides the extra flavor of mentorship as well as stronger linkages between the existing business community, women and the youth. Finally, it allows for a wider tax bracket to be formed since, by requiring investees to be formalized legal entities, the investee companies enter into the taxation realm. It shouldn’t take a little wisdom from heaven to permit business angel investing to become a government driven entrepreneurship initiative.

[email protected]

Twitter: @carolmusyoka

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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.

[email protected]
Twitter: @carolmusyoka

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Outsourcing the Government

The National Assembly today voted unanimously for the bill to outsource the oversight and representative role of parliament to a leading international audit firm CWP. The same bill also outsources the role of government ministries to Dineshco, a Business Processing Outsourcing company in Madras, India. The extraordinary bill was the brainchild of the Member of Parliament for a previously unheard of constituency in Kwale county, long known to have harboured desires for secession anyway. “Since Pwani cannot leave Kenya, the next best thing is for the government to leave us, and for us parliamentarians to leave ourselves,” said the diminutive and often vituperative MP.

The quotation above sounds like a ridiculous headline story in a freakish nightmare movie. But is it preposterous to think of outsourcing as the solution to the chasmic corruption in the executive and the cataclysmic rent seeking in the institution that is supposed to keep the executive in check, namely parliament? Think about it for a River Road minute. We find a company that is willing to run our government ministries and ensure that efficient service delivery is procured for the ultimate customer: the mwananchi. We pay the company a percentage of the national budget. The company then delivers proficient services in health, education, tourism, environment etc. procuring supplies from the least cost provider and leveraging on economies of scale just from ordering in bulk across the ministries. We throw out the Cabinet Secretaries, Principal Secretaries and the entire civil service. We will have a President who will be the head of the country in as much as the non-executive chairman of a private sector corporate is the ceremonial head of the institution.
The President is actively encouraged to visit schools and hospitals and take appropriate kissing baby pictures for the media.

We then turn our attention to parliament. We throw them all out. We hire an audit firm to provide monitoring and oversight over the company running the executive. We keep 47 senators who will represent the counties and meet the audit firm once a quarter to receive a report on what the company running the executive is doing. We allow the senators to ask questions relating to services that are being provided to their counties. The senators never meet the company. They only engage through the auditors. We actively encourage the senators to visit schools and hospitals in their counties and take appropriate kissing baby pictures for the media.

Kenya has now hardwired corruption both in its institutions and in its collective DNA. We have to reboot. But we have to outsource management of our institutions away while we reboot. The idea of outsourcing everything, while extreme, has been undertaken in smaller measures elsewhere that are worthy of mention.

The Financial Times, in its March 23rd 2015 edition ran a story headlined: UK government outsourcing raises questions over pay. It turns out that the coalition government in the UK has outsourced GBP 88 billion worth of contracts to the private sector. The FT also reports that more than 2,800 top-grade engineers – who service military equipment including aircraft at the Defence Ministry’s Defence Support Group – are expected to lose the right to their civil service terms on April 1st 2015 after the agency was sold for GBP 140M to the outsourcing company, Babcock. The FT article also cites the example of the Lincolnshire Police Force where the G4S security company manages a number of back office functions. G4S staff now supports police officers in the logistics and administration surrounding arrests, which frees up more expensive police resources to remain in front line roles.

A November 2014 article in The Economist also sheds some light on government outsourcing. Titled Government outsourcing: Nobody said it was easy, the article mentions that the two big private-prison firms in the United States, Corrections Corporation of America and GEO Group, have delighted shareholders with an average annualized return since 2004 of 18.5%. The main cause is America’s bloated justice system, which locks up more people than in other rich countries. An American online magazine published by GOVERNING, ran an interesting article on the pros and cons of privatizing government functions in December 2010.

An interesting excerpt is as follows: “This past March, for example, New Jersey Gov. Chris Christie created the state Privatization Task Force to review privatization opportunities within state government and identify barriers. In its research, the task force not only identified estimated annual savings from privatization totaling more than $210 million, but also found several examples of successful efforts in other states. As former mayor of Philadelphia, Pennsylvania Gov. Ed Rendell saved $275 million by privatizing 49 city services. Chicago has privatized more than 40 city services. Since 2005, it has generated more than $3 billion in upfront payments from private-sector leases of city assets. “Sterile philosophical debates about ‘public versus private’ are often detached from the day-to-day world of public management,” the New Jersey Privatization Task Force reported. “Over the last several decades, in governments at all levels throughout the world, the public sector’s role has increasingly evolved from direct service provider to that of an indirect provider or broker of services; governments are relying far more on networks of public, private and nonprofit organizations to deliver services.”
The report took careful note of another key factor: The states most successful in privatization created a permanent, centralized entity to manage and oversee the operation, from project analysis and vendor selection to contracting and procurement. For governments that forgo due diligence, choose ill-equipped contractors and fail to monitor progress, however, outsourcing deals can turn into costly disasters.”

All these stories are of course ringed by spectacular failures as in any industry. But they demonstrate a willingness to look externally for solutions when no internal ones are forthcoming or viable. We are collectively sick as a nation, perhaps it’s time to give others a chance to cure us from the corruption malaise that bedevils us.

[email protected]
Twitter: @carolmusyoka