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Budgeting for Dummies

A professor was giving a big test one day to his students. He handed out all of the tests and went back to his desk to wait. Once the test was over the students all handed the tests back in. The professor noticed that one of the students had attached a $100 bill to his test with a note saying “A dollar per point.” The next class the professor handed the graded tests back out. This student got back his test, his test grade, and $64 change.

 

For once in a long time, Kenyans have been collectively tested on their financial knowledge, and the score is not looking good. The annual reading of the national budget, which traditionally happens in June of every year, is a mundane affair with the ordinary mwananchi hardly bothered by the events in Parliament. But corporate Kenya pays keen attention for any changes in taxation rates will trigger internal discussions on how that impacts on the pricing of products, and how much of that can be absorbed or has to be passed through to the consumer without hurting sales, the elusive “sweet spot”. The ordinary mwananchi only wakes up to smell the government budget roses when she goes to purchase goods and realizes that her total basket has become more expensive.

 

The  16% VAT on fuel products was initially introduced in 2013 but given a 3 year grace period for implementation. Using the now familiar process, Treasury carried on the VAT exemption in the Finance Bill 2016 for a further two years. The can was kicked down the road with the full appreciation that said road would come to a dead end after the election cycle. Because, you know, one doesn’t bite the hand that, you know.  The rolling can came to a shuddering halt on September 1st 2018 when the exemption officially came to an end. Legislators hemmed and hawed about how the Kenya Revenue Authority (KRA) was giving instructions for application of the 16% rate when they had personally removed that nefarious clause via an amendment to the Finance Bill 2018 that was awaiting a presidential signature into law.

 

But KRA are no fools, having worn the cloak of legal authority from their reading of the original Finance Act 2013 which provided a 3 year exemption on application of the tax, which exemption expired in 2016, was further delayed in the 2016 Finance Act to September 1st 2018. The 2013 and 2016 Finance Acts are law and therefore have been and still are in effect until subsequent law makes any changes to them. Directions were given: Apply the new rate with immediate effect.

 

How we thought that kicking the now weather beaten VAT exemption can down the road for another two years would be panacea to what ails our budgeting process beats me. Folks, we have a Kes 558 billion deficit. Expected revenues in FY2018/19 are Kes 1,997 billion against a budgeted expenditure of Kes 2,556 billion. VAT is expected to contribute at least 24% or about a quarter to the total revenue. The only way a discussion can be had about reducing fuel related VAT to 8% or kicking the can down the road for an illusionary two more years is if we are willing to discuss chopping off some of the Kes 2.5 trillion expenditure. But that would take time and significant resources to try and unpack where the fat in our recurrent expenditure can be trimmed. Using a zero based budgeting approach, for instance, would be a good start. With this method, the budget begins from a zero base and every single function within an organization is analyzed not only for its line item needs, but what those cost.

 

The budget would start from ground zero, rather than an increase or decrease from the previous year. This would provide the much needed granularity in the analysis of what makes up the government’s recurrent expenditure, that is currently budgeted at Kshs 1.1 trillion, and how much of it actually requires to be spent or budgeted for based on its impact on service provision to the ordinary mwananchi. Initially an excruciatingly painful exercise for finance and accounting officers in an organization, it helps to weed out historical inefficiencies in the cost budgeting process.

 

Today the ordinary mwananchi would say: “kimeumana” (things are tough). Whether it was in 2020 as the MPs were purporting to introduce, or now, the VAT exemption on fuel had to happen. Because we have bitten the apple from the tree of unchecked expenditure and, dammit, that fruit tastes good. So let’s stop our wailing and gnashing of teeth. It’s getting old. We need to ask harder questions about where our taxes are going to, because boy have we been schooled about tax management!

 

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Twitter: @carolmusyoka

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Wine and chocolate from the Tax man

[vc_row][vc_column width=”2/3″][vc_column_text]The New York Times online edition ran this breaking news story on Tuesday September 15th this year: “De Blasio to require computer science in New York City schools.” The article explains further, “To ensure that every child can learn the skills required to work in New York City’s fast-growing technology sector, Mayor Bill de Blasio will announce on Wednesday that within 10 years all of the city’s public schools will be required to offer computer science to all students…the goal is for all students, even those in elementary schools and those in the poorest neighborhoods, to have some exposure to computer science, whether building robots or learning to use basic programming languages. Noting that tech jobs in New York City grew 57 per cent from 2007 to 2014, Gabrielle Fialkoff, the director of the city’s Office of Strategic Partnerships, said, “I think there is acknowledgment that we need our students better prepared for these jobs and to address equity and diversity within the sector, as well.”

Bill de Blasio was sworn in as Mayor of New York City on January 1st 2014. It’s still early to comment on the efficacy of his tenure, but it is noteworthy that his goal is to have an educational curriculum that makes his citizenry relevant in the not so distant future, when he will likely already have left office. At the risk of sounding condescending to you dear reader, this is what forward planning looks like. It requires complete selflessness in the sense that you are making policies that will benefit future generations and that have zero positive impact on today’s bottom line. If you ask any employer what a key resource for delivery of their organization’s strategic goals is, they will tell you that it is competent and skilled human capital. And that human capital doesn’t buy skill from aisle 7 at the local supermarket. The academic curriculum in our secondary and tertiary institutions is critical for businesses today and it is imperative that they are regularly reviewed for relevance in a rapidly changing technological backdrop. Let me park this aside briefly.

So I went to visit Moraa at her furniture factory last week. Yes, I did say pax romana on any more entrepreneur-in-Kenya horror stories in last Monday’s column, but I have uncrossed my fingers just this one time after the mind blowing visit. For those of you reading this for the first time, Moraa is one of several insanely committed entrepreneurs whose courage to do business in Kenya, employ citizens and develop a supply chain that generates value as well as impacts more lives is nothing short of admirable. She, and many others like her, try to do legitimate business in Kenya but have had great difficult getting government support in opening new markets or creating an enabling environment for goods to be distributed within the region despite all the chest thumping around “ease of doing business” reforms.
Anway, Moraa has imported state of the art furniture cutting and printing machines in order to make a high quality Kenyan product. I stood in awe as I watched one laser machine print out a beautiful cartoon motif on the back end of a wooden bed resulting in a high definition, permanent image that did not drip or bleed past the edges. She had several other cutting machines that remained unmanned, and when I asked I was told that there was a severe shortage of skilled wood artisans since many polytechnics had converted into universities. On her last jaunt to one of the former polytechnics [I will not say which one, as I’ve realized government agencies take umbrage whenever I talk about them here and are always quick to send me a point of correction. However it is extremely refreshing to see that a) they read the papers b) they are sensitive to public perception of their services and c) they actually do care!] She found that they had some of the latest and very expensive machines that were simply lying idle in the workshop. Having been purchased, there were no trained personnel one to teach the students on how to use the equipment! As entrepreneurs always turn a challenge into an opportunity, Moraa’s next goal is to see how she can create a technical institute to train wood artisans, as she needs some for her own factory and envisages that the growth opportunities in the industry will continue to drive demand for this skilled resource.

Back to the curriculum discussion: How often do our public universities meet with industry and determine whether the output in the name of graduating students meet the needs of employers today? I recently saw an advertisement in the newspaper calling for public participation in the much-needed review of the 8-4-4 curriculum which is a wonderful initiative. My two cents worth from my well worn armchair: Have a two year course run in form 3 and 4 that teaches students how to run a business and ensure that it is project based rather than theoretical. It will assist a) those students who don’t necessarily want to pursue university studies and b) will ensure that those students who eventually end up working in government get a good sense of what it takes to be an entrepreneur which should guide their future policy making of today’s current buzz word: “ease of doing business”. Of course all this is futuristic, like Bill de Blasio’s dreams of a tech driven culture in the New York City post 2030.

On a happier note, staff from Kenya Revenue Authority visited Moraa last week. They came bearing gifts; a bottle of wine and a beautifully wrapped box of chocolates as part of their customer care week thanking tax compliant businesses. When she managed to scrape her jaw off the floor in shock at the friendly and very engaging visit, she shared the incredulous story. My jaw, not surprisingly, is still on the floor. When government works, it works well! Nice touch KRA!

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

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End of the Entrepreneurial Trilogy

[vc_row][vc_column width=”2/3″][vc_column_text]Many years ago when I was in primary school, we used to play a frenetic game called “Tip”. The Player who was “it” would touch someone else while yelling “tip!” and the person so touched became “it” and would have to touch someone else to make them “it”. The game could go on for days, and it would be much to one’s chagrin if they were collected by their parents after school and the person who was “it” would wait until the last minute to tip you and run off chortling with glee as you stewed in your parents’ car all the way home waiting for the next day when you could tip someone else. However, there was repose from this mind numbingly silly game in the form of the words “Pax” which had to be accompanied by one crossing their middle finger over their index finger. When one was on “pax” one could not be tagged. The challenge, of course, was to always remember to be “on pax”. The purpose of this reminiscing is that I am bringing the exhausting “being an entrepreneur in Kenya” trilogy to an end after today. Pax! Here’s why:

Didier (not his real name) is a foreign investor in Kenya. He runs a chain of fast food restaurants and opened his first branch in 2012. Like any good foreign investor, his first port of call was Kenya Investment Authority (KenInvest) to see what benefits he could receive as he set up his first unit, which would require bringing in a lot of restaurant equipment. As you can imagine, he didn’t get much joy as the folks over at KenInvest were only interested in certain sectors of the economy such as manufacturing, oil and gas but not the restaurant industry. Crestfallen, but not beaten, he set up anyway. 14 licences later, he opened his first branch and within the first six months of opening had visitors from the Kenya Revenue Authority over for an audit of the start up that had not even finished a year of business. Not to be left behind, the Ministry of Labour chaps also came to do an audit in month seven.

As his business grew, he began to open new branches. He quickly came to discover that the much-touted Single Business Permit from Nairobi County came at a very high cost. Having to pay Kshs 300,000 (three hundred thousand in case you cannot read figures) per branch, he was duly informed that the permit ran over a calendar year from January to December. So if he opened a branch on December 29th of any year, he would still have to pay the FULL amount of Kshs 300,000/-. “Carol, to do business in Kenya, you have to know someone, and even that someone is not guaranteed to help you,” he said. He continued, “Out of the 14 licences that I need for EACH branch at least half of them run on a calendar cycle. Can you imagine the loss I make from licensing whenever I am starting a new branch?” The feedback that he has received from Nairobi County officials belongs in the Frustrated Entrepreneurs Hall of Fame: “Why do you want to deny the county revenue?” How is paying for a license every 12 months from date of issue rather than every calendar year from January to December denying revenue to this most efficient of institutions? Meanwhile, he opened his sixth branch less than two months ago. Within a week of opening he had been visited three times by Nairobi County officials who were “checking” on the standards of the business.
Didier has to date employed 150 Kenyans in his business. Kenyans who are paying Pay As You Earn income taxes as well as being productive members of society who consume goods and services thus playing their part in keeping the economic wheels of the country turning. As it is a restaurant business he has to maintain the county health standards and therefore has to send all 150 of them to get health certification twice a year at the cost of Kshs 1,000 per employee. You can do the mind boggling total math for yourself. By the time Didier was done telling me about all the costs of running a restaurant business, I concluded that he could easily shave off a significant part of his food prices if the taxes and licence fees were streamlined. You, the Kenyan, are paying for a lot of government sponsored operational inefficiencies.

“I don’t get it, Didier,” I mused, “Why do you stay and do business in Kenya?” He didn’t miss a beat. “Because there’s a huge opportunity here, I can see it.”

There is a certain short termism in the way both the central and the local governments approach revenue collection. The approach is transactional rather than strategic. The view: Let us collect what we can now = short term, rather than: Let us look ahead and see how to grow a wider tax base by creating an enabling environment for new businesses to thrive = long term. Today entrepreneurs are beaten down with a highly toxic operating environment where the compliance officers from various government institutions are used to frustrate and harass rather than to drive compliance. To paraphrase someone who wrote to me last week, “We really have to wonder about government officials who are lifetime employees. What could they possibly understand about risking everything to build a business in a hostile environment when they have always had a salary?” So my two cents worth to the team responsible for looking after the growth of entrepreneurs in this country is this: Help Moraa (the Kenyan from 2 weeks ago) and Didier (the foreign investor who is not in a strategic industry) do business in Kenya. They, and many others like them, will build solid businesses that generate revenue – part of which attaches to the government’s fiscal bottom line. The End. Pax Romana!

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

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Right of Reply from SMEs

[vc_row][vc_column width=”2/3″][vc_column_text]Last week I wrote the true story of Moraa, an enterprising furniture manufacturer that just wanted her government to help her grow her business locally as well as find new export markets. What I didn’t expect was that I would be opening the floodgates to responses from other readers who suffer from a similar angst as Moraa. For instance JGM penned:

“I have made a lot of noise from way back about these investor conferences which we spend a lot of money to hold yet we do not do the same for our own local investors. We do not invite them to county meetings to discuss how to grow together. Instead you have all manner of government agencies harassing them. You wonder what the definition of an investor is. Like hawkers, they don’t have to be arrested and their merchandise confiscated. Just charge them the levy they were supposed to pay and tell them to leave unauthorized space. But recognize they put up their own little money hoping to get a return. That is an investor. In fact the average hawker is one of the most intelligent forms of an investor, as he has to factor in a risk most other businesses don’t: deliberate government crackdown! If these county guys would call us we have roundtables and meetings and agree on a common agenda, we would gladly pay them more levies for them to deliver service.”

JGM does have a point. Hawkers are investors. They may be at the bottom of the food chain, but they are business people trying to make an honest living. It would be far more innovative to treat them as potential growth enterprises than to beat them down daily and view them as the nuisance they are perceived to be. KM is a young man who I once employed and he left as he was bitten by the entrepreneurial bug. At less than 30 years old, he and a friend set up a microcredit agency about five years ago. He exemplifies the face of the Kenyan hustler as he writes: “Carol, I’m so happy you wrote this morning’s article. The SME is struggling to get access; we are harassed by KRA at each and every turn. Literally Nairobi County camps at either of my two branches and there is always a new licence or ‘fee’ I have not paid! Maybe we should create a lobby for SME’s? I have several horror stories.” But clearly not enough horror stories to make him want to close shop because he is passionate about his business. For now he’s all about maintaining his entrepreneurial sanity.

Meanwhile, back at the Murang’a County ranch, KG sent me this missive: “Dear Carol, I am involved in the small-scale production of juice in Murang’a County with all intentions of scaling up. My frustrations can be summed up as follows:
I have been having the runaround with KEBS for the last four months and not because my product failed but just trying to get the certificate after paying Kshs 5800/=. KRA would want me to pay excise duty on the juice but they have 17 requirements for me to fulfill before they grant me a licence. Some are reasonable and straightforward but let me highlight a few of what I consider ridiculous (maybe they need to put on sneakers and see the work we are doing)
• Valid security bond for the protection of excise duty
• NEMA certification
• Letter from the county government showing the factory is in a designated industrial zone.
• Licence fee of Kshs 50,000 for me to pay taxes!
My business is an SME for heavens sake! In view of the above what am I to do? Operate under the radar thus stifling my growth? Or do I remain small?
Kindly share some of this issues with the wider public and perhaps some sense may start prevailing.”

As Jeff Koinange aptly puts it, “You can’t make this stuff up!” Good people: these are real Kenyans who have ideas and capital and are willing to pay taxes if that will enable them to grow their businesses, employ more people as well as create a supply chain that grows with them and strengthens the economy. Please note that not a single one of them has requested for money in the now ubiquitous ‘naomba serikali’ fashion. MW writing from the heart of Nairobi’s hustler district sent in his two cents: “Hi Carol! Thanks for hitting the nail on the head on how to grow this economy in today’s Business Daily! I am a small offset printer on Kirinyaga road and I often wonder what those who run this country think about us small business people. It is obvious that these businesses employ the majority of Kenyans. If you cross beyond Moi Avenue the population increases in quanta and so do the daily transactions, albeit in small denominations! The government needs to do little things like making life bearable for the Jua Kali Mechanics by building them sheds, provide water, toilets, and perhaps organize them into co-operatives that could buy modern tools so that their work can graduate to industrial standards. My point is these top shots have no idea what Kenya is all about. They just think about foreign investors! If we are having problems investing in our own country how will foreigners fare?” I wanted to give MW a hi-five as he summarized every SME owner’s frustrations: if the locals cannot succeed in doing business at home, what makes the government think that a foreigner will fare better?
To their credit, two different chaps from the Export Processing Zone sent me lengthy emails to disabuse me of the notion that they are unhelpful. Both were eager to meet with Moraa and provide some assistance. I linked up Moraa with them promptly. Kenyans just want a hassle free local business environment through which they will build their enterprise on the back of their own capital and sweat. Government can do it.

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

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SMEs need less talk and more walk

[vc_row][vc_column width=”2/3″][vc_column_text]Achieng’s Uncle was visiting when she asked, ”Uncle, I’ve been a good girl, will you give me a thousand bob?” He looked at her fondly and said “I think you would be more successful if you asked for a hundred bob.” Achieng answered, ”Look Uncle, give me a hundred bob or give me a thousand bob, but don’t tell me how to run my business.”

The Ministry of Industrialization and Enterprise Development (MOIED) recently launched its strategic plan for transformation. I sat down in anticipation, ready to find a document that would be the road map to guide Kenya’s achievement of middle-income country status. At fourteen pages long, the document is short and crisp and spends a considerable amount of space defining the ten industries that demonstrate great potential. These have been identified as agro-processing, fisheries, textiles and apparel, leather, construction materials and services, oil, gas and mining services, Information Technology, tourism, wholesale and retail and finally small and medium enterprises. Then the document skids into two pages that quite aptly describe the challenges facing those industries backed by quantitative economic data. By this time my excitement was building up to a frenetic crescendo, the solution had to be coming round the corner by the time I got to page 13 of the 14-page document. I turned the page and slid down my seat, slack jawed and drained. There was nothing. Unless you count a 5-point strategy that uses language such as develop, create, launch and drive but does not put a single timeline or work plan around those pledges. I kid you not, if someone opens up that document in the year 2050 they would quite easily place it in the public domain and pass it off as a fresh document, since there are absolutely no time commitments or demonstrable goal driven action plans attaching. Fine, there is ONE time bound goal: “To drive ease of doing business reforms and reach top 50 by 2020”. I’m still grappling with top 50 of which beauty parade we are trying to achieve and what the “ease of doing business reforms” actually consists of. Let me latch on to that one for now.

I’ll give you the true story of an amazing female entrepreneur who is blazing the trail in her chosen industry of furniture manufacturing. Let’s call her Moraa for today, as she has been trying to meet with the Cabinet Secretary at MOIED for the last five months with no success and I don’t want to ruin her chances for that hallowed meeting when it eventually happens. Moraa started off her business about five years ago manufacturing quality furniture. She survived the first year, and the second, and the third and is now a proud employer of 28 Kenyans. Feeling that she should expand her horizons and mitigate market concentration risk, she travelled to Uganda last year and found a retailer willing to purchase her quality products. That’s where the fun and games began. ‘Carol, there is not a single place where one can get information about how to export one’s goods in Kenya,’ she told me. ‘But how did you figure it out?’ was my surprised response.

Moraa’s treacherous self taught journey to becoming an exporter was one that demonstrated tenacity, grit and a typical entrepreneurial strength of character that defines anyone doing business in Kenya.
Her first port of call was the Export Promotion Council. “Are you exporting tea? No? What about coffee? No? What about curios? No? Aii, we can’t help you!” Moraa stood there, gob smacked at the sheer lack of interest in assisting her with a basic checklist of what a Kenyan businessperson who wants to export non-tea, non-coffee and non-curio related products needs. Using her networks she discovered that she needs an export duty exemption certificate so that her goods could freely pass through the Kenyan border point of Malaba for their initial entry into Uganda, a member of the East African Community. After a few false starts she ended up standing in line at the Kenya Revenue Authority’s (KRA) imposing banking hall and paid the paltry sum of Kes 300/-. ‘Carol, it’s 300 bob per container, can you believe it? And it doesn’t matter whether it’s a 20 foot or 40 foot container!’

Moraa’s disappointment with our government is that they are bending over backwards to make life easy for foreign investors to open up shop in Kenya, but not doing enough to ensure ease of doing business for the very SME’s that form the 10th engine of economic growth in the MOIED strategic plan. She showed me a screenshot from the Invest in Kenya web page and mused how a foreign investor who was willing to start up with Kshs 200 million could get a 10 year tax holiday in the Export Processing Zone scheme. ‘I’m based here in Kenya, and KRA tells me that if I want to get a 5 year tax holiday I must put in start up capital of Kshs 250 million. How? I’m an SME!’

If you want to know where to fish, listen to the sound of the river. That is an old Irish proverb that is often used to educate business leaders on how to understand the markets in which they operate and get an emotional connection to their customers. The hard working folks over at MOIED need to put on a pair of sneakers and walk the length and breadth of Nairobi’s Industrial Area, knocking on doors and looking into the battle weary eyes of business owners today. They might discover that far from the new fangled ideas that have been cleverly written into the strategic plan, part of the answer to Kenya’s economic growth is in facilitation, education and ease of doing business in its purest form: opening new market frontiers and having a single point of information on how to do business for Moraa and her entrepreneurial kith. The entrepreneurs will do the rest: run their businesses and grow our economy.

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

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

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Confluence of Political and Economic Risks

I recently dined with a European diplomat who asked the ubiquitous question that foreign residents in this country like to do: “What do you think will happen at the next Kenyan elections?” Before I tell you what I answered, I have to state categorically and most unequivocally that I am neither a political analyst nor commentator. I do, however, occasionally comment on the confluence of politics and economics as often happens invariably. That confluence is particularly necessary in the banking industry, where I spent many happy years, when analyzing credit risk of a customer for a term loan of not less than five years.

Within the duration of that loan such a customer is bound to cross the Kenyan election cycle. Depending on the nature of the customer’s business, the company is likely to have difficulties in loan repayments due to cash flow constraints occasioned by poor sales, deplorable debt collections or, heaven forbid, destruction of the company premises therefore impacting on the ability to produce the goods and services that are being procured. My answer to the diplomat saw him imperceptibly swallow and he leaned forward in interest.

“There will be bloodshed in 2017 as the historical patterns demonstrate it.”

“What do you mean?” he whispered.

“In banking, we look at historical behavior as a strong barometer of what future behavior is likely to portend. To understand our history of political violence, you have to start in 1992 when the first multi party elections were held,” I began. “In that year, you had an incumbent who was running against a very strong and credible opposition. That was when Kenya endured the first of several bloody episodes of tribal clashes.” I went on. “In 1997, the same incumbent was running for his second and last term as president. He had the benefit of the state machinery behind him, as well as a fragmented opposition. This time, the political waters were muddied in the coast region, where the pre-election clashes were largely centered. The coastal tourism economy very nearly collapsed and the hotel industry underwent massive bankruptcies.”

“Well what do you make of the peaceful election in December 2002?” the diplomat asked. “Doesn’t that destroy the pattern of electoral violence?”

“Actually, therein lies the pattern,” I responded. “Every time an incumbent is stepping down, there has been a peaceful transition in Kenya. It happened in 2002 and in 2013. But whenever there’s been an incumbent fighting to maintain the status quo, there has been bloodshed; ergo 1992, 1997 and 2007. The 2017 elections are a status quo event. The pattern will be the same.” My lunch partner mulled over this for a few minutes and promptly changed the subject.

In 2008, a few banks took advantage of the politically instigated clashes in the beginning months of the year to blame the growth in non-performing loans. Some of this was not entirely true and was a slick way of reporting previously suppressed bad loans. But you’d think that the regulator would have cottoned on to the games being played. It didn’t. It is not difficult to see why, when you look at the kind of pedestrian analysis the banking supervision department at the Central Bank of Kenya (CBK) undertakes. In the recently released 2014 Bank Supervision Annual Report, the Central Bank dedicates the monumental amount of three sentences to analyze the 2014 asset quality of the entire banking industry. I will pick two of the three sentences as an illustration:

“ The lag effects of high interest regime in 2012/2013 and subdued economic activities witnessed in the period ended December 2014 impacted negatively on the quality of loans and advances. As a result, non performing loans (NPLs) increased by 32.4% to Kshs 108.3 billion in December 2014 from Kshs 81.8 billion in December 2013.”

When your non-performing asset book increases by a third, it requires a fair amount of explaining beyond the vanilla high interest rates and subdued economic activities reasoning. There should be a fairly robust amount of granularity around the specific industries driving the poor performance of loans. It is an open secret that the central government endured inordinate cash flow challenges in 2014 that impacted key suppliers of services, particularly in the construction industry. This would invariably have a knock on effect to the suppliers of construction companies such as cement, cable and ballast for example. But this is what should be of concern as we hurtle towards an election cycle in the next two years. The retail loan book across the banking industry is the single largest loan segment with 3.6 million accounts grossing Kshs 516 billion and accounting for 26.6% of total loans in the market. This is ahead of trade at Kshs 375 billion (19.3% of total loans) and manufacturing at Kshs 237 billion or 12.2% of total loans. Retail loans, codified by the CBK as personal/household loans, are consumer loans and in this market represent the largely salary check off loans that pepper many banks’ unsecured loan offers. It’s highly likely that the bulk of these loans are used to purchase consumer items such as cars, furniture and electronics rather than investment in income generating activities. A political event such as post election violence, followed by an economic downturn caused by reduction in productive capacity of Kenyan companies will lead to retrenchments. You can also never underestimate the capacity of cheeky borrowers to take advantage of politically volatile environments to stop repaying loans due to destruction of work places and such like sob stories. I saw it happen in 2008.

A notable risk therefore sits in the banking industry come 2017: any delays in government payments (partly occasioned by tax collection difficulties on the part of Kenya Revenue Authority) together with probable election related violence will negatively impact bank loan books. Don’t be surprised if you find difficulty getting an answer on your loan application that year. Your bank is just not that into you in an election year.

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Twitter: @carolmusyoka