Lipa Na Mpesa As An SME Growth Engine

[vc_row][vc_column width=”2/3″][vc_column_text]A tweep (citizen of #KenyansOnTwitter county) recently drew my attention to a July 2nd 2017 Bloomberg article titled “MYbank deepens push for business banks won’t touch.” MYbank is an online lender that is 30% owned by Ant Financial, Alibaba’s financial affiliate.In case you missed it, Chinese billionaire Jack Ma’s Alibaba Group is the number one global retailer with its monolith ecommerce platform. The article quotes MYbank’s President Huang Hao, who is looking to win as many as possible of China’s 70 million to 80 million small businesses as customers, most of which have no access to bank loans as they lack collateral. “We are like capillaries reaching every part of the society. It could be a small restaurant, a breakfast stand, no other financial institution would have served them before.” By 2016 MYbank’s outstanding loan portfolio was US$ 4.9 billion with a non-performing loan ratio of about 1%. The article further quotes Huang as saying that the bank’s technology, which runs loan applications through more than 3,000 computerized risk control strategies, has kept delinquencies in check.

Huang’s description of MYbank as being like capillaries is eerily reflected by Safaricom’s Lipa Na Mpesa mobile payment platform. From large hotels to food kiosks, from barbershops to Uber taxis, from petrol stations to supermarkets, everywhere you turn, Lipa Na Mpesa (LNM) is now a viable option for payment of goods and services. The product has successfully straddled the small, medium and large business spectrum as a reliable cashless payment option with lower merchant transaction charges (in the range of 0.5% compared to 2% and above for debit/credit card services). According to Safaricom’s FY 2016 annual report, there were 43,603 LNM active 30 days+ merchants on its network. The FY2017 results announcement reflects that the number of merchants is now just over 50,000.

Cash flow is the lifeblood of a business, as any long suffering entrepreneur will tell you. LNM offers real time settlement of payments made on its platform working with 19 banks. What this means is that the business owner will receive the cash generated from revenues straight into its bank account on a real time basis which essentially makes it an attractive revenue collection tool for the entrepreneur weary of sticky fingers at the cashier’s till or even stickier encounters with gun toting customers. The game changer in the peculiar Kenyan economic space is the obvious intersection between the real time mobile payments being collected at the till and the potential to leverage on these cash flows for working capital expansion. 50,000 merchants are fairly low in a country with hundreds of thousands of businesses primarily using cash as the mode of payment. But this is where it gets interesting.

According to the FY2016 Safaricom annual report, the LNM payments in the month of March 2016 alone were Kshs 20.2 billion or an average of about Kshs 459,000 per one of the 43,603 merchants. Bear with me for a minute. Assuming these were SMEs, imagine the relief of being able to borrow from a financial institution, without any collateral, and using the real time unassailable revenue collection history from this payment platform. Imagine even further, that the repayments can simply be deducted at source and calculated as a percentage of historical daily takings.Then before the settlement of each day’s revenue collections, the financial institution collects a daily repayment, thereby reducing the loan amortization amounts into bite sized, easy to swallow chunks unlike the monthly hernia-inducing ubiquitous loan repayments.

Your generic bank will not be interested in this model. It’s simply “too much admin” to start configuring their systems to undertake daily as opposed to monthly loan amortizations and to try and guesstimate an SME’s potential risk of default on a loan without collateral using only mobile payment history as the risk variable. But a modern fintech can build the risk algorithms required to do this well. There is also the dual opportunity for Safaricom to grow its LNM merchant base into hitherto unchartered territory, using collateral free business loan products in addition to helping to formalize the large number of informal businesses operating in Kenya. The fintech space is where this innovation has already started happening here in Kenya, but it will only make economic sense if it is done on a large scale. Partnering with Safaricom will be key to this growth.

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The Road To Economic Hell Is Littered With Good Intentions

“The road to a Kenyan hell is paved with good intentions” – Anonymous Parliamentarian

The IMF recently released a report titled “First Review of Kenya Under Stand By Credit Facility” in which a review of the effect of the interest rates capping on the Kenyan economy was undertaken. And it confirmed the warning that was consistently given by economists and bankers alike in the period leading to the signing of the interest rate capping bill in August 2016: Wanjiku is not getting loans from the banking industry. But we all knew that was going to happen, didn’t we? Perhaps I should define the “we” as those that were not drunk with the giddy excitement that parliamentarians had infected across credit addicted Kenyans: a fatal assumption that banks could be tamed by legislation into giving Wanjiku more money for less interest. The IMF report states and I quote, “International experience, however, shows that such controls are ineffective and can have significant unintended consequences. These would ultimately lead to lower economic growth and undermine efforts to reduce poverty. In addition, linking deposit and lending rates to the policy rate limits the central bank’s capacity to maintain price stability and support sustainable economic growth.”

In Wanjiku-speak, the IMF tells us that central banks globally are responsible for the monetary policy of countries. They use interest rate tools to increase or decrease money supply in the country in order to manage inflation and stimulate economic growth. In Kenya, that tool has been the Central Bank Rate (CBR). Now when that tool is used as a benchmark to lend money at the same rate to both platinum and God-knows-if-they’ll-repay-us borrowers, the obvious tendency will be to cut off the latter like the gangrenous arm that they are. Here’s an example. Jim runs the supermarket at the corner. You’ve watched him start that business from a small 100 square feet shop at the shopping centre to 5,000 square feet of retail space. He comes to you for a bridging loan as his bank has accepted to give him a loan but there’s a bit of paperwork that has to be completed. He expects to repay you when the bank credits his account in the next two weeks. Peter, who lives across the road from you, is a habitual drunk and has been fired three times in the last five years. He wants you to loan him some money and promises to repay you when he receives his salary, since he now has a new job. Who will you lend to and why? Before the interest rate caps, if you were flush with cash you would lend to Jim at say 15% and were happy to extend that loan to a year because you knew that he would repay it with the cash flows from his business, even if the bank loan didn’t come through. You might have considered lending to Peter, but at 30%, a higher rate to mitigate for the higher default risk. You also give him short repayment tenor of one month, as you know he may be fired any time.

What the interest rate capping has done is to force the banks to lend to both Jim and Peter at the same rate. And in most third world economies, there are more Peters than there are Jims in terms of quality borrowers, meaning that there will be more banks chasing fewer quality loans. Furthermore, by using the CBR as the benchmark, it has forced the Central Bank to be very cautious in how it uses that tool for monetary operations. If it drops the CBR, it causes bank interest rates to drop from an already precipitously low rate to an unsustainable level. Whatever little lending is occurring already will simply come to a shuddering halt. The interest rate capping law essentially forced the Central Bank to play football with both hands tied behind its back.

The Central Bank issues a quarterly report titled The Credit Officer Survey and is used to establish the lending behavior in the banking sector. The report is issued at the end of every quarter and essentially requests banks to submit information on eleven economic sectors on items like credit standards for approving loans, demand for credit and interest rates amongst others. The last published report is for September 2016, and I am assuming that the department responsible for its publishing is crossing the T’s and dotting the I’s in what will most certainly be a revealing December 2016 report. The Q3 survey showed that demand for credit increased in the Trade, Personal/Household and Real Estate sectors compared to the previous quarters. In other words, your entrepreneurs, salaried payroll check off workers and homebuyers were borrowing more in that particular quarter. But it wouldn’t be for long.

As I couldn’t get the biblical truth in the form of the Q4 report, I decided to do a soft survey in my networks within three Tier 1 banks in Kenya. All three banks had virtually stopped unsecured lending in the SME sectors. All three banks had also stopped salary check off loans unless they had express agreements with the corporate employers where the banks were handling the payroll. In simple words, your entrepreneurs and your salaried workers are not getting loans as much as they used to. One bank said that for the first time in memory, they had negative growth in their loan book: the monthly loan repayments outstripped new loan drawdowns, which simply means that their loan book was shrinking. In the Q3 Central Bank report, total loans to total assets had slightly reduced by 2% from 61.16% to 59.17% from the preceding quarter. You should expect this reduction to be significantly higher in the Q4 report as the asset mix moves in favor of short-term government assets.

Parliament can try and legislate interest rates, but they cannot legislate appetite. Banks cannot be forced to lend, they can only be encouraged to do so via central bank driven monetary policy incentives. Parliament may have had the best intentions, but they’ve created an economic hell. Once the shine has worn off the cheap bauble that is the interest capping law, the glaring truth has been revealed. The impact will be devastating to the Kenyan economy.

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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Disruptive Forces Needed In Banking

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

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

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

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

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

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

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

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The Unintended Consequences Of The Banking Amendment Act 2015

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

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

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

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

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

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

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

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Political Fallacies Shouldn’t Drive Economic Behaviour

[vc_row][vc_column width=”2/3″][vc_column_text]In my previous life, I was an executive director on the board of Barclays Bank of Kenya. Being the first female in that position in the bank’s ninety-year history was a testimony to the bank’s progressive shift at the time to a more gender inclusive and younger board. Right outside the 8th floor boardroom at Barclays Plaza, was a toilet facility: for gentlemen only. The ladies toilet was a hop, skip and a jump further down the corridor where the staff bathroom facilities were. Now, a fallacy can be created here: that Barclays Kenya never envisaged a day that women would ever be on their board, and therefore contrived to only have a gentleman’s commode available that was contiguous to the board room. The more likely story is that when the building was constructed, the toilet facility was tucked on as an afterthought, as that boardroom was being partitioned. Back then, it was primarily men on the board and therefore it made perfect sense that it would become a gentlemen’s facility. With the passage of time it was never deemed necessary to add a ladies toilet probably because the female directors on the board never raised it as a mission critical board agenda item. Why do I give this story? I narrate it as it demonstrates how urban legends are created: That women were never imagined to ever join the boardroom and the lack of a toilet is evidence of such myopic thinking. Which is absolutely untrue.

Last week I had an early morning meeting in Upperhill, Nairobi’s rapidly trending “must have” corporate address. I turned onto Hospital Road and the rising sunrays in the salmon colored sky glinted off the steel and glass edifices of several new buildings. Upperhill is a testimony to unplanned gentrification, with a road infrastructure that is struggling to catch up to the real estate capital that has been heavily invested there.

That real estate capital is a further testimony to the fallacy that is often being perpetuated that Kenya is walking an economic tightrope, with certain doom waiting at the bottom of the political circus. The buildings didn’t drop out of a Jupiter sky. They were deliberately constructed by owners of capital that see further past the building’s balance sheet depreciation. I was a little stumped. A building is a large and long-term investment. It is a loud and vociferous “we are here to stay” statement. And there are several of those statements in that square mile or so that forms Nairobi’s emerging financial district. So I asked one of the corporate titans located in Uppherhill as to why there was such growth and development in the area, when the print, television and social media paint such a gloomy picture of the country’s future. His response was reflective of corporate Kenya: Social media in Kenya is an effective pressure valve, it allows for steam to be released regularly to reduce the compressive forces of political dissatisfaction. As a business driver there would be greater fear if voices of dissent had no outlet, as that would mean that the country would be snowballing into a cataclysmic event whose trigger could not be determined, as happened with Tunisia’s Mohamed Bouazizi’s self immolation in December 2010 in protest of police corruption and ill treatment that sparked off the Arab spring. Owners of capital detest the inability to predict or calculate political risk. Kenya’s political risk is seemingly one that can be calculated and absorbed in the cost of doing business in the financial capital of the greater East African region.

Italy provides a classic example of political risk divorcing itself from economic growth. By the time Silvio Berlusconi was taking on the Prime Minister’s office in April 2005 for his third tumultuous shot at greatness, he was forming the 60th government that Italy had had in the 60 years since it had become a republic in 1946. Past Italian governments hardly lasted more than a year on average. Yet Italy remains the 9th largest economy in the world, as well as a card-carrying member of the European Union and the G7 economic powerhouse. How is this possible, when we in Africa have been conditioned to believe that central (and now county) governments are the singular premise on which great economies are grown?

According to a report from Focus Economics, Italy’s economic structure relies mainly on services and manufacturing. The services sector accounts for almost three quarters of total GDP employing around 65% of the country’s total workforce. Within the service sector, the most important contributors are the wholesale, retail sales and transportation sectors. Industry accounts for a quarter of Italy’s total production employing around 30% of the total workforce. Manufacturing is the most important sub-sector within the industry sector. The country’s manufacturing is specialized in high-quality goods and is mainly run by small- and medium-sized enterprises. Most of them are family-owned enterprises. Agriculture contributes the remaining share of total GDP and it employs around 4.0% of the total workforce.
The Focus Economics reports adds that after World War II, Italy experienced a shift in its economic structure. It transformed itself from an agricultural country to one of the most industrialized economies in the world. The force behind the post-war economic miracle was the development of small- and medium-sized companies in export-related industries. In the following decades, the economy has had both ups and downs. It is also noteworthy that Italy is the last Eurozone member on Transparency International’s corruption index at number 69 next to Greece, Romania and Bulgaria. The Italian Court of Auditors estimates corruption to amount to about 40% of public procurement value.
We can and we are already growing into a regional economic powerhouse, if we leave politics to the politicians and simply focus on growing our SME base ourselves. Our stable shilling in recent volatile times also demonstrates our economic resilience. The Italian model substantiates that economic growth, in spite of political turbulence and corruption, is not such a fallacy.

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That used to be a bank over there

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

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

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

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

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

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

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]

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]