Monday, March 31, 2008

Safaricom IPO: Forex hedging in Uganda

Afrika Investment Bank has entered a "Forward" partnership with selected Ugandan banks to transact Safaricom Initial Public Offer (IPO) at a fixed Uganda shilling share price.

The "Forward" contract safeguards clients from the instability and anticipated fluctuations of foreign exchange transactions by fixing the market rate of a currency before the actual transaction. In this case Ugandans who may want to buy shares in the Safaricom IPO but have to buy Kenyan shillings first will do it at a fixed rate of $0.08 (Ush140) equivalent of Ksh5.

Wednesday, March 26, 2008

Safaricom IPO financing

The usual Kenyan buzz is on, disagreements over the cabinet composition, ODM has remmembered it was opposed to the safaricom IPO..... But the best news is that banks are falling over themselves dishing out loans specifically for this IPO, Equity Bank is indeed offering 100% financing. Noteable is the fact the shares will act as collateral for the loan, however most banks are using the normal loan application requirements to process the loans applications.
This is a great oppurtunity for people to acquire an asset the loan way, especially if you are in employment or in a stable business.
It is worth noting however that the terms and condations of the loans are not very clear, issues include; the applicable interest rates, does the loan cover the total amount applied for or the value of shares allocated? Equity Bank has already indicated that the excess monies if any will go towards servicing the loan and that the applicant will not be handling any cash. None of the other banks have clarified this issues.
If all goes well, everybody (the banks, the investors) stand to make some money. If the banks give large amounts for the IPO,they will significantly contribute to the expected oversubscription.

Tuesday, March 18, 2008

Understanding subprime mortgage lending in the US

From wikipedia.

Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for market interest rates because of problems with their credit history or the inability to prove that they have enough income to support the monthly payment on the loan for which they are applying. The word Subprime refers to the credit-worthiness of the borrower (being less than ideal) and does not refer to the interest rate of the loan. Subprime loans or mortgages are risky for both creditors and debtors because of the combination of high interest rates, bad credit history, and murky personal financial situations often associated with subprime applicants. A subprime loan is one that is offered at an interest rate higher than A-paper loans due to the increased risk. Subprime, therefore, is not the same as "Alt-A", because Alt-A loans qualify for the "A-rating" by Moody's or other rating firms, albeit for an "alternative" means.

he subprime mortgage crisis is an ongoing problem manifesting itself through liquidity issues in the banking system which have become more prevalent due to foreclosures which accelerated in the United States in late 2006 and triggered a global financial crisis during 2007 and 2008.

Monday, March 17, 2008

Equity Bank and low end housing

This is a very noble idea (previous post), but will Equity (or is it HF) target the traditional mortgage clientèle just like the other banks? or will they target a totally new market. I am very interested in the modalities of actually granting this loans, I am especially interested in the eligibility criteria. Will Equity (or is it HF) target the traditional mortgage clientèle just like the other banks? or will they target a totally new market, i.e. low income earners. This is an important issue considering the low penetration levels and risky nature of mortgage financing even for high income people. Equity is known to be creative, so I look forward to the new products.

Equity to invest excess cash in low­ end homes market


Written by James Makau

March 10, 2008: Equity Bank is shifting its focus to mortgage financing hoping to replicate its micro-lending success in the market that millions of aspiring homeowners have found difficult to penetrate.

Last Friday, as the bank announced the 2007 results, it emerged that the coming in of foreign investors towards the end of last year has left Equity with too much idle cash that it now plans to pump into Housing Finance (HF) — a home loans financier where it holds a 25 per cent stake — targeting the low income mortgage market.

Equity — Kenya’s largest bank in terms of depositors and capitalization — maintained the growth tempo to break its own earnings record by a wide margin last year. The results show that the bank’s after tax profit grew by 151 per cent in 2007 to Sh1.9 billion helped by robust growth in customer deposits, loans and advances.

The huge capital injections last year have however put Equity in a unique position leaving with excess money for short term lending. This aspect of a bank’s business is measured by the liquidity ratio — which for Equity has risen to 77 per cent from 38 per cent in 2006.

Dr James Mwangi, the chief executive, told the Business Daily that Equity plans to use HF to manage the excess liquidity while opening the home loans market to ordinary Kenyans.

Dr Mwangi said HF is set to play a critical role in the bank’s 2008 strategy — offering it a window to enter the mortgage market as well as tapping into opportunities that are expected to arise from reconstruction funding following the recent destruction of property worth millions of shillings in post-election turmoil.

Equity acquired a 25 per cent stake in HF in November last year, an investment that provides it with an avenue for penetrating the mortgage market without incurring significant start-up costs.

The bank’s entry into mortgage lending should help lengthen the maturity profile of its loan book, which remains largely short term.

A liquidity ratio of 77 per cent — well over the statutory minimum requirement of 20 per cent — has left the Equity management with the daunting task of finding viable investment avenues the money to generate new income.

Equity high liquidity position is unique in the fact that it came in a year in which Barclays Bank, Kenya’s largest in terms of total assets and the industry’s most profitable had to confront a low liquidity challenge.

Barclays closed the year 2007 with a liquidity ratio of 18.8 per cent, 1.2 per cent below the statutory minimum in what analysts attributed to its rapid expansion strategy.

Other key financial sector players such as Standard Chartered Bank and KCB Bank remained well above the statutory minimum level, but are keenly monitoring their position in a market characterized by neck-break competition on both branch network and lending fronts.

Dr James Mwangi
Equity Bank last year raised its long -term borrowing threshold from Sh0.5 billion to Sh4.5 billion signalling its new clout in the lending market as shareholder funds shot up six times from Sh2.2 billion in 2006 to Sh14.9 billion in 2007.

Analysts at CFC Financial Services say the recent investment by Helios EB investors totalling Sh11 billion bodes well for the bank and should serve to strengthen its capital base and more importantly its prudential ratios leave ample room for it to expand its loan book portfolio.

“The benefit of an equity investment as opposed to a subordinated debt is the fact that the bank is now not obliged to make any interest payments which could have had a negative impact on the its profitability,” said the report by CFC Financial Services.

The bank’s balance sheet position for 2007 strengthened as loans and advances to customers grew by 100 per cent from Sh10.9 billion in 2006 to Sh21.8 billion last year. Within the same period, Equity’s total assets increased by a massive 165 per cent from Sh20 billion in 2006 to Sh53.1 billion last year.

But despite the rapid growth, the bank’s cost to income ratio improved from 67 per cent in 2006 to 59 per cent last year, pointing to the management’s ability to control the costs as a proportion of income.

In 2007, the bank’s net interest income was up 83 per cent to stand at Sh2.8 billion, while income from non interest income-funded activities stood at Sh3.1 billion last year marking a 64 per cent rise from 2006, thanks to the 826,000 new customers who joined the bank last year and the increase in the branch network as well as the roll out of new ATMs in 2007.

With 73 per cent of all cash transactions carried out through ATMs, the bank is looking at fees and commissions income as a vital source of income.

Dr Mwangi added that the outlook for 2008 looked promising despite the setbacks witnessed in the first quarter of the year, saying that the bank was surprised at the level of business transacted at the beginning of the year during the period of political unrest.

“The outlook looks very promising indeed after the peace deal and the opportunities arising especially in reconstruction funding,” he said.

As an added sweetener for investors, Equity Bank topped up the earnings per share — the portion of a company’s profit allocated to each outstanding share of common stock— by 148 per cent from Sh2.77 in 2006 to Sh6.88 last year.

The proposed dividends have also been worked upwards 200 per cent from Sh181 million to Sh543 million.

Stock pickers will be closely watching the moves of the major shareholders carefully in a year that a two-year mandatory share lock ends in August.

Following its public offer by introduction at the Nairobi Stock Exchange in 2006, Equity Bank’s major shareholders were barred by Capital Markets Authority regulations from off loading their shares for two years.

In a move to allay any speculation about the issue, Dr Mwangi told journalists he had not intentions of off-loading his shares in the bank even after the lock-in period ends.

“I have no intentions of selling my shares or leaving Equity unless the shareholders ask me to or I retire,” he said.

Wednesday, March 5, 2008

Judge removes sting from law on bounced cheques


Written by Albert Muriuki ImageMarch 05, 2008: A High Court judgment has removed teeth from a recently enacted law that criminalises issuance of bouncing cheques.

In a judgement that some legal experts argue is expressly contrary to the provisions of the relevant law, Mr Justice Jackton Ojwang said disputes arising from failure to honour promissory notes should be resolved through mediation and in the courts.

It appears to put issuance of bouncing cheques under the ambit of civil offences for which a person cannot serve a jail term— except where contempt of court is evident — and where the remedy comes mostly in the form of compensation for damages.

It also turns the clock backwards on official attempts to shore up confidence in the cheque as a means of financial transaction.

The rampant issuance of dud cheques has eroded confidence in it as a means of payment, adding to the cost of financial transactions in the economy as most institutions reject personal cheques.

The credibility erosion has left bankers cheques as the only viable means of carrying out paper money transactions, creating a vibrant income stream for banks.

But in the ground breaking judgement delivered last Friday, Mr Justice Ojwang said the issuance of bouncing cheques fell under private contractual matters where the most practical course of judicial action was compensation and reconciliation.

It means issuers of bouncing cheques can escape jail terms by quickly entering into private agreements with the payees on how to make good on the payments.

“In all cases the court may promote reconciliation and encourage and facilitate the settlement in an amicable way of proceedings for common assault, or for any other offence of a personal or private nature not amounting to a felony,” Mr Justice Ojwang said.

Felony is a term used in common law to refer to very serious crimes.

Issuance of bouncing cheques though criminalised by an Act of Parliament is considered a misdemeanour, a less serious offence that attracts a fine of Sh50,000, a one-year imprisonment or both.

The judgement arose from a case involving Joseph Kimani Kamau and Zilphan Arende Abila.

Mr Abila had complained that Mr Kamau had issued a $23,496 bad cheque (Sh2 million at the time of the offence in 2005) for the importation of a Mercedes Benz. It had been drawn on Commercial Bank of Africa but was referred to drawer for insufficient funds. Mr Kamau pleaded guilty and was sentenced by a magistrate’s court to 18 months in prison.

That custodial sentence went against a probation report that had informed the guilt plea. The report, though not binding to court, had recommended he be put under probation on account of being a first offender.

In giving the custodial sentence, the magistrate had relied on the prevalence of cases of bouncing cheques despite Mr Kamau having settled part of Mr Abila’s dues after the cheque had bounced. At the time, only Sh300,000 was outstanding.

“Considering the probation officers report, I do not find this case a suitable one for probation, given the prevalence of this kind of offence, I will overlook the probation officers report and sentence the accused to serve 18 months in jail,” said the magistrate.

The High Court, however, disagreed and concluded that the sentence could not stand because of its non-compliance with established legal principles.

“The offences charged in this case were misdemeanours, and related to private contractual matters, in respect of which the most practical course of action was to see to a process of compensation and reconciliation between the parties. Considering that the parties, by their own devices, were well agreed on a process of compensation, in my opinion, it was inappropriate for the lower court to abstain from accommodating the principle of reconciliation. On this account, I would not sustain the sentence awarded by the lower Court,” the judge said.

Mr Kamau had also been charged with the offence of obtaining money irregularly.

Statistics show that between January and September last year , at least 34 of the 41 licensed commercial banks reported incidents of bouncing cheques, with the total value in the nine months estimated at over Sh2.2 billion.

The law criminalising issuance of bouncing cheques was passed in 2004 and states that any person who draws or issues a cheque on an account is guilty of a misdemeanour, if they know that the account has insufficient funds; knows that the account has been closed; or has previously instructed the bank or other institution at which the account is held not to honour the cheque.

The CBK annual report shows that in the financial year to June 2007, the daily volume of cheques settled through the central clearing house averaged 46,833 valued at Sh8.51 billion.

According to the CBK, bounced cheques have the principal effect of undermining confidence in the use of cheques as payment instruments in the banking system.

“This in turn hinders the extension of credit and the settlement process with business increasingly resorting to cash on delivery. In addition, drawees of bounced cheques pay additional fees and resultant charges to their banks thereby increasing the cost and risk of doing business,” said the Central Bank in a press statement in January this year.

Lawyers were reserved in their opinion on the judgment stating that behavioural change from the issuers was the best remedy in solving the menace.

“Even if you were to increase the penalty for offenders, the law still provides for out of court settlements and most victims of bad cheques are never interested in pursuing legal cases after getting compensation from the drawers of the cheques,” says commercial lawyer and advocate of the High Court Emmanuel Wetangula, adding that the best way out of the situation was for honesty among business associates.

Tuesday, March 4, 2008

Credit Bureaus in Kenya

I'm researching on credit bureau in Kenya and had always thought Kenya had three of them, but they are actually only two. Transunion Kenya is actually part of Credit Reference Bureau. If someone has the whole story I would be very grateful.

Credit Kenya Expo Report

The Credit Kenya expo was held on 26th and 27th of Feb at the Sarit Centre. I managed to visit the exhibition on 26th afternoon as I could not make the conference which was being held during the morning hours. The expo was well organized, though most exhibitors were commercial banks whose sme targeted products are generally similar and predictable and, some stands were not maned at all (Metropol East Africa is the main culprit here).
However I did get a load of useful info,and here I am very grateful to the helpful lady at the Credit Reference Bureau stand. Over the next posts I will be sharing some of what I learnt and much more.