Wednesday, April 30, 2008

Banks big winners in Safaricom IPO

From The East African.


Forget the investors and the stockbrokers. Commercial banks, already Kenya’s profit behemoths, are set to be the biggest winners in the Safaricom IPO, raking in millions of shillings in commissions and interest charges.

While the brokerage fees for the entire transaction stand at just Ksh750 million ($11.9 million), analysts say that the banks will make several times this sum because they will benefit from both brokerage fees and from lending.

The brokerage fees, representing 1.5 per cent of the offer of Ksh50 billion ($793 million), are to be paid to the commercial banks and 21 brokerages that facilitated the IPO.

Underlining their expectation of handsome returns, by the close of the offer on Wednesday April 23, the banks, licensed fund managers, and stockbrokers had reportedly collectively spent more than Ksh3.2 billion ($51 million) rolling out additional infrastructure and marketing themselves to the public for the IPO.

Commercial banks, which were appointed by stockbrokers to act as agents for a consideration of three-quarters of the 1.5 per cent brokerage fee, are likely to consider this money well spent, given the additional income from charges and interest, mostly borne by applicants.

Among these were the up-front payment of a commitment fee of anywhere between 1 and 3 per cent, depending on the bank, for all loans issued to applicants for buying the Safaricom shares, as well as the imposition of non-refundable interest charges, which were also being paid up-front. The non-refundable interest was pegged to a non-negotiable fixed period.

Some banks have put this fixed period at six months, meaning that an investor will have to pay the interest on the loan he/she took for six months, even if they repay the principal in full on the first day the Safaricom shares hit the market. This is significant, given that some banks were financing up to 100 per cent of applications.

Another measure that has brought banks handsome income is the imposition on all investors who applied through them of a central depository system fee of Ksh1,000 ($16). The Central Depository System Corporation is said to be following up on these charges, since the opening of CDS accounts is supposed to be free.

Calculations by The EastAfrican show that if a commercial bank were to have lent out Ksh20 billion ($317 million) — as one major player says it has – the combination of these fees could add up to nearly Ksh1 billion ($16 million), with the fees for opening 200,000 accounts alone adding up to a cool Ksh200 million ($3.2 million).

By the end of last week, an estimated 1.7 million people are said to have participated in the Safaricom IPO, although the exact figures are expected to be released this week by Citibank.

More than one million new CDS accounts were opened during the IPO. Many applicants relied on bank loans to make their applications.

Analysts say the Safaricom IPO, in which the Kenyan government is selling 25 per cent of the profitable mobile phone company for Ksh50 billion ($790 million at current exchange rates), is expected to be oversubscribed at anywhere between 150 and 400 per cent.

Retail investors in the region alone are said to have made applications in excess of the targeted Ksh17 billion ($270 million). The retail investors had been expected to buy 3.28 billion shares out of the 6.5 billion reserved for local investors, with the remaining 3.22 billion going to local institutional investors.

This is despite the fact that Tanzania barred its nationals from participating.

Until the offer closed last Wednesday, lead broker Dyer & Blair was hoping to persuade Tanzanian authorities to allow the IPO, in which case it had said it would petition Kenya’s regulatory Capital Markets Authority for a country-specific extension.

The unprecedented number of applicants in the Safaricom IPO, as well as the profits expected to be made by the banking sector, are likely to focus attention on the lack of capacity of the 21 or so active brokerages at the Nairobi Stock Exchange. Without the participation of commercial banks, it is doubtful whether the brokerages would have pulled off a process as massive as the Safaricom IPO.

“Banks traditionally handle about 80 per cent of the big IPOs,” Fred Mweni, managing director of Tsavo Securities, told The EastAfrican. “This is unlikely to change any time soon, and it is preferable that the potential of their day-to-day participation in the stockmarket be regularised.”

While the collapsed Nyaga Stockbrokers, for example, had about 130,000 accounts, indications last week were that Equity Bank, which has branches countrywide, had alone processed about 300,000 accounts for the Safaricom IPO.

The massive amounts of money expected to be made by the banks are also raising concern among financial circles about the legal grey area that is created when the financial institutions virtually double as brokerages and lenders during an IPO.

While all stockbroking fees are regulated by law, there are no regulations, for example, to cover the charges that banks can impose on investors who go through them. In the Safaricom IPO, this lacuna was exploited to charge non-existent CDS fees.

There are also no regulations or directions governing a situation where a bank appointed by a stockbroker to be an agent during an IPO channels all applicants through the appointing broker, irrespective of whether the applicants have accounts with the broker or not.

"The way forward is for the CMA to allow commercial banks to open investment banking divisions, or to push towards acquisitions of existing brokerages so that CMA rules apply across the board,” Mr Mweni said. “The third alternative is to issue new licences to new players to widen the spread of brokerage services around the country.”

Given the size of the Safaricom IPO, and the distinct possibility that the size of future offerings will continue to rise, the Central Bank of Kenya is also said to be contemplating regulations on lending during initial public offers to safeguard customers deposits.

Monday, April 14, 2008

CBK seeks to expose hidden cost of credit

From the Eastafrican Standard.

By James Anyanzwa

Central Bank of Kenya will soon demand that banks provide customers with an annual percentage rate (APR), a measure expected to lower the costs of consumer credit, a senior bank official has said.

The facility, which is an all-inclusive measure of the cost of credit, is expected to lower bank charges, which have locked out a substantial portion of the population from accessing credit.

"We are indeed working with the Kenya Bankers Association and the Financial Sector Deepening Trust (FSD) to explore the modalities of introducing an ‘Annual Percentage Rate’ measure of credit in Kenya," Ms Rose Detho, CBK’s Director Bank Supervision, told a news conference during the launch of a survey on bank charges and lending rates at the bank’s offices in Nairobi, yesterday.

Detho said some countries have already adopted the instrument as a measure of the cost of credit.

"We are consulting with stakeholders. We expect to undertake a study on APR, which will be completed in the second half of this year," said Detho.

Meanwhile, the costs of opening and running a current account have dropped 12 per cent, setting a stage for increased access to banking services, according to findings of CBK latest study on Bank Charges and Lending Rates.

The findings, unveiled yesterday, indicate a sharp decline in the average cost of operating a current account by 12 per cent for the nine-month period between March and December, last year.

However, the costs (excluding additional charges) charged by a group of 20 banks to obtain a loan of Sh50, 000 repayable every month over a period of two years rose slightly by 0.5 percentage points to 16 per cent over a similar period.

In the higher end segment of the credit market, interest rate on a loan of 500,000 repayable over a three-year period fell 0.01 percentage points to 15.79 per cent, according to figures of a group of 25 commercial banks.

"From reading of the survey, majority of banks have reduced the costs of offering services due to competition," said Detho.

The CBK’s report on the update of the Survey on Bank Charges and Lending Rates was launched in August, last year.

According to the survey, Co-operative and Victoria Commercial banks offer the cheapest rates in the lower end of the credit market segment, providing loans to the tune of 50,000 loan. The two banks both charge a rate of 13.5 per cent.

Dubai Bank and Stanbic Bank Kenya Ltd stand to be the most expensive in this segment, charging a massive 20 per cent and 20.75 per cent respectively on a similar amount of loan.

"Most banks are now providing loans in the 50,000 category. There is a significant reduction in loan charges," said Ms Caroline Pulver, Project Manager at FSD.

In the higher end segment of the market, Equatorial Bank is the least expensive charging a rate of eight per cent on a loan of 500,000 paid monthly over three years.

Dubai Bank and Stanbic Bank Kenya are also the most expensive banks in this category charging 20 per cent and 21.75 per cent respectively on similar amounts.

Monday, April 7, 2008

Debt collectors prey on pyramid scheme victims


By John Ndegwa

When Stephen Mwanzia Muema read a classified advertisement claiming that anybody who had lost money in pyramid schemes could recover their hard earned cash, he felt like his prayers had been answered.

Mwema, 34, who runs a food kiosk in Kawangware, Nairobi, had last year invested Sh10,000 in Development Entrepreneurship Capacity Initiative (Deci), one of the pyramid schemes that swindled unsuspecting Kenyans millions of shillings.

But after 10 months of following up on every turn and twist of the Deci rip-off, he finally saw light at the end of the tunnel.

"I saw a newspaper advertisement saying that people could recover money lost in pyramid schemes and I decided to seek the agency’s help," he says.

The advert that attracted Muema’s attention read in part: "Have you invested your money in pyramid schemes, business community Saccos and they have closed their offices, have failed to pay you, have cheated you with excuses? Stop the stories and excuses! Recover your money now!"

New breed of con artists

Thus when he stepped into an office on Nairobi’s Kenyatta Avenue, Muema was confident that his tribulations were about to end.

But were they? Apparently and as it turned out, Muema was yet again walking into another deceiving trap.

To recover his Sh10,000 he was told that he needed to produce all the Deci receipts, a copy of his national identity card and pay Sh2,000 registration fee.

Because his money was less than the minimum amount of Sh75,000 threshold the agency was recovering, he had to pay a five per cent ‘facilitation’ fee.

In total, Muema was required to pay Sh5,750 upfront before the agency could embark on recovering the Sh10,000 he lost in Deci.

According to the lady who served him, it would take four to six weeks to recover the money after which he would pay a final five per cent fee.

If he recovers his money, Muema would have paid the agency Sh9,500.

Unknown to Muema though, the people who allege they could help him recover his money represent a new breed of con artists operating under the guise of debt collectors.

Though debt collection agencies have existed for years, the new crop of swindlers is operating on the pretext of debt collectors targeting desperate investors who lost their money in pyramid schemes.

According to Mr Peter Wanjau, an accountant at a leading beverages distributor and a former debt collector, the agencies are claiming they can recover money on behalf of those conned by pyramid schemes are in fact former pyramid scheme operators who have turned to debt collectors.

"They have realised that people who lost money in pyramid schemes are desperate to recover their money and are easy targets," he states.

When Shillings & Sense visited the agency that had placed the adverts, a man at the office said they follow up cases for people who lost money in pyramid schemes upon entering a "voluntary agreement" with the distressed party.

"We work with lawyers to file cases on their behalf and wait for the legal process to take course," he explained unconvincingly, adding that their target is usually frozen accounts of pyramid schemes rather than the directors.

On why they charge a registration fee and ask for a percentage against the amount to be recovered instead of recovering the money first and paying themselves from the recovered money, he said: "Ours is a service and even when you go to a lawyer or doctor you must pay a consultation fee."

According to Wanjau, individuals disguising as debt collectors to con gullible people are operating on the basis that there is no law that regulates the practice and conduct of debt collectors.

This has effectively provided room for anybody to set up shop and operate as a debt collector. "This is a business that anybody can engage in" he explains, adding that in fact most are briefcase operators with no professional training.

Traditionally debt collectors have been viewed as ruffians who enjoy harassing, intimidating, threatening, attaching and even auctioning a debtor’s properties.

This has made some people believe that because the government has failed in helping them recover their money from pyramid schemes, debt collectors can use their skills to help them.

But according to Mr Wachira Ndege, the group operations director at Credit Reference Bureau Africa, people need to realise the traditional methods of debt collection no longer work. "Things have changed and being crude does not work," he says.

Car and General eyes growth with credit rating


Written by Emmanuel Were
Car and General
April 7, 2008:
Car and General is adequately protected against default on long term debt instruments, an assessment by the Global Credit Rating (GCR) shows. Global GCR gave the distributor of motor vehicles and engine products a BBB rating in the long term and an A3 in the short term.

The short term rating indicates that the company can satisfactory meet day to day cash obligations, but “the risk factors are larger and subject to more variations.

“It means we are an investment quality company good to receive credit for some of the institutions like banks,” said Mr Ted Grayson, the Group Financial Director at Car and General.

Credit rating agencies give potential lenders a third party opinion on the credit worthiness of a borrower. By the end of October last year, about 50 local firms had been rated by GCR.

The need for ratings has increased as companies - gunning for opportunities brought by recent economic boom seek funds for expansion through commercial loans and bond issues.

For Car and General, the rating provides a second avenue of raising cash for long term expansions plans.

In an earlier interview with the Business Daily, Car and General managing director Vijay Gidoomal said the company would not seek to raise additional cash from its shareholders and would instead use internally generated cash for expansion.

Three and two wheeler motor vehicles constitute the core business of Car and General and has faced increasing challenge from cheap imports from the far east and Asia.

“Some of the industry factors can weigh down a company hence reducing its rating,” says Alex Owino, an analyst at Metropol the East African representative of Global Credit Rating Company which is based in South Africa. The BBB rating also states that there is “considerable variability in risk during economic cycles.”

Car and General which deals in several engines, motor vehicles and generators returned a profit before taxation of Sh257 million in the financial year ended September 2007; a 45 per cent increase over the previous year.

Improved sales of its branded Cummins engine and generator business were the main driver for a profit increase, the company had said.

Robust growth in the construction industry created a need installation of generators to act as a source for a power back up.

Friday, April 4, 2008

SA microlender Blue returns to Kenya

From BusinessDay-SA

SOUTH African micro financier Blue Financial Services is resuming operations in Kenya since normality returned to the conflict-ridden country, and might invest in Zimbabwe once the political situation there has stabilized.

CEO Dave van Niekerk said yesterday in Kenya the company had pledged to invest another R60m in Kenya.

Blue suspended operations in Kenya in January after post-election violence that claimed the lives of more than 1000 people, including one of the company’s managers in the Kenyan province of Eldoret.

Van Niekerk met Kenyan prime minister-designate Raila Odinga in Nairobi on Tuesday and was assured of the government’s commitment to rebuilding the economy .

“Government is supporting the micro lending industry and sees it as a key strategy in re-establishing Kenya as a stable and developing economy,” Van Niekerk said.

Blue, which is listed on the JSE, is Africa’s biggest microlender, with operations in 10 countries.

“Given the political stability and government’s commitment to economic reform, we are ramping up Blue’s investment and product offerings in the country.

“Kenya has always been a significant investment opportunity for us and will definitely form part of an initial R80m we have earmarked for investment in the region,” he said.

Blue acquired Kenyan microlender Jaribu Credit Traders’ debtors book and its 13-branch infrastructure in November.

Van Niekerk said his company planned to invest R65m in Tanzania and Uganda this year as it moved to expand its operations into east Africa.

Blue had received regulatory approvals to operate in Cameroon and Rwanda within the next two months.

The company, with a loan book of R400m, was considering expanding its operations in Angola, Mozambique and the Democratic Republic of Congo, and was also considering acquisitions in southern Africa to boost its revenue.

Blue would dual list in Zambia and Botswana This month to give the local population a chance to buy its shares, Van Niekerk said.

Thursday, April 3, 2008

Microfinance has a bright future in Africa’s development

Publication Date: 4/3/2008

IN THE EARLY 1900s, OIL MAGNA-te J. Paul Getty was once quoted as saying: “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” Little did he know that barely 100 years later, a revolutionary banking model would turn his perceived world view on its head.

One might argue that Getty was a millionaire with little time for the poor. However, his perception is not far-fetched, judging by the common perceptions held regarding the provision of financial services in developing countries.

The foremost danger our people face today is the inability to get out of debilitating poverty. The reasons are varied, but the most fundamental, and perhaps most visible particularly for entrepreneurs, is lack of finance to start off.

I am under no illusion about the challenges of doing business in a growing economy like Kenya, but examples abound where the injection of small loans has turned people into notable businessmen, let alone making it possible to feed, clothe and shelter a family.

THE OVERWHELMING ADVANTAGE of microfinance, which generally refers to the making of tiny loans to people who would otherwise not access credit, is not that interest rates are low. It is that it makes it possible for poor people, many without collateral, to access credit.

A Sh10,000 loan, a pittance for many in the middle class, can be the beginning of a successful business for the vegetable vendor, commonly referred to as Mama Mboga, or the Jua Kali artisan.

Most financial institutions would be reluctant to advance credit to this group of people because of the perceived risks, high cost of transactions, and inability to provide collateral.

Our experience, however, demonstrates that given the chance, the poor can manage risks better than many ordinary folks. They can build assets, increase their income, and enjoy the resultant higher standard of living. In ordinary circumstances, the default rates are also much lower than would be expected among small-scale players.

This experience should provide the way forward for all those who genuinely want to minimise poverty in the developing world.

If we think about the trillions of dollars spent in poverty alleviation programmes in the developing world and the fact that the intended impact still remains a mirage, we are greatly pained that few people have seriously rethought the development paradigm.

Poverty is not lack of money, or indeed, of jobs. Poverty is the lack of power to determine one’s own destiny. Where that power is present, jobs and money will also be present.

The problem with aid is that it produces victims of philanthropy, who are forever grateful, timid and ever expecting more. Microfinance is the typical “teaching people how to fish and not giving them fish for one day.” Anyone who receives credit to open or expand a business, however small, is a client just like the well-established business mogul.

Microfinance does have its drawbacks, chief among them being that it is based on trust rather than conventional commerce. Should the business fail, the lending institution will have little recourse, as there is no collateral to fall back on.

It is interesting, however, that Equity Bank has one of the lowest non-performing loans in the industry. This is despite the fact that the majority of our borrowers have no collateral in the conventional sense. What they have is trust and backing by their fellow entrepreneurs.

I strongly believe that microfinance provides part of the solution to the question of “power”. I would be wrong to assert that it is the panacea to all the problems of poverty, but I must admit that it is a working model that is now the subject of study by many leading institutions including the Harvard Business School.

Given the foregoing, the question that stands out is what we ought to do with microfinance to make it more effective.

I DO NOT SUPPORT THE IDEA OF BO-rrowing one’s way out of poverty as not every enterprise can grow on loans. It is, therefore, critical that microfinance lenders carefully assess the business model of every borrower, his credit history, and provide financial advice. It is senseless to rush into giving loans as it may hurt, rather than help, the borrower.

This is an area the Government and development partners such as the World Bank should invest in actively and incrementally. The area of sharing risk with poor borrowers should be explored.

Finally, and perhaps the most important, microfinance cannot be a substitute for adequate infrastructure development, provision of security, sound fiscal policy and good governance. These provide the highway on which the small-scale business must ride. Without them, great business ideas would be stillborn.

Dr Mwangi is the CEO of Equity Bank. These are excerpts from a speech he delivered on the future of microfinance during the 10th Annual African Business Conference at the Harvard Business School.