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Is your company simple, transparent and honest

On an early evening last week, I wearily drove home after a long day and found a neighboring boy riding his bicycle in the car park. As I reversed into my parking, I saw him to the left of my car, sitting on his bicycle and waiting for me to move my car so that he could get back to his solo cycle game. As soon as I parked my car, he rode ahead and flipped me a birdie. That 10 year old baby faced scallywag flipped me a birdie! In case you don’t know what that is, you need to google it. They don’t call us Black Mothers for nothing. I turned on my handbrake and burst out of my car seething with rage. Today was not the day for being disrespected. Tomorrow was not looking good either. I strode up to the boy and asked him why he flipped me the birdie. He didn’t miss a beat, “I didn’t show you that finger, I showed you this finger,” as he lifted up his index finger. “So you don’t deny that you communicated a finger to me, eh?” Was my furious response. The kid needs a lawyer to advise him about self-incrimination. Let’s just say that he won’t be doing that again soon to me or any adult in that compound. At least that’s what I hope.

Safaricom’s recent launch of the Simple, Honest and Transparent brand promise was a huge relief to many customers, myself included. I can’t remember how many times I have bought data bundles only to have them expire simply because I didn’t note the successful purchase message I received which stated the expiry date. Worse still, I don’t recall getting a reminder that the bundle was about to expire anyway. So a virtual product, with no biological attributes that could make it degradable, inedible or unusable was set to expire poof! Just like that. Buying voice and data bundles was also a nightmare as there were choices of minutes, tariffs, gigabytes and all manner of icecream flavors for what is really a vanilla product. But it’s all been simplified and expiry dates removed. The bigger question that the new brand promise evokes is: was the company not simple, honest and transparent before?

Not being simple or transparent I totally understand. It’s almost par for the course for many businesses. Many company products are anything but simple: ask banks and insurance companies. Many organizational services are anything but transparent: ask hospitals running up bills for surgical patients or patients at   Intensive Care Units. Not being honest? Well, that tends to raise more than just eyebrows. It means we used to promise you one thing, but actually delivered something else. We broke our customer promise.

Are there other companies out there that are not simple, honest and transparent? Hundreds, probably thousands. Which is why consumer protection activists find a space to play in the judicial system. As does a regulator like the Competition Authority of Kenya which has the legal consumer protection mandate to investigate complaints related to false or misleading representations, unconscionable conduct as well as supply of unsafe, defective and unsuitable goods. As should the boards of the companies that provide these products and services. What Safaricom has essentially done is to get us to turn the spotlight onto our own organizations with three little words about everything we do. Are we simple in the way we give pricing information to clients and deliver our products to the market? Are we honest about all the promise we are making to customers and not leaving them to pay massive excess charges when they claim insurance after a risk has crystallized? And are we transparent about all the charges we are billing without leaving surprises at the end when the client gets the actual bill? The young scallywag of a neighbor flipped me a birdie and changed his mind about which finger salute he was giving me when he encountered the incensed, livid recipient. His dishonesty was borne of self-preservation. Is self-preservation the motivation for companies that promise one thing to the customer but deliver something else? Food for thought at your next board meeting.

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Twitter: @carolmusyoka

 

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Eliud Kipchoge broke more than a record

The morning of Saturday 12th October 2019 will forever be etched in many Kenyan minds. Eliud Kipchoge made history by coming in a sub-two hour marathon clocking 1:59:40. The ultimate part was watching  him come down the last 100 metres, his legs powerfully striding towards the finish line and his face a blend of studied concentration, then total relaxation and utter joy when he realized he would come in with milliseconds to spare. I’ve rewound that clip countless times, Eliud’s power salute to the crowd on his right, thrusting out his index finger in salutation to an unseen supporter, followed by his victory signage: two fingers beneath his eyes telling the crowd “Watch this…I got this”.

Around about the umpteenth time of watching and rewinding, I realized something I hadn’t noticed before. In the last 500 metres, his pacemakers fell behind to let him run to his glorious victory and fame and then ran behind while yelling, clapping and generally providing a euphoric rearguard as he came pounding down the pike. Their unabashed joy and selfless pride as he crossed the finish line was as emotional as it was inspiring.  This was not about them, it was about him. It was about the role that they played to get him to deliver on the challenge. His victory was 100% their victory too.

I then played back excerpts of the race again. I watched all 1:59:40 of it. I had particularly enjoyed how seamlessly the transitions that the rotating team of seven pacemakers had undertaken in their Y formation. There was not a single trip up. No one was huffing and puffing while getting in step for the grueling 2 minute 50 second average pace per kilometer. No one elbowed the other to get into their laser beam designated space. It was like watching a ballet performance. Precise positioning designed to be delivered in a seamless choreography. I’m not a huge fan of sports, but I occasionally enjoy watching team sports like football, that are designed to ensure that wins arise from multiple player efforts rather than lone star performances. Running is a solo sport so watching 41 individuals rally around a lone star of a solo sport just to help him make a solo achievement was amazing.

I then reflected on what part I’ve played in my past life as a corporate employee to help make my boss look good. Having had fantastic bosses for the most part and, thankfully, a few intellectually plus emotional intelligence challenged bosses, it ended up being a long reflection. The great bosses I have had would no doubt have the rest of the team cheering behind as the individual continued to soar in the organization, largely due to our own individual performances that, collectively counted, helped them deliver and exceed expectations.

The one-on-one sessions with these bosses where there was motivation, encouragement and a lot of mentoring really helped me grow. In my first banking job, I needed a lot of that because I was completely clueless about how banking worked, how to credit assess borrowers, how to make sales pitches to corporate clients or how to structure complex trade facilities that were in multiple currencies. Both my boss at the time, and her boss at the time, took time to sit me down, explain the processes while accompanying me to critical clients to help provide the senior leadership presence required for client decisions to be made. As a result, I excelled at my work and this in turn helped my bosses achieve their team targets as they provided the same support to other team members.  If these bosses chose to run a corporate banking marathon, I’d sign up 200% to be on their pacemaker team!

My bad bosses. Well. Thankfully they were very few. Interesting enough, this reflection made me realize that they had one management strategy in common: divide and rule. In getting their team members to constantly bicker and perpetuate a silo mentality, they seemed to relish the backstabbing and the constant currying of favors by some team members. They gave their time sparingly, dishing it out as if it were the last drops of water to a lost group of stragglers in the middle of the Sahara desert. If the team members were in Kipchoge’s team, they’d be randomly arranged in shapeless formation and trip each other up deliberately while elbowing aside the main man. The marathon would be completed eventually, but the race would not be won. To Eliud Kipchoge and his band of pace making warriors: Congratulations! Even though Eliud was the main event, his pace makers profile were elevated at a global level as part of Team Victory. Well done.

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Twitter: @carolmusyoka

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Conflict on the Board; Lead Director Needed

In case you missed the press and a couple of my opinion pieces in the recent past, the South African insurance giant Old Mutual suspended and then fired its Chief Executive Officer, Peter Moyo, on 17th June 2019. There were a lot of crossed wires dangling from the untidy termination, as the Board accused the CEO of conflict of interest, which he countered with a counter claim that the Chairman of the Board, former South African Finance Minister Trevor Manuel, also had major conflicts of interest with the organization during his chairmanship. Several bloodied noses and one board director resignation later, the Board has fired Moyo despite a court injunction reinstating him to office and we are all waiting and watching with bated breath.

We will never know what kind of discussions have gone on and continue to be had in the Old Mutual board room. One thing for sure is, of the two protagonists in the case, one remains at home twiddling his thumbs while the other continues to hold his chairmanship seat. But could a chairman who has been accused of conflict of interest by a CEO reasonably lead a board in any discussions that touch on the status of that CEO, up to and including the CEO’s termination? This is not to say that the allegations against the chairman are true, but the ensuing crisis is not the place for brinksmanship on the part of part of the chairman of a very public and very large institution. In the United States corporate governance practice, the role of CEO and chairperson is often held by one entity. Following the financial crisis of 2008, this practice came under great scrutiny by shareholder activists who felt that the dual role played led to failure of a number of the large financial institutions that collapsed or were affected. The role and merits of the ‘Lead Director’ came under greater focus as a critical tool for unlocking potential deadlocks created by a chair/CEO whose management leadership was under scrutiny.

Lead Directors emerged in the late eighties in the United States as a way to bring balance to a board led by a dual chair/CEO. The Lead Director would be selected from the cohort of independent directors  and would be involved in setting the agenda, chairing executive sessions and helping to shape board room dynamics. In some cases, the Lead Director is designated as the vice chairman of the board. Anthony Goodman, in an April 2011 Financial Times article, writes that “the Senior Independent Director, formalized in UK corporate governance practice in 2003, was created as a counterweight to concerns about over-mighty board chairmen. So, the tendency towards building empires obviously does not begin and end in the CEO’s office.”

Clearly, the recognition that a super-chairman can emerge in some boardroom situations does not rest entirely in the United States and the British recognized this danger when they created a similar role. Back at Old Mutual, a company whose annual report establishes a commitment to good corporate governance, the role of Lead Director seems to exist. Looking at their latest annual report for the year 2018, a Mr. G Palser holds the role of acting Lead Independent Director. In the current crisis situation, assuming that he was still on the board in that position, the board would be looking at him to provide sagacious leadership and drive the discussions around the CEO’s termination as well as the communications surrounding the highly publicized Chairman’s conflict.

The Lead Director in this situation would have to assume that leadership, but would require a noble chairman to yield that leadership to him. Where such nobility is lacking, it would then require a strong cohort of both non-executive and independent non-executive directors to demand that the leadership is yielded to him. It is noteworthy, however, that on their website, Mr. Palser is no longer a director, nor do any of the independent directors have the designation of Lead Independent Director.

If the board is fragmented, deep schisms are bound to transpire. The resignation of Nombulelo Pinky Moholi from the Old Mutual board in mid-September 2019 can only be viewed in light of these schisms. Ms. Moholi, a previous CEO of the South African telephone giant Telkom, and director of Woolworths and Anglo American Platinum said she resigned for personal reasons. Unless a tell-all book is written by an insider, it is difficult to know what the current board dynamic at Old Mutual looks like at the present moment, but if ever there was a time for individual board director wisdom and courage for the Old Mutual directors it is now. Particularly since Peter Moyo has sued to have them declared as “delinquent directors”.

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Twitter: @carolmusyoka

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Information is a Two Sided Coin

“Alarm as 388 Kenyan firms dissolved in 6 months” was the heading of an article in the Standard Newspaper on Saturday, 21st September 2019. The article went into great details of the month on month dissolution by the Registrar of Companies in 2019. “This month alone, the Registrar of Companies has dissolved 95 companies while 100 were dissolved in July and 90 in May. March saw 103 firms struck off the register, marking the highest attrition of private firms in a single month so far this year. While reasons for dissolution are varied and range from companies ceasing operations to those relocating or reorganizing their shareholding, the high attrition rate over the past six months is remarkable.”

Well, the heading worked as the article circulated via Whatsapp groups, raising alarm about the “deteriorating economic state” of the country. So I thought I’d help the writer square that alarmist circle for a standard minute. In the government financial year starting in July 2017 and ending in June 2018 (FY2018), there were a total of 557 applications for dissolution of companies. These applications come from the companies (shareholders) and are completely voluntary. In the financial year ending June 2019 (FY2019), there were a total of 508 applications. The article was spot on in saying that “the reasons range from companies ceasing operations to those relocating or reorganizing their shareholding”. It is simply, the ordinary course of business. Should that be a cause for alarm? Actually, this should be read in the same vein as the number of companies that were registered during the same period. In FY2018, the Registrar of Companies registered 46,364 companies. Using basic arithmetic as well as very simplistic thinking, the net number of companies that came into existence then would be 45,807 if you deduct those that were registered from those that were dissolved. I call it simplistic thinking because there is no data available at the Companies Registry that can determine whether the potential economic impact of the newly registered companies more than makes up for the loss of the dissolved ones.

What is manifestly clear though is that 46,364 potential economic vehicles were created during that period. Closer home, in FY2019 there were 41,094 companies registered. Again, using the same formula, it can be argued that the net companies that came into existence were 40,586 if you deduct the 508 dissolved companies.

The truth of the matter is that the Registrar of Companies registers on average about 700 limited liability companies a week. There also appears to be some discerning amount of external faith in the Kenyan economy that warrant foreign registrations locally. The number of foreign companies that were registered in the two financial years in question were 191 and 190 respectively. How about companies limited by guarantee? This is a vehicle often used by non-profit organizations that seek a legal personality outside of the typical NGO registration. These companies don’t have share capital or shareholders, rather they have members who act as guarantors. In FY2018 there were 352 such registrations, while in FY2019 there were 387 companies limited by guarantee that were granted registration.

The more interesting statistic is the registrations of sole proprietorships which come under the Registration of Business Names (RBN) Act. In FY2018, there were 65,712 sole proprietorship businesses registered. In FY2019, there were 60,554. Registration under the RBN Act is one of the quickest ways of setting up a business for the ordinary Kenyan citizen wishing to start trading and doesn’t require as much legal documentation to incorporate as a company does. It is the registration of choice for many of the small scale businesses such as barber shops, bars, restaurants, kiosks, traders, shop owners and the hundreds of small and medium sized enterprises that oil the economic engine of this country. They are the suppliers to county and central governments, the ones whose goods line local supermarket shelves and the ones who run the vibandas in the urban markets where white collar workers like to eat their lunch.

There is no doubt that there are companies in this country that are undergoing difficulties as we read about the numerous retrenchments of staff and corporate bankruptcies in the media. But that data, which is difficult to get consolidated from any one source, is reported specifically as and when it comes into the public domain. Assuming that companies that voluntarily apply for dissolution are red flags waving in the streets of death and despondency would be as fatuous as assuming that all people dying from fever like symptoms are plagued by Ebola. There are two sides to every story and, based on the numbers above, perhaps the heading should have been “SME growth is alarmingly healthy as there are 81 times more companies registered than are being dissolved!”

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Twitter: @carolmusyoka

 

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Sights and Sounds of Kigali

I spent the early part of last week on a work assignment that has taken me on an annual trip to Kigali for the last five years. However this year I was struck with the significantly high number of new buildings that were sprouting out of every corner of the central business district.

First let me give the ubiquitous credit that Kigali deserves. You can eat off the pristine streets. Literally. I took an early morning walk, before the sun’s rays had even slipped out of bed. I was assured that the city was extremely safe even in the dwindling darkness. The streets were deathly quiet while ornamental bottle palms rose ramrod straight along the medians, standing guard over the brightly lit roads. Every so often, I would randomly find solitary armed guards standing at ease on a street corner providing undisguised assurance. Despite being completely alone in the breaking dawn, I never once considered that I might be unsafe.

In the course of walking along the streets, the sheen fell off the luster of what looked like a rapidly growing commercial real estate sector. Several new buildings, many of which had startlingly beautiful architecture I might add, stood empty past the first floor. By the end of my walk I was struck at how many such buildings I had walked past. I asked some locals what the back story was later in the day. It turns out that part of the city’s strategic master plan was to zone certain areas as commercial. This zoning came with a land utilization plan, which required that any building with less than one floor would have to have an additional minimum of four floors above it. Where the building owner was unable to undertake this development, he would have to sell the property to someone else who purportedly could.

The result, of course, is an overstock of commercial real estate in Kigali simply because there are not as many viable off takers for office space as was imagined. In a defensive play, the City of Kigali this year passed a rule that businesses could not be based in residential areas. The objective, obviously, is to drive these tenants into the central business district and provide much needed respite from the stress induced heart attacks that low occupancy, coupled with oversupply causes to the highly leveraged property developers.

This cannot go on for too long though. At some point the banking industry will stop giving loans to developers, a number of whom are foreign, due to the repayment lag that is certainly developing on the real estate segment of their loan portfolios. If credit in that sector begins to become tight, then developers will have to either use cash to build – which requires excessively deep pockets – or they may have to borrow from other jurisdictions, which brings in greater risks such as currency fluctuations. The City of Kigali fathers will have to relax or pretend not to notice the property owners who are not acceding to the zoning laws requiring storied buildings.

One thing the Rwandese are getting right is the international conference business. With the traditional hut inspired architectural masterpiece that is the Rwandan Convention Centre, as well as the singular government focus to drive conference tourism, Kigali has certainly established itself as a premier conference destination. When this assignment took me there last year, we landed at the airport only to find the immigration queues literally starting on the tarmac of the airport, before getting into the terminal building. A KLM jumbo jet had landed just before us and over 300 passengers were inching their way to about eight immigration counters. All this because that particular week was a big agricultural conference. It took about two and a half maddening hours to get past immigration only to get to the hotel and discover that the government had commandeered our rooms (which we were told is not uncommon) to give them to conference participants of their choice. We were politely “moved” to other hotels, while my colleague was dispatched to a dive somewhere in the outskirts of the city, which made for entertaining anecdotes from a furious colleague who had mentally prepared to stay at the 5 star hotel that we were originally booked in.

I do have to applaud the Rwandans for providing electronic immigration gates at the airport for their nationals. The gates are unmanned and only require the nationals to scan their passports. The same service is commendably provided to expatriates working in the country, who can register for the service in advance making for faster processing of resident passengers. If you have never visited Rwanda, give it some consideration. It’s a rare part of black Africa that is visibly trying to get things right.

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Twitter: @carolmusyoka

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Communication Challenges for Managers

I fear I have to opine once again on the topic of job interviews as the nature of my work requires that I sit through interminable hours of the same.

Some time ago I sat as a member of an interview panel for a senior management position. One thing struck me as odd: most of the candidates used acronyms incessantly during their presentations. Now I am not talking about standard acronyms that are widely understood such as CEO (chief executive officer) or FYI (for your information). I’m talking about institutional specific acronyms that only someone who worked with the interviewee, more so in their specific department, would understand. “I was in charge of the SPC within which a key deliverable was BPIS” is an example of a sentence delivered with much aplomb by a prospective candidate to a confused audience. Another candidate waxed lyrical about “The merits of GLAS in the reduction of MANEX” and two of us panelists scribbled notes to each other wondering if the other knew exactly what was being said.

The result? Poor scores on those specific questions. I’m like a dog with a bone on the improper use of acronyms by professionals. It becomes a standard language of communication that prevents many individuals from articulating themselves clearly outside of their day to day, business as usual activities. As a board member I see this very often in the presentation of board packs that have been lifted word from word from internal management reports meant for internal management audiences. The acronyms therein are lingua franca for employees, but complete Greek to board directors who only come into the organization for quarterly board and committee meetings.

Reading a board pack in advance then becomes a 3000 metre steeple chase event, each acronym providing a comprehension hurdle to jump over the metres of pages that one has to read before a board meeting. Anyway, back to the interview room. As panelists we had an extensive discussion about the appropriate way an interviewee should make a power point presentation that was part of the interview process. Should they sit or should they stand? The majority view was that an interviewee should stand, as it provided the opportunity for us to see how the individual comported themselves. We never told the candidates this, expecting that they would decide how best to present themselves. Majority stood. A few sat. Those that sat performed dismally in that segment of the interview primarily because it is very difficult to make a presentation and keep swiveling on one’s four legged seat between the screen behind you and the audience in front of you.

As audience members, we ended up communicating with the side profile of the seated candidates, which position also yielded a critical communication fail: complete lack of eye contact with some of the interviewers as the candidate could not physically see panelists seated along the same side of the table. But standing also produced its own interesting revelations. One male candidate had not buttoned the top of his shirt nor was his tie pulled up tight. He left a very untidy impression. One lady, who had chosen to wear a clinging, knee length dress with a low neckline decided to sit for the first part of her presentation. She then stood up for the second part, but her dress didn’t follow the natural laws of gravity and lovingly bunched itself snugly around her hips so that it rode up quite high above her knees.

It provided titillating conversation after the interview for the male panelists, who could – to a man – determine at which point of the presentation they stopped paying any attention to the words coming out of her mouth much to the amusement of the female panelists. Lesson here for ladies attending interviews is to be mindful of what they are wearing to an interview and how the fabric moves and shifts as one sits or stands. Like any good athlete or musician, practicing for interviews is imperative and getting a friend to video record one as they answer questions or make a presentation is an excellent way of catching one’s idiosyncrasies, nervous tics and unintended body language. Following up on how one performed during an interview, where possible even if one is successful, also provides an excellent feedback loop for constant self-improvement.

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Twitter: @carolmusyoka

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How to Train Yourself Into Proserity

During a recent visit to a neighbouring East African country, a colleague recollected his nerve jangling experience as the company secretary for a parastatal. As with all parastatals, the board of directors is made up of appointments emanating from the line ministry. Depending on what the line minister ate for breakfast that morning, recommendations on board director appointments can be anywhere from sensibly appropriate to downright bizarre. In the case of this parastatal, which for purposes of this piece we shall call EACB, a number of the directors fell into the latter category, top of which was Director Mary.

Mary sent an email to the company secretary, attaching a brochure for a training event that was to be held in the United States. The training was on sustainable mining practices in the 21st century. The company secretary scratched his thinning hair. The parastatal was in the agricultural industry and therefore the subject matter of the proposed training was completely irrelevant. But as he scrolled down the screen, his fingers nearly slipped off the mouse in shock. The cost of the training was an eye watering US$68,000 for one participant, and this was before flights and accommodation. The entire training budget for directors that financial year was the princely amount of $32,000. He stood up and took a walk around the building, just to compose himself and the staccato fire of thoughts that were ricocheting around his mind.

When he got back to his desk, he consulted the CEO of the organization who was as dumbfounded as him when she heard not only the cost, but also the irrelevance. She supported his view that they should decline the request. The company secretary then sent a polite email to Mary telling her that it was not possible to send her for that training due to the cost being above budget, as well as irrelevance of the course to the institution. Mary fired off a series of emails back to the company secretary, using many less than flattering choice words that described him as incompetent and petty. By this time, word had reached the company secretary that Mary was angling for a position as a permanent secretary to the ministry in charge of mining. The purpose of the course was to give her a leg up in demonstrating that she had the professional qualifications to do the role. Having got support from the board chairman, the company secretary stuck to her guns. At the next board meeting, once the opening protocols had been dispensed with, Mary fired the first salvo: “The company secretary is inept and should be fired for disrespecting a director.” The chairman, who was clearly a card carrying member of the I-got-your-back club, stepped in and managed to nip that inane discussion in the bud.

A few months later, Mary was indeed appointed to the mining ministry and she stepped off the parastatal board. Within nine months of her senior ministry appointment, she was fired. For wanton, brazen corruption. The end.

We got to talking with this company secretary about his experience as he described the difference between private and public sector corporate governance. “Public sector directors have a sense of entitlement in this country,” he mused. “They view the resources of the parastatal as being theirs to use.” As he was now in the private sector, he marveled at how the directors of his current board were focused on ensuring that the organization’s mandate was delivered in as cost efficient and profitable a manner as possible. “Why do you think that is the case?” I probed. “Pedigree,” was his singular response. According to the company secretary, the pedigree of who was selecting the public sector directors as well as the pedigree of those selected determined the outcome of what would happen to the organizations on whose boards these individuals would sit. Pedigree in this case went outside of biological breeding. It was a function of education, motivation, exposure and the ubiquitous and, quite frankly, over mentioned quality of integrity. Perhaps because of the proximity of the shareholder to the board of directors, poor director selections can be dealt with swiftly and unapologetically. Let me hasten to add, in most cases. However in the public sector, the shareholder is represented by a multiplicity of interests, is amorphous, shifts and changes according to the political wind blowing on that day and, finally, can be prevailed upon to tolerate mediocrity in the boardroom by using the very same multiplicity of interests. Which then opens up an interesting subject for debate: should public sector directors be appointed or should they apply for the roles competitively? More on this next week.

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Twitter: @carolmusyoka

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German Engineering Required In The Board Room

The Germans produce excellent cars. They have also produced a very interesting corporate governance system that was the subject of great scrutiny during the Volkswagen emissions scandal of 2015. In case you mysteriously missed the “Dieselgate Scandal”, Volkswagen was accused of installing software on its US based cars to produce fake results, during environmental regulator tests, on the illegal amount of nitrous oxide being emitted by its diesel cars which could lead to premature death due to respiratory diseases occasioned by smog.

So corporate governance experts weighed in on the scandal, saying that it was a matter of when, and not if, it could happen. German company law provides for a two tier board system. First is a supervisory board whose composition is fairly regimented under a system of co-determination or “Mitbestimmung”. The co-determination system requires at least a third of the board of directors consist of employee representatives if there are less than 2,000 employees and, where employees are more than 2,000,  then half of the board is required to be made up of employee representatives. If the company has less than 500 employees, then there is no requirement for employee representation on the board. The second tier of oversight is a management board which is made up of executives. For companies that have over 2,000 employees, one of the management board members must be a staff director or “Arbeitsdirektor” who represents the employees.

In the case of VW by the time the 2015 scandal was rolling by, the unions and labor representatives occupied half of the supervisory board seats, and took up three out of five of the executive committee seats. Of the remaining seats, according to a September 24th 2015 New York Times article  by James Stewart, two seats are appointed by the German State Lower Saxony where VW is headquartered, three of the seats are held by the founding Piech and Porsche families, two other seats are held by the Qatar Sovereign Fund which owns 17% of the shareholding and one seat is held by a management representative. How in the name of bratwurst  does this affect corporate governance you might ask? A board is only as good as its directors, and if its directors are singularly there to push an agenda, then that agenda is what will prevail at the expense of everything else. Hence the need to balance out a board by having a good number of independent directors who provide the voice of “other stakeholders” including minority shareholders. In the VW case, between the union and labor representatives as well as the two state government representatives, there was always a need to ensure that employees stayed employed. Period. The company was also driven by its Chairman’s need to become the number one automobile producer in the world, which it achieved  in 2014. According to the New York Times article, Ferdinand Porsche, the chairman, directed a successful turnaround at Audi before taking over the leadership at the overall VW group in 1993. The articles continues to state that VW employed nearly 600,000 people in 2014 to produce 10 million vehicles compared to the second largest automobile producer Toyota who employed 340,000 to produce just under nine million vehicles.

So if you think about it, from a basic efficiency ratio perspective, one VW employee produces 16.7 cars compared to a Toyota employee who produces 26.5 cars, almost ten more cars than his German counterpart. Do you think any push for efficiency and wide ranging automation will garner support at a union and labor representative populated board? Another curious construct of the VW board at the time, was the election of Piech’s wife Ursula to the board in 2012. Ursula, a former kindergarten teacher, had been his children’s governess before ascending to the new wife job description. But the Porsche and Piech family members who owned over half the voting shares and vote them as a bloc under a family agreement, were not going to be overruled by small voices at an AGM.

So an employee dominated board, with a strong and powerful family dynasty representation on the same board, were never going to listen to any concerns that may have filtered up about the risks that the highly touted new diesel engines were carrying. Nor was this board the one to ask “what is the legal fix?” at the board meeting where it was announced that the cars were never going to pass the American Environmental Protection Agency emission rules. Sell cars, remain number global one and keep everyone happy and employed was the mantra. Needless to say Piech was forced to step down as chairman, as was the chief executive officer Martin Winterkorn following Dieselgate and VW has been forced to pay almost $25 billion in penalties.

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Twitter: @carolmusyoka

 

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How To Get Rid of A Board African Style

I recently ran into an acquaintance from a neighbouring East African state who regaled me with stories of that country’s own public sector corporate governance shenanigans that are not too far removed from our very own. For purposes of this story, we will call him Matiku. Matiku, and others not herein named, were board members of a parastatal that provided oversight on players within an important industry and key economic driver of this special country. With barely two months  remaining to the end of their first three year term, the line Minister announced that he was dismissing the entire board.

Now if you know how the public sector works in these East African parts, a board director appointment to a parastatal is typically done by the line minister under whom the parastatal falls while the board chair is often appointed by the President. The board was rightfully indignant, after all there had been no malfeasance nor whiff of scandal regarding its role prior to the offending letters from the Minister. Furthermore, with two months remaining to the end of their terms, it beggared belief that the minister would be chomping so hard at the bit that he couldn’t wait for their term to expire in a mere sixty days. But the mother of all umbrages had been taken by the board Chairman. What the heck did the Minister think he was purporting to do by dismissing him, a whole presidential appointee?

So the Chairman did what any good chairman would do. He sought audience with his appointing authority because, if he had done anything wrong, he wanted to hear it straight from the horse’s mouth. The meeting with the President went well. Very well actually. To begin with, the President had no issues with the board. In fact, he told the Chairman, the Minister had reached out to him earlier and asked him to fire the Chairman, but when asked why, the Minister couldn’t give a good answer. So the announcement of the entire board’s firing came as a surprise to him.  “Call a press conference and tell the media that the only person who can fire you is the President. The Minister has no such authority,” were the sagacious words of the President.

Which is exactly what the good Chairman did.  As some folks like to say, the lightning that was about to strike started doing pushups in readiness. The media went to town with the story, highlighting the spunk of the ordinary mortal of a chairman to dare thumb a whole Minister in the eye. The Permanent Secretary at the line ministry then called the Chairman saying “Please ask the board to ignore the dismissal that was undertaken in a mistaken chest thumping, egotistical manner,” or something along those lines. Within 48 hours of the Chairman’s meeting with the President, Matiku and his colleagues were back in office. But the vindicatory lightning was not done striking. At the end of the two months, the entire board was reappointed for a three year term by the Minister, who quite likely had received a tongue lashing from his boss.

At an event to welcome back the board, the line Minister stood up to give a speech. “My friends, congratulations on your reappointment. I know you are unhappy with what I did the other day, but I was just doing it to test you.” Matiku’s shoulders shook mirthfully by the time he got to this point in the story. “We had to pin the Chairman down to his seat as he was about to stand up and accost the Minister,” Matiku humorously recounted. But why did the Minister take such a brazen step of firing a board if there was nothing negative on record, I asked Matiku. His brow furrowed in deep thought. “We don’t know. Even if he wanted to appoint his own friends to the board, he could have just waited two months and done it as our terms were coming to an end.” While Matiku and his board colleagues try to decipher the “mystery of the Minister who couldn’t wait for sixty days”, it is noteworthy that the political structures that govern board appointments in the public sector often do suffer from the folly of human ego. It goes without saying that if appointments were based on meritocracy and not political expediency and largesse, the Minister in this case would not have played a bad poker hand. More importantly, the key take away from this story is that even at the best of times, an East African President does use an often vilified media to do his dirty work for him!

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Twitter: @carolmusyoka

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Board and CEO separation is a painful divorce

This week’s corporate governance exemplar stems from our brothers down south in Johannesburg. The insurance titan Old Mutual is in a bit of a tizzy after its board, on 24th May 2019, announced the suspension of the Old Mutual CEO, Mr. Peter Moyo. In the wintry three weeks between the suspension and the subsequent termination of employment announcement on 17th June 2019, it would appear that the Board was trying to engage in a mutually acceptable separation agreement which talks collapsed spectacularly and culminated in the CEO’s termination of employment. Folks: Good CEOs don’t get fired, their exits are negotiated in a way that ensures that face is saved by the protagonists on the table who are the Board on the one hand and the CEO on the other. By the time a CEO is getting fired,  head office is ablaze and the fire extinguishers are broken. Or communication has simply broken down. In Moyo’s case, the Board’s announcement last Tuesday and the hot-on-its-heels  ensuing response from Moyo blew the lid on the minefield that the Board had been navigating with regard to conflict of interest, a perennial corporate governance bug bear.

“Mr. Moyo’s conflicting interest in the NMT group of companies was declared upon his employment and was governed by a specific protocol to regulate the conflict of interest in addition to the general obligations flowing form his employment contract. During the latter half of 2018, the Old Mutual Related Party Transaction Committee (RPTC), a committee of independent OML Board members, requested a report on Mr Moyo’s related party transactions, and confirmation that the terms of his employment contract had been adhered to. During this process, various concerns emerged relating to Mr Moyo’s conduct in relation to his conflicting interest. One of the concerns raised involved two declarations of ordinary dividends by NMT Capital during 2018 totalling R115m. the resultant benefit to Mr. Moyo and his own personal NMT

investment company was R30.6m. These dividends were declared in breach of Old Mutual’s rights as preference shareholder since arrear preference dividends were unpaid at the time and, at the time of the second dividend declaration, the preference share capital was redeemable. The preference share capital remains unpaid. Mr Moyo chaired the board meeting of NMT Capital at which the second ordinary dividend of R105m was declared.”

So what has the Board done here? Imputed wrong doing on the part of Mr. Moyo and make it appear like he acted alone. In fact, they say as much when the statement continues; “The Board has not been provided with an acceptable explanation why, in clear contravention of the relevant preference share agreement with Old Mutual as well as Mr Moyo’s employment obligations, ordinary dividends were declared whilst debt to Old Mutual was outstanding.”

Well, Peter Moyo didn’t take this lying down. He came out fighting, setting the scene for a Mohammed Ali-esque  rumble in the jungle with his own statement on the same day. “The SENS statement released by Old Mutual today contains assertions that at best are incomplete and at worst misleading,” was his opening salvo. He then explained the context of the relationship that was now playing center stage. “Both Old Mutual and Peter Moyo are shareholders in a company called NMT Capital. The NMT/Old Mutual relationship originated in 2005 and was acknowledged when Peter Moyo joined Old Mutual. A separate protocol was signed by both parties to regulate any potential conflicts.” In simpler words, we were in bed together in one house, and got in bed together at a new house. We knew this may raise eyebrows and cause some distress so we signed a protocol to guide us, as man cannot live on bread alone. Especially not if he’s living in two houses.

Moyo continues, “It is quite correct that NMT Capital declared dividends of R115million last year. Old Mutual received R23million (20%) of these dividends, in line with their shareholding. Old Mutual was also paid an additional R20 million in preference dividends. The meeting that Peter Moyo chaired resolved to pay an ordinary dividend of R105million to the ordinary shareholders (Old Mutual 20%, Moyo 26.66 amongst others). In addition the same meeting resolved to pay an addition R37million to Old Mutual. This included the preference dividend. At all times, Old Mutual had a separate director on the NMT board. Importantly he voted for all these dividends. It is therefore difficult to understand any conflict when Old Mutual were party to these decisions through this director’s representation of Old Mutual’s interest and his voting for both sets of dividends.”

I’m not sure how said Old Mutual director who sat at said NMT meeting that declared those dividends slept that night. He was put squarely in the middle of the fight by Moyo’s statement which said: Hey, we made this decision together bro, so you can’t throw me under the bus! This case brings out, in a beautifully pedagogical nature, the interplay between human personality and the treacherous conflict of interest dynamic within a board. The situation is playing out now and we watch and wait with bated breath at what the outcome will be, particularly since Moyo concluded with the inevitable “see you in court!”

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Twitter: @carolmusyoka

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Tax Evasion Generates Personal Liability

Well, the running commentaries on the recently read budget will keep us busy for the next few weeks. I will say one thing: it is very aggressive. For aggressive expenditure to occur, there has to be, commensurately, an aggressive revenue collection. Directors of private and public companies need to be alive to the fact that it is not only the Companies Act 2015 that provides strict liability for individual directors for statutory breaches. The taxman has always been waiting in the wings, ready to hold directors liable for tax evasion. Originally Section 116 of the Income Tax Act, Cap 470 provided that where an offence under the act had been committed by a corporate body of persons, every person who at the time of the commission of the offence was a director, general, manager, secretary, or other similar officer of the body corporate, or was acting or purporting to act in that capacity, shall also be guilty of the offence unless he proves that the offence was committed without his consent or knowledge and he exercised all the diligence to prevent the commission of the offence that he ought to have exercised having regard to the nature of his functions in that capacity and in all the circumstances.

Whoa! What a mouthful of a sentence! All those words to simply say: “Boss, if you’re a director or senior officer of a company and that company commits a tax offence, you are also personally guilty of the offence unless you can demonstrate that you were blissfully ignorant and that you were smart enough to try and stop said offence from taking place if your position warranted you knowing that it was going on.”

Someone woke up and realized this was a fairly easy pill to swallow so they designed an amendment to kick the heat up a notch. Particularly in light of the fact that Kenyans love to form companies for all manner of businesses and appoint their friends as directors or proxies. So section 116 was repealed by Act 29 of 2015 and replaced with Section 18 within Act 29 that deals with liability for tax payable by a company.  Because misery loves company and karma is a five letter word related to a female dog, Section 18 brings the company’s shareholders into the tax offence garden party. Section 18(1) states that subject to subsection (2) where an arrangement has been entered into by any director, general manager, company secretary [see what they did there? They clarified the word secretary by narrowing it down to the company secretary] or other senior officer or controlling member of the company with the intention or effect of rendering a company unable to satisfy a current or future tax liability under a tax law, every person who was a director or controlling member of the company when the arrangement was entered into shall be jointly and severally liable for the tax liability of the company.

Hold my glass for a minute. Apart from clarifying that it’s not just ANY secretary on the hook here, the law now provides that it is a controlling shareholder who is also on the hook for arrangements that prevent both current and future tax liabilities being met. A controlling shareholder is regarded as one who beneficially holds directly or indirectly, either alone or together with a related person or persons, 50% or more of the voting rights, rights to the capital or rights to the dividend. So what happens in subsection (2)? This is where an escape hatch from personal liability is provided. The above mentioned persons shall not be liable if they did not derive a financial or other benefit from the arrangement to evade tax. Well that should be easy to prove, right? Don’t get too excited yet. Above mentioned persons also have to have notified both the company and Kenya Revenue Authority (KRA) that they were opposed to the arrangement once they became aware of it.

I think by now you’re getting the gist of KRA’s mandate over you as a non-executive director, executive director, general manager or company secretary of a Kenyan company. Previously you were allowed to plead ignorance as your defence. But the 2015 amendment doesn’t entertain your ignorance of the offences, rather it places on you the dual responsibility of showing that you not only didn’t benefit financially, but that you also went out of your way to send something more formal than a Whatsapp message to that recalcitrant CEO saying that you were NOT trying to be part of the tax evasion scam. With a copy to KRA stat!

Mull on that this week, as you watch our friends at Times Tower go on overdrive this year.

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Twitter: @carolmusyoka

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Board Dilemmas

Once upon a time in a land far, far away there lived a man named John who worked as the Operations Director at Vocando. Vocando was an influential think tank funded by international donors who supported its mission to help the land that was far, far away develop sustainable social policies and all that NGO mumbo jumbo. The chief executive officer, Juliana, was an experienced administrator who had recently been hired to steer Vocando back on track after a few years of ineffective mandate delivery.

John, understandably, was not happy with the Vocando board’s decision to hire Juliana when he had viewed himself as the only credible candidate for the job. He had vocalized this loudly to anyone within earshot once the announcement of Juliana’s appointment was made. Within the first six months of Juliana’s tenure, an anonymous letter was sent to the chairman of the board. the letter claimed that Juliana was incompetent and had been hiring relatives into the organization. The chairperson gave short shrift to the letter, casually mentioning receipt of it to the board and not giving it any further airtime.

Three months later, John called the board chairman and said that staff were about to go on strike. “Whaaat?” was the explosive response from the chairman. “What do they want to go on strike about?” Apparently the staff were unhappy with the leadership and felt that it needed to be changed according to John. The chairman called an emergency board meeting and asked Juliana to explain what was going on. Juliana explained that she had no idea what John was talking about as no one had approached her about a strike. In fact, she mused, it was odd that John would approach the chairman directly about the purported strike, rather than come to her first. Not surprisingly, many of the directors agreed with her view and asked that Juliana should have a meeting with the staff and try to get to the bottom of the alleged strike.

The alleged strike fizzled out. But within a month, a second anonymous letter was sent to all the board directors stating that Juliana was incompetent and that Vocando was headed towards anarchy and total staff despondency if she carried on in the role. Another emergency board meeting was called in the air conditioned board room, on the fifth floor of  a tall building, in the capital city of the land far, far away. Juliana was not invited to join the meeting. By this time, most of the directors were exasperated at the escalating tone of the anonymous letters. “We can’t keep meeting like this every time this coward sends these letters,” said one director. The chairman took the view that perhaps it was time to evaluate Juliana’s actual competence as a chief executive.

“But we know who is sending these letters,” said another director, “it’s John and we have to determine if we need to think about his continued stay here.”

The chairman was loathe to open up that can of worms. John was a very effective operations director, but had come out weakly in the interviews for the chief executive role due to a demonstrably poor appreciation of critical stakeholder management at a chief executive level. The board hemmed and hawed about the relationship between the two individuals and eventually left the meeting completely undecided about what steps to take. A few months later, Juliana resigned and John was appointed to the chief executive role.

This painful chronicle of Vocando’s travails in a land far, far away is based on a true story. The board was in a difficult situation and evenly split on whose side to take in this titanic personality clash between the chief executive and the operations director who was undermining her tenure.  The fact that it had come down to taking sides was a failure of the chairman in guiding the board to take a holistic rather than a partisan view of the situation from inception. John’s initial unsuccessful application for the role merited some discussion at the board, especially with regards to how the potential minefields that the incoming chief executive might encounter would be navigated. The chief executive’s eventual resignation remains a stinging indictment on the capacity of the board, led by its chairman, in its fiduciary role of providing effective oversight on the organization. Leadership wrangles require to be faced head on and without fear or favor. It takes a board with unceasing gumption to do this.

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Twitter: @carolmusyoka

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Public Sector Has Corporate Governance Challenges Too

John asked his wife, “Where do you want to go for our anniversary?”
She said, “Somewhere I have never been!”
He told her, “How about the kitchen?”

And then the fight started.

The 2011 court case titled “Republic versus the Attorney General and two others ex-parte Consumers Federation of Kenya (COFEK)”  brought to fore the volatility of power dynamics in the triangular axis between the board of a parastatal, the chief executive officer (CEO) and the parent ministry. In that case, the Director General of the Communications Commission of Kenya or CCK (now renamed to the Communications Authority) was appointed to his office for a three year term with effect from July 2008 to expire in July 2011.

Following two and a half years of the ubiquitous board and management two step tango, the end of the Director General’s term loomed. In December 2010, an appropriate six months before the expiry of the employment contract, he wrote to the Chairman asking for renewal of his appointment for a further term. However, the Board was not trying to get back on the dance floor with the gentleman and in March 2011, the Chairman of the Board wrote to the parent Ministry, specifically to the Minister of Information and Communication, to advise against the Director General’s renewal of contract. And then the fight started.

In a gazette notice dated 20th July 2011, the Minister reappointed the Director General against the wishes of the Board. COFEK, in keeping with its public interest mandate, went ahead to challenge the appointment in the above mentioned suit with a key question for determination being whether the Minister’s action was abuse of power. A key point of departure between public and private sector governance is that depending on the instrument that was used to create the parastatal – an act of parliament, legal notice or company incorporation – the appointment of directors is often the sole preserve of the line minister, while the appointment of the chairperson, in some instruments, is left to the President.

Due to drafting oversight on the part of legislative drafters, the appointment of the CEO of some parastatals is left to the Minister yet the board is the entity charged with oversight and responsibility over the institution’s financial and operational mandates. As the CEO of a parastatal is the accounting officer for the finances and operations of the institution, it is beyond governance comprehension how anybody other than the board of that institution – who have fiduciary responsibilities drawn from their oversight role – can be responsible for the appointment and removal of that officer.

The Court in the CCK case reviewed the relevant administrative framework that guides the governance of parastatals including a circular issued by the Head of Public Service, dated 23rd November 2010, where the Board was made the appointing authority in the appointment of the chief executive officer of a state corporation. The Court also looked at the State Corporations (Performance Contracting) Regulations 2004, which also gave the board of a state corporation the responsibility of recruiting all staff including the chief executive officer.

The Court then concluded that the Minister was required to exercise administrative power reasonably, rationally and within the confines of the law. Thus the power to appoint a Director General should follow a decision of the Board and only in exceptional circumstances should the Minister go against the decision of the Board and share his reasons in writing. In such a situation, the Minister still has to refer the issue back to the Board for a decision and, in the current circumstances, he had failed to do so. The Minister was therefore found to have acted unreasonably and therefore unlawfully.

From a governance perspective, it is imperative to note that the unholy trinity is susceptible to the vagaries of humanity. A board can go rogue. A CEO can go rogue. A Cabinet Secretary can go rogue. In the above example, if the Board had gone rogue and was trying to remove an effective CEO while the Minister was trying to correct such wrong, then a travesty was committed and a precedent set. However, if the Minister was rogue and in cahoots with the CEO, then justice was served. Whether there are enough checks and balances to ensure that the wrongs of one of the three are corrected is a matter of jurisprudential application.  It is noteworthy, though, that a court will only be limited to the procedural application of the appointments, rather than any underlying governance rot that an institution may be enduring. Such rot is invariably a matter for shareholders to handle.

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Twitter: @carolmusyoka

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More Sights and Sounds of Cape Town

South Africa is a country of multiple paradoxes, brought about in large part by its diverse racial and socio-economic history. Unlike its cousin Johannesburg to the north west, Cape Town has a centuries old history as it was established as a convenient pit stop for the seafaring Dutch traders who were en route to the Far East to trade in spices. On my second visit there this past Easter, I took the time to revel in the predictable and well-trodden touristy excursions.  But this time I chose to experience them through the lens of a visitor from an East African country, more specifically a Kenyan lens.

 

You see, in this beloved sun kissed country of ours, historical partiality has ensured that access to the sea front along the coast line is reserved for the favored few land and hotel owners. One can only see the beautiful beaches in the North and South Coast by entering one of the hotels, visiting a beach front private property or gaining access to the slivers of public beaches that would appear to have been begrudgingly provided to stifle the potential noise of the pedestrian proletariat.  As we weaved our way south, out of the city towards Cape Point, we drove along a road that neatly divided the beach to the right which broke the crashing Atlantic sea waves and beautiful, expensive residences and shopping districts to the left. The beach and the sea have been democratized to enable everyone to enjoy what is a public utility. There were public parks along the way, the most notable one being Moui Point, with playgrounds, benches and public sculptures while ordinary citizens cycled or jogged along the made for purpose paths.

 

Our driver Ali had lived in Cape Town for the last twelve years. He is originally from Bukavu in eastern Congo. It only took a few minutes of him listening to our Kenglish before he cottoned on that he could speak to us in fluent Swahili, creating an instant bond. His guided tour was thereafter centred on showing us the million dollar homes of the people who have transformed Cape Town into a playground of the globally sourced rich and sometimes famous. The moneyed suburbs of Clifton and Camps Bay were nestled on the foothills of the stunning 12 Apostles mountain range. At the base of Camps Bay peninsula was a public beach where we found mainly colored families barbecuing up a storm in the name of Sunday lunch, each in their own little space but taking scenic advantage of the Atlantic vista in front of them and the public facilities that the Western Cape provincial government had provided for them.

 

We snaked further south, driving along the stunning ocean drive which cuts a meandering path along the jutting rocky mountain range that makes up much of the Western Cape coastal line. As we crested yet another cliff, a breathtaking settlement appeared down in a valley, bordered by a rock filled beach that provided a natural breakwater to the giant waves that crashed around them.

“That’s Llandudno town down there,” Ali said in hushed tones. The houses were enormous architectural masterpieces and skillfully built into the rocky foundations that made up much of the area. “Only celebrities and rich people live there. There are no schools and no shops there. Nothing that can attract the ordinary person,” snorted Ali.  I had to scribble down the odd name of the town as we zipped past a signpost with the Welsh name. According to Wikipedia the last census in 2011 revealed that the population is largely 86.9% white, 10.3% black and then the rest. Memo to self: devolution comes in all shapes and sizes.

 

The Western Cape is home to the South African wine industry and its tourist sites such as Table Mountain, Robben Island where Nelson Mandela spent most of his imprisoned years as well as the Cape of Good Hope ensures that there is a steady stream of tourists all year round. But it is the large African diaspora that lives and works in this very cosmopolitan city that draws on its nectar like attraction to economic promise. As I wrote earlier in the year about Mtwapa’s multi-tribal substrata that ensures non-violent episodes during each Kenyan election cycle, Cape Town similarly remains removed from the occasional xenophobic incursions that flare up in South Africa. “Why is that?” I asked Ali. “The people here are very mixed,” was his quick response. “There’s lots of coloreds here, more than the blacks so no fighting.” As Cape Town to the south and Mtwapa, on Kenya’s coastline demonstrate, the more you mix up a population from a racial and tribal perspective the more tolerance you find. That’s some food for thought.

 

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Twitter: @carolmusyoka

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Life In The Sticks

I am a tree farmer. I have planted thousands of trees on a small piece of dry land somewhere on the windswept plains of Laikipia. I thought trees would be a good way to rejuvenate a piece of land that had been denuded by charcoal terrorists who had destroyed every single living tree within their abominable reach as most of the land owners in that area were absentee landlords. What I didn’t count on was that a simple project like planting trees, on a nondescript piece of land in a rural backwater, would turn out to be the most humbling experience of my life.

 

For starters, rural settings have an entirely different socio-economic dynamic than that of the urban setting to which a born and bred city dweller like me could ever have imagined. The minute I started to put up a fence, local youth appeared and requested to be hired. I had the good fortune to get a fence erecter from a different town who was quite familiar with how local dynamics played out and he hired a couple of them for good order. One of them ended up staying on as the farm caretaker and that is when the rain started beating on me. Let me first start by cautioning that this is my experience, my story and therefore my conclusions all of which I am completely entitled to own. In my experience, the problem with hiring local labor is that there is a sense of entitlement that local youth have, which entitlement means that they don’t have to work that hard to deliver their contracted labor. “Mama, hapa tunalipwa kazi kwa siku. Na siku ni kutoka saa mbili mpaka saa saba,” was how I was informed that wages were paid daily and the daily rate started at 8 am and ended at 1 pm. Right. Lesson 1: local labor was a seller-dictated resource. Promptly after that, the Member of the County Assembly (MCA) got my number and called me inviting me to a “small tea to raise funds for his son who was going to a university somewhere in the Rift Valley.”

 

I wouldn’t have picked this man out from a pod of whales if I stumbled upon it. Quite frankly, he could say the same thing about me. So I said the first thing that came into my umbrage-filled mind, “Well, where I am from men don’t ask women to support them financially, you don’t know what problems I have.” This smooth operator didn’t miss a beat, choosing to neatly sidestep that gender stereo based swipe. “Today it’s my turn, and tomorrow I will help you.” Gah! I mumbled some weak response and hung up. Lesson 2: telephone numbers of perceived wealthy city folks were highly valued currency in these parts. Which leads us to lesson 3: putting up a chicken wire fence held up by treated poles = massive wealth.

 

A few months later, I had fired the local caretaker as by now he had settled down neatly into his role as a labor assassin. How? As we were in the process of planting trees and needing to dig holes for the trees, he had created a cartel of laborers who would demand a pre-determined fee per hole. Then he realized that he could hire students for half the fee and arbitrage on the price differential. Now it’s not supreme powers of deduction that helped this telephone farmer discover that she was skirting on dangerous labor law infractions. No. It was the oldest form of skullduggery known to man: the disgruntled laborers blew the whistle and sang like canaries once they were cut off from the gravy train. Lesson 4: If you have a farm in County W, hire your caretaker and all subsequent workers from Counties X,Y and Z. Mix and match. Divide and rule. The colonialists knew exactly what was needed to tame the African native into a self-preservative existence.

 

The cherry on the icing of this welcome-to-rural-life soliloquy was a text message that I got from the local parish priest. (Please refer to lesson 2 above about mobile numbers being currency) “Dear madam: we are having a harambee next June and your contribution would be highly appreciated.” To which my prompt response was: “Dear Father, I am yet to receive a ‘welcome to this parish’ message from you. It would be nice to be welcomed with anything other than a request for money.”

 

Okay, fine. I didn’t send that text back. But I certainly thought those exact thoughts. I just ignored it and I am preparing for a case to answer when I get to the pearly gates. But it did lead to my final lesson number 5: the Nyumba Kumi initiative is a very urban construct. In the windswept plains of Laikipia, you couldn’t operate a stealth bomber without folks over 100 miles yonder telling you the thread count on your pilot jumpsuit. If you’re thinking of buying land and starting a new life out in the sticks, forget anonymity. It doesn’t exist.

 

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Twitter: @carolmusyoka

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Sights and Sounds of Mtwapa

Nestled on the southernmost tip of Kilifi County, Mtwapa is a bustling kaleidoscope of cultures, economies and social systems. The Mombasa-Malindi highway splits the town into an east side and west side, with various activities happening along the kilometer long central business district. Dust devils constantly swirl around the unpaved sidewalks that front various commercial and residential buildings squeezed side by side. The population is extremely diverse from a cultural perspective, with a significant number of retired foreigners residing there. Business owners as well as workers come from the hinterland, which is confirmed by the various bus company offices dotting the town offering express buses headed all the way to Western Kenya directly from Mtwapa.

 

If you’re visiting Mtwapa, you are strongly encouraged to toss any sanctimonious morality crown you may be wearing into a dustbin as soon as you cross the Mtwapa creek bridge. The first thing that hits you is that there is a bar – or the more urbanized term “lounge” – at every corner. During the day, the desolate tables belie the heaving weight of the alcoholic and carnal aspirations of the previous evening’s revelers. The second stark discovery is that there are as many chemists as there are buildings in the town. I walked into two different chemists that were within 10 metres of each other. “What is your unique selling proposition that makes you stand out?” I asked as I couldn’t understand how any business could remain prosperous with such intensity of competition. Veronica, the owner of one of the chemists, was very forthcoming. “I came here from Bamburi where it was very slow. I’ve been in business for ten years and my customers are different from that chemist over there,” she pointed to the one directly across the street. “Each of us have our own customers, and the business is enough for all of us.” Jacob, her competing neighbor to the left, pretty much said the same thing. For both chemists, their fastest moving consumable items were condoms, the morning after pill and Viagra. Veronica chuckled as she reflected on this, “Huku ni Sodom na Gomorrah!”

 

Further down the street is an open air vegetable market. I sat with Mary, who is the chairlady of the traders welfare society. The market is fairly cool, despite being out in the open due to the various trees lined up on one side. About 153 traders pay Kshs 500 a month to the owner of the land as “rent” and pay a further Kshs 500 a month to the Kilifi county government as license fees. Mary is slightly bitter as they were moved from their previous location on the main high street due to what was going to be a road expansion. As it was public land, they did not need to pay any rent and therefore had lower overheads. Their economic situation was further compounded by the opening of two large brand supermarkets within 300 metres of each other. The supermarkets now provide fresh vegetables and pre-cut sliced fresh fruit such as pineapple and melon, which were the mainstay of the vegetable traders. Consequently foot fall has significantly reduced and there is no particular  unique attraction to bring shoppers to the open air market. County government innovation is greatly required here, to help the traders build permanent stalls that provide various fresh ingredients and street food that would enable a memorable shopping experience for the vibrant town population. Mary shrugs her shoulders in the typical Kenyan resignation and acceptance of her lot in life. “Many women here are not sleeping at night worrying about how they will pay school fees and feed their children. I sleep at 11 pm and leave the house by 4 am in order to get to the Kongowea wholesale market before the good produce is sold out,” she explained in Swahili. She didn’t want any government handouts, just a fair trading environment in what was becoming an increasingly difficult way to do business.

 

Mtwapa is a town of stark contrasts and varying populations that ebb and flow during its 24 hour economic life cycle. The bars are desolate by day and vibrant at night, creating an intricate web of symbiotic business such as taxis and tuk tuks, late night street food sellers, recreational drugs and short term lodging options. The most outstanding social element of this town however emanates from the lack of a morality lens: various election cycles have blown over a peaceful and non-judgmental population. In Mtwapa everyone is accepted at face value and not skin color or tribal pedigree. There’s no time for that election tension nonsense out there: life is too short and must be lived within 24 hours a day.

 

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Twitter: @carolmusyoka

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Criminal Liability For Directors

Being a company director is hard. Scratch that. Being a company director in Kenya, is extremely hard. And nothing brought that point painfully home more so than the press release issued by the Director of Criminal Investigation George Kinoti a week ago. In the document dated 25th February 2019, the Director released the names of one hundred and seven companies and their directors, on the premise that “the underlisted companies and their directors are believed to be connected with or have information which will assist in ongoing investigations into fraudulent [sic] construction of Arror and Kimwarer multipurpose dams valued at Kshs 63 billion…”

Both mainstream and social media took to the list with much glee, as the list of directors read like a who’s who in the Kenyan corporate scene. Criminal culpability was being imputed for executive actions taken in what seems to be the extraordinary course of business. Note my use of the word “executive”. While the story is still being unraveled, what is slowly coming out is that goods and services were procured in the name of the construction of the dams. Said goods and services were provided by companies who had executive officers that execute decisions and boards that provide oversight and accountability for the acts or omissions of those executives.

 

The accounting officer in a company is the chief executive officer (CEO). He or she is responsible for all the decisions and actions that the company undertakes. However, the board is ultimately accountable for those decisions and actions. Since the board is not involved in the day to day actions and are meeting on a minimum of a quarterly basis, it is not unfair to assume that they are in the dark about what cheques are being signed by the management accountant in finance at 3 p.m. this afternoon. Boards rely heavily on management to follow approved policies and procedures, the internal auditor to provide real time assurance of controls and the annual external audit process to verify that the business is under overall effective control. Failure of the board to provide effective oversight is supposed to be met with retribution from shareholders whose interests the board represents.

 

But this is where it gets interesting. Enter stage left the Director of Criminal Investigations. In the same press release, he continues to aver that the companies and directors were “..paid to offer various services. They should avail the following documents (i) quotations (ii) invoices (iii) delivery notes amongst other relevant documents.” It goes without saying that feverish phone calls were quickly made by directors to CEOs asking them – with varying degrees of consternation – what the heck was going on and what documents are these that were being referred to? Board directors wouldn’t have the first clue where to find these documents, but management should and would. Which then begs the question why the Director didn’t just address his press release to the companies and their CEOs?

 

A strong message was being sent in that press release. The social capital card was in play, you know, the one that relies on embarrassment and peer pressure to yield up results. It would be a herculean task to directly link a non-executive director to the provision of goods and services of a company unless they signed the invoice in their own blood. But dragging their names in public would mean that they could likely sing like proverbial canaries if required or they would help to apply the necessary pressure on recalcitrant management to produce what was needed. ASAP. Sadly, the names of directors included a number who had resigned from those companies years ago, thus whose names were unnecessarily being published.

 

One critical lesson here is that anyone who resigns from a director role must ensure that not only is that resignation accepted and acknowledged, but that the company secretary on record files and updates the company’s records at the Companies Registry. There is a dangerous precedent being set here in dragging non-executive directors from the board room and into the fifth floor accountant’s office. Board room conversations in this country will now have to have an operational risk agenda item: who are we doing business with and what kind of trouble can it bring us? Banks have already been forced to do it with the anti-money laundering breaches and prohibitive regulatory fines following the National Youth Service corruption investigations last year.  I guess even tile and towel importers will now have to do the same.

 

[email protected]

Twitter: @carolmusyoka

 

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Sights and Sounds of a Techno Dar es Salaam

I was visiting some friends in Dar es Salaam last weekend and we were driving around the city looking for a place to have a late lunch.

 

We came to a set of lights where there was a road to our left, which my friend wanted to turn into. The road was designed with a slip way to allow for easy traffic flow for cars wishing to turn left, but there was also a zebra crossing right before the end of the turn. My friend hesitated a little, as the lights were red and she was wondering if she could make the left turn since there was no oncoming traffic. Seated by the side of the road were a male and female traffic officer. The 5 pm sun was smoldering hot as it languidly set in the west and the traffic officers were clearly marking time under the shade of a scrawny tree waiting to clock off. My friend and I both turned at the same time to look at the police officers as she wondered out loud whether she could make the turn. The female officer began laughing and whispered something to her male colleague, who simply shrugged his shoulders.

 

She stood up slowly, stretched her arms and then ambled to the car. “Madam, umefanya makosa,” she mirthlessly informed the driver of her error. “Failure to observe zebra,” (sic) she said as she pointed where to park on the side of the road. But what happened next is what amazed this Kenyan passenger. My friend removed her driving licence and walked to the traffic officer. She was invited to take a seat on the makeshift bench under the scrawny tree and the traffic officer proceeded to type furiously into a hand held device. 15 humid minutes later, my friend came back to the car carrying a little slip of paper the size of a credit card receipt. She started the car and we drove off.

 

“So what was the verdict?” I asked, making the very Kenyan assumption that a kangaroo court had been held as was atypical in both Tanzania and Kenya where any traffic stop occurs. “I have been given a ticket and seven days to pay it via mpesa” was the matter-of-fact reply. It’s just as well that I was the passenger doing nothing more than spectating when such East African shattering news was being relayed as calmly as if one was picking ticks off a dog’s back. My friend who has lived for many years in Kenya quickly realized that her nonchalance was misplaced. “Oh, yeah. Things have changed in the new regime. Traffic cops have to give you a ticket which states your offence and then you can pay it via mpesa within 7 days. They have to charge you there and then if you commit a traffic offence.”

 

I grabbed the ticket and took a snapshot immediately for the sake of posterity. The little slip of paper had the name of the driver and her licence details, car model, registration number of the car, the details of the owner of the car (may I add that it was a car hire and the car hire company’s name was recorded on the slip since the machine is connected real time to the vehicle registration registry) and the name and identity number of the traffic officer. The puny little document packed quite an information punch as the traffic offence that was committed was clearly stated, “Failure to observe a pedestrian zebra crossing Section 65”, as well as the mobile number of the hand held machine, location of the offence and various payment methods at banks or via mpesa.

 

My friend paid the fine the next day, as we headed to the airport. By this time I had observed how Dar drivers religiously stopped at zebra crossings and traffic lights even on a Sunday. I was informed that due to the numerous traffic cameras around the city, offending drivers who did not pay their fines could easily be traced. Law enforcement has changed the behaviour of Dar drivers. More importantly, even though I couldn’t get the information on time, it looked like the traffic officers had a daily financial target to meet which would then motivate them to issue tickets like candy at a toddler party thus enforcing the law zealously. If you’ve ever driven on Tanzanian roads in the past, you will recall that their traffic cops’ ability to extract “chai” made our boys-in-azure-blue look like wilted tea bags. That has changed. Significantly. If the Tanzanians can do it, so-help-the-corruption-tin-gods, so can we.

 

[email protected]

 

Twitter: @carolmusyoka

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Data Makes For Big Innovation

Earlier this month, this newspaper led with a headline that Safaricom’s Fuliza product lent Kshs 6.2 billion in its first month after launch. In case you’re one of those laggards that hasn’t entered the mpesa universe yet, Fuliza was launched by Safaricom in January 2019. Its objective is to help the mpesa user avoid that embarrassing “oh-no” moment when goods or services that she wishes to purchase are literally in hand but the funds to pay are not. I signed up for the product following an SMS blitz by Safaricom as soon as it was launched for no other reason than to just stop the confounded messages coming through. Two weeks later I stood at the supermarket till purchasing items via Mpesa. Lord help me because I came up short, Kshs 434.74 to be precise. Usually I would give a sheepish grin to both the cashier and to the visibly irritated customers behind me and mumble something about “please let me withdraw from my bank” and have to wait several nail biting, interminable minutes as my bank’s mobile app chooses to be slow on that day at that moment. But the Mpesa app immediately prompted me to Fuliza – which, by the way, means “continue” in Swahili. In seconds I had been allowed to overdraw my Mpesa by that amount, the transaction was completed, I got an update that I was charged the princely amount of Kshs 4.35 for the overdraft facility and I now owed Kshs 439.09 due in 30 days. Most importantly, the fellows standing in line behind me never knew that I had run out of funds. At all. The next day I withdrew funds from my bank into Mpesa. Again I got a message in a split second, the outstanding amount had been automatically deducted from my funds. And my available limit was back to the Kshs 12,000 that I had automatically been awarded when I signed up.

 

Fuliza is a testimony to those two words you see being bandied about miscellaneously: “big data”. Big data are extremely large data sets that may be analysed to reveal patters, trends and associations relating to human behavior and interactions. CBA Bank, the creators of the first Mpesa based lending product Mshwari, used mpesa usage data to feed into their credit algorithm that calculated how credit worthy the loan applicants were. It soon became apparent that about 58% of mpesa transactions failed where the user was sending money to another beneficiary. But about 85% of the same transactions would be repeated within two days, that is, payment to the same beneficiary because funds were now available. It doesn’t take a rocket scientist to see that the data was speaking to a funding gap that would be eliminated within 48 hours as cash came in. In banking-speak this is what an overdraft does: provide a short term cash bridge pending arrival of funds. In the example above, my overdraft interest rate was 1% for a 30 day facility.

 

If you were to ask the over 400,000 customers that are using Fuliza daily as to what the annualized interest rate (12%) is, they’d tell you that they didn’t care. I certainly didn’t at the point where I was standing at the till with a basket of goods already packed and carefully perched on the counter ready for my hasty exit. Actually neither do the millions of Mshwari customers who are ready to pay a flat fee of 7.5% for a 30 day loan (again, if you annualized that you would get 90%). The Fuliza product currently endures a default rate of less than 1%. So for every 100 shillings that are lent out, less than 1 shilling is lost. The automatic limit that I received of Kshs 12,000 was done without my asking and without my knowledge. The bank just used my data to generate a very important product for me.

 

 

To the Kenyan legislature, the lesson here is this: a little bit of research would have led you to see how you could force banks to use the reams of data that they have about their customers to provide a better and differentiated pricing which would have achieved the goal of lowering the cost of loans. Instead, the largely uninformed interest cap route taken has ended up drying credit supply. What these mobile loan applications are telling parliamentarians is that at the end of the day, the retail client is indifferent to the price. He just wants to “fuliza” his life!

 

[email protected]

Twitter: @carolmusyoka

 

 

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Culture Dictates Culture

When the white man first landed on the shores of the East African coastline in the sunset years of the 19th century, he seemingly came to look for trade opportunities as well as to convert the native heathens into Bible thumping Christian converts. Well, in the famous words of Jomo Kenyatta, when the missionaries arrived, the Africans had the land and the missionaries had the Bible. They taught us how to pray with our eyes closed. When we opened them, they had the land and we had the Bible. Somewhere along the way, the native heathen was also made aware of how backward their culture and traditions were so that converting into Christianity required the shedding off of a number of these traditions. Some, of course, were barbaric such as female circumcision. But there is a very thin line between what is viewed as culturally backward and what is personal opinion driven in large part by one’s individual historical narrative and value system.

 

I write this because of the recent cases in court relating to high school students and their right to keep their natural, God given hair in a preferred state. Let’s take a step back. At the point of creation, whether by evolution or by a supreme deity, the human being was allocated a head of hair ostensibly to protect the scalp from weather elements. The human being of African extraction was given a very curly, very tough and very wiry version for whatever reason that supreme deity or nature saw fit. Ours is not to question, ours is to execute. And execute we have, by keeping the hair extremely short for men or extremely chemicalized, heat straightened to the point of flame grilling or simply short for women who can’t deal with either the chemicals or the heat. This is because in high school we were socialized that the African curly, tough and wiry type of hair must be tamed for good order to prevail otherwise there would be chaos and anarchy followed by sheer despondency if the African native was allowed to let their hair take its natural curly, touch and wiry direction of onwards, upwards and outwards.

 

So I stood and clapped when I saw the ruling allowing the schoolgirl with dreadlocks to keep her hair. My joy was not because of the rationale given which was it was her religious right, but because – for the love of God and country – it is the most natural way to maintain our very curly, very tough and very wiry locks.

 

We are skirting on a dangerous ledge here. Our workplaces are filling up with a younger generation that were not necessarily exposed to the value system that demonized dreadlocks due to an association with Mau Mau fighters and all things rebellious. This generation does not understand why keeping their hair in its most natural form would be offensive to anyone who subscribes to being an authentic African. If you look at pictures of Masai morans you will see dreadlocked young men, with neat locks tinged in the deep ochre colors that have come to signify the Maa culture. Because that was how they kept their hair in its most natural state. The same attitude that demonizes a natural, African hair culture is the same that will demonize cultural changes in the work place and refuse to embrace diversity in its purest form. It is the same attitude that will make students believe that their African identity is one that should be dictated by a historical narrative and not by what they interpret as their own narrative in an ever evolving cultural dynamic. It is also the same attitude that demonizes a girl’s right to cover her head for religious reasons where such religion is deemed to be unacceptable in certain areas. It is said by some that to colonize people’s minds you must first demonize their culture and then their traditions.

 

We are still being colonized here when the fact is that our African hair is ungovernable. It can be tamed for purposes of the good order so ordained by our colonial historical narrative. African men keep their hair closely cropped to govern it. African women have harder hair governance choices to make. It would be impossible not to link those difficult choices with the need for diversity in schools and workplaces. Diversity fosters strong and tolerant communities. Diversity fosters boundless creativity.

 

[email protected]

 

Twitter: @carolmusyoka

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Leadership Is An Art Form

Many moons ago, I worked as a senior relationship manager within the corporate banking division of a major bank in the country. I had done corporate banking for a while by then and pretty much knew the nuts and bolts of finding structured working capital solutions for private and public sector institutions. As luck would have it, I took over my boss’s role as he was leaving to take on a different position elsewhere within the group. At our handover lunch, he imparted his words of wisdom which I carry with me to this day. “Carol, you’re about to take over a very high performing team. These guys have been your peers for a long time. You cannot manage them the way I have managed all of you. You’ve always known me as the boss, so taking directions from me was easy. With these guys, you are going to have to collaborate and influence, rather than command and control.”

 

I led this team because my former boss took the time to explain to me that I was about to take over the reins of a high performing team who should be allowed to do what they did best, leaving me to juggle the various stakeholders that needed to be managed to enable the team to perform well. I got to thinking about this when I saw some idle chatter at a forum talking about how the CEO of our biggest power utility needed to be an engineer. Why? Because only an engineer could run an institution that distributed power.

 

The same fallacious argument can be applied to an airline needing to be headed by a pilot, or a hospital needing to be headed by a doctor. Apart from being very insular, such an argument fails to take into account that leading an organization is less about one’s technical skills and more about one’s leadership capabilities. Which is why we end up with very many CEOs and heads of institutions who have been promoted to their precise level of incompetency and who have triumphantly led those institutions down a cataclysmic rabbit hole.

 

A CEO’s primary jobs are to know how to manage both internal and external stakeholders as well as to get the right people to do the right job. Regarding the latter, he needs to ask them the right questions to know if they are doing the right thing. Too many rights, right? Puns aside a classic example would be the retiring head of Absa Group Limited (formerly known as Barclays Africa Group) Maria Ramos after ten years at the helm. Ms. Ramos joined Absa/Barclays as the Group Chief Executive in March 2009 from her previous role as Group Chief Executive of Transnet Limited. Transnet is the South African state owned freight transport and logistics service provider. Prior to that she served as the Director General  of the South African National Treasury.

 

She had no executive experience in the banking industry and led the bank through very difficult transitions first with the consolidation of all the Barclays entities in Africa into one legal South African registered group, followed by the grinding divorce of the group entity from its London based parent. At her time of joining, the marriage between the Barclays and Absa in 2005 had not been well consummated leading to two very different cultures, disparate centres of power and all the ugliness that follows what the acquiring party (Barclays) called an acquisition of 56%, while the acquired party (Absa) called it a merger of equals.

Having taken over from the very dyed-in-the-red-wool Absa stalwart Steve Booysen, one of Ms. Ramos’ first tasks was to establish a team of executives that would deliver on integrating the two entities so as to derive from the synergies that were heralded at the time of the acquisition four years earlier. She also had to navigate the minefield of a growing black management cadre following the successful implementation of Black Economic Empowerment (BEE) initiatives in a traditionally white, male dominated institution. Her negotiation skills were exemplified when Barclays PLC agreed to a billion dollar divorce settlement which is to pay for investments required in technology, rebranding and other separation related expenses.

 

The point is this, Maria Ramos remained as the head of one of the top four banks in South Africa (and quite likely Africa as a whole), for ten years not based on her banking credentials, but on her capacity to lead a very complex institution during very complex situations. So at the next board interview for a CEO, you as a director need to ask yourself whether the person seated in front of you can lead or even build a high performing team. Not whether they have the engineering credentials of the guy on the ground.

 

[email protected]

Twitter: @carolmusyoka

 

 

 

 

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Situational Leadership

Tucked into a 5 acre corner of Riverside is a first of its kind office and leisure development called 14 Riverside. Straddled to the north by the Nairobi River and to its south, the Chiromo Campus student hostels, 14 Riverside is not easy to see from Riverside Drive and many Nairobians would have struggled to place its location, or even known of its existence before 15th January 2019.

 

John (not his real name) is a CEO of a medium sized business that was based in one of the 14 Riverside buildings. Having heard the first explosion, he ran out of his office and encountered Martin, (not his real name) one of his team members who had yelled out “bomb” to all the staff in order to get their attention. Without hesitation, Martin began mobilizing staff to vacate the second floor offices through the fire exit. Speaking authoritatively and brooking no resistance, he pushed as many staff as he could out of the door, down the stairs and out through the fire exit where they ran northwards towards the emergency exit gate that the property had provided in the event of the very disaster that was now playing out. The CEO recollects that he just followed the instructions as given, without thinking twice because of the way Martin ordered all of them to leave. By the time Martin finally got down to the exit, he was unable to leave as the shooter was now in close proximity and he had to run back to the office and hide together with other staff. The good news is that they were eventually found and released unharmed later that evening.

 

As John recollected the story, he continued to marvel at how everyone submitted to Martin’s commands even though Martin was not a fire marshall or former military staff. It was simply the way he instinctively took charge and seemed to know what to do that led everyone to follow his instructions which saved lives. Martin demonstrated situational leadership at a moment when there was very little time for the organization’s leaders to think, plan or mobilize an emergency protocol. The worst situations can seemingly bring out the latent skills that lie within us.

 

The interesting thing about watching the DusitD2 attack as it unfolded on live television was that several different teams showed up, ostensibly to help immobilize the attackers and provide medical assistance to the injured. There was no panic, no scrambling about. Just methodical and controlled responses. An operational zone was established that pushed back the media away from the hot areas. The Kenya Red Cross set up their control centre from which to provide psychological assistance and tracing of missing persons. Different armed units rolled in and disappeared into what must have been a command centre somewhere within the bowels of the complex from which instructions were being given on who should go where.

 

And within 24 hours, the shooting was over. Over the following weekend, a few of the building’s tenants were allowed to go in and assess the damage. The feedback was amazing: other than damage caused by the bullets which shattered glass entry doors, most offices were left intact. No personal effects disappeared. No mass looting took place. When we were told that the area was declared a crime scene and was sealed, that is exactly what happened. The Westgate fiasco appeared to have drawn various learnings that were visibly applied. On the face of it, the emergency responses appeared to be well coordinated and singing from one command centre hymn sheet. This is particularly so since our collective national trauma following the Westgate terrorist event in September 2013 was first caused by the dastardly shooting of innocent victims followed to a large extent by the horror caused by the “guys in charge” who were supposed to be leading a rescue operation. From a recce squad that went in and pulled out in disgust following the accidental shooting caused by “friendly fire” to a troop of shopping savvy army soldiers who came out with as much gunshot residue on their fingers as they did items off the supermarket shelves.

 

To the families, friends and colleagues of those who died at 14 Riverside please accept my sincere condolences for your loss. Eternal rest grant upon them oh Lord and may perpetual light shine upon their souls.

 

[email protected]

Twitter: @carolmusyoka

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Big Bang Change Initiatives Never Work

In 1843, Daniel M’Naghten tried to kill Sir Robert Peel, England’s prime minister at the time. M’Naghten thought that Peel wanted to kill him and while trying to shoot Peel, he inadvertently shot and killed Edward Drummond who was Peel’s secretary. Medical experts at the time testified that M’Naghten was psychotic, resulting in a not guilty by reason of insanity verdict. Following the subsequent public outrage, the Lords of Justice had to define what the defense of criminal insanity was: “Insanity is a defense to criminal charges only if at the time of the committing of the act, the party accused was laboring under such a defect of reason, from a disease of the mind, as not to know the nature and quality of the act he was doing; or, if he did know it, that he did not know what he was doing was wrong.”

Last Monday December 3rd 2018, much of Nairobi was brought to a standstill by a badly executed decision to ban matatus from the central business district. I want to imagine that there was a management committee meeting to plan such gargantuan decisions. In that meeting, the chief engineer would have said something like “a matatu is X metres long and Y metres wide thus it would require Z square metres of space in a terminus. The termini that we are envisaging for these matatus has a total of Q square metres of space and therefore has the capacity to hold  a maximum of ( Q divided by Z) number of matatus at any given time.” The chief city planner would have said, “Actually to your point, we have discussed with the matatu owners association and been informed that there are a total number of R matatu saccos, a total number of  S matatu routes and a total number of T matatus. The termini that we are designating for these routes will therefore have V number of matatus designated to going through it during a 24 hour cycle.”

 

The leader of that meeting, who would be seated at the head of the table in a faux leather executive chair, would swing on his seat from side to side nodding keenly. He would then lean forward, gently placing his elbows on the buffed faux mahogany table and form his fingers into a steeple. “What are the risks we are facing here, good people? What could go wrong, if we decide to go big bang and just announce a total ban?” To which his chief of staff would have said, “Well, based on the numbers being tabled before us, it is unlikely that we can accommodate all those number of vehicles in the designated termini. I suggest we first start with a pilot route, and we undertake a phased approach by testing it on a low traffic day like a Sunday to see the vehicle movements. We can then take the next step of pushing the pilot phase into a weekday to see the real effect. I suggest we start with one Eastlands route that has got heavy matatu traffic and that terminates where there are other operational matatus that can pick up the terminating passengers to take them on to the city centre.”

The fearless leader would lean back with a thoughtful expression on his face. “You!” he would point at his finance manager. “You’re always playing the devil’s advocate at our meetings. What else are we missing here?” The finance manager would pretend to look upset when he is secretly pleased that his contrarian views have been found to be useful. “Well, if we go big bang rather than do a pilot test, how far would people have to walk? Where would they walk? Is it possible that there may be a human traffic situation that criminal elements could take advantage of? What if there isn’t enough space in the termini, would that mean that the matatus could spill over into the streets and cause a tailback leading to a massive traffic gridlock? What if…what if it rains? What would happen to commuters? How about the disabled ones or the ones who are sick?”

“Enough! I’ve heard enough. Going big bang has more risks than benefits. We have to first do a pilot to understand how this might work following which we can figure out how to mitigate the known and yet to be known risks.” The legal manager would lean back and breathe a quiet sigh of relief. This big system change that his colleagues were proposing could later be viewed through a M’Naghten lens: Did management apply reason in their decision making and, where no reason was applied, did they know that what they were doing could have catastrophic consequences? I think Nairobians now know the answer to that.

[email protected]

Twitter: @carolmusyoka

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CEO New Year Resolutions

New Year Resolutions From A Chief Executive Officer

 

I can’t believe the end of 2018 is nigh. It’s been a good year, at least far better than 2017 which I daresay we achieved budget by the grace of nothing but terrorizing staff. On my fiftieth birthday this year I promised myself that I would be more intentional about my goals so here are my 2019 resolutions.

 

Resolution 1

I will engage youthful customers. My marketing team keeps harping at me about how I am completely out of touch with that segment of our customer base. Of course I’m out of touch, those ingrates don’t have the spending power that our older customers have. Can you believe that marketing made me attend some allegedly popular Sauti something concert so that I could watch how the youth engage with products? I hated it. Loud, brash, packed like dengu in a bowl and no one seemed to have a concept of personal space. I think I prefer to observe these fellows on their social media turf. It’s more hygienic anyway.

 

Resolution 2

I will learn more about social media. My seventeen and sixteen year old daughters cannot get their noses out of their phones and burst out into laughter when I said that my Facebook account was proof that I knew social media. After threatening to cut off the wifi subscription for the house if she didn’t introduce me to what was considered cool social media, the older one showed me what I figure must be her ‘safest’ friend on Instagram. The pictures people put on their feeds or is it stories are cringeworthy. She showed me one of the feeds from the boys in her class. I need to have a long conversation with the principal of her school. How in heaven’s name can underage boys proudly post pictures of themselves smoking and drinking on a public forum? And these are the boys in class with my girls? I need to talk to my wife about home schooling. Maybe she should retire early since she’s always complaining about her job and teach our children from home. I asked daughter number two to show me her Snapchat account so I could join and learn. All I got back was a “You’ve got to be kidding me DAD, that’s gross”.

 

Resolution 3

Maybe I need to rethink resolution 2. Wife would never quit her job.

 

Resolution 4

I will have monthly meetings with my direct reports. Look I hate team meetings. All that people do in those sessions is whine about why they are not delivering on their targets. I prefer to meet my direct reports one on one so that I can really give them an unfiltered piece of my mind while in the privacy of my office. But my board chairman is getting concerned that my team seems to be disjointed and pulling in different directions based on his razor sharp observations. I think I’ll have people dial into an online conference number so we don’t all have to be in a room together at the same time and they don’t feed off of each other’s negative vibes.

 

Resolution 5

Scratch resolution 4. Who does the chairman think he is? I know how to get the best from my people and having team meetings is not the panacea. Divide and rule is how I’ve run this joint and it’s worked quite well for me since I became king of this castle.

 

Resolution 6

I need to work on my retirement plan. I need to start and finish building a house in Vipingo Ridge at the coast. I have no intention of building a house in the village, how will my peers ever get to see it unless they come there? Which we know that they will never come to that rural backwater. Vipingo has class, it has pedigree, it brings vacationers who always “ohhh and ahhh” when they see the homes there. That means that I need at least two more good bonuses. That means I need to cut off the fat found in the costs of running this place so that I can drive up the profit for the next two years. Let me look at those headcount numbers once again….

 

That’s it. No one said that they have to be ten resolutions. These will serve me just fine for now. It’s time to run this place like a boss!

 

[email protected]

Twitter: @carolmusyoka

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Gikomba on steroids Part 2

Last week I began the first of a two part series on how Gikomba market is the exemplification of Kenya’s entrepreneurial spirit. The only time the word “poverty” should be used in the same sentence as Gikomba is that there is a significant poverty of infrastructure conversely met by a wealth of gumption and fortitude within the trading community there.  After going through the furnishings section of the market, we made our way past hundreds of second hand clothing stalls to the fish market. The vehicle we were travelling in inched its way down to the fish market, with both sides of the muddy road teeming with second hand clothing stalls. Other traders, who were not fortunate to have the “formal” wood and iron sheet stalls, displayed their wares on plastic sheets by the roadside leaving only enough space for one vehicle and thousands of pedestrians to navigate their way.

 

We smelt the fish market before we saw it. Mary (not her real name) our fish trader came up to guide us to where to park. The piquant aroma of deep fried fish imbued the air as we walked to Mary’s corner. She tells us that the fish market was built in 1964 by the Nairobi City Council with only 24 stalls. Today it houses over a thousand fish traders who have occupied every single inch of space inside and outside the market. We see tilapia, nile perch and cat fish in both cooked and uncooked forms piled high on rickety wooden display frames. Fish is openly fried in deep metal karais on charcoal stoves with one trader loudly cautioning us “chunga mafuta, hapa hakuna insurance.” Once we sat down inside a stall that Mary has sub-let, she brings us up to speed on the current issues in the fish market. “I have been in the business for 17 years. It’s a good business, but in the last four years our market has been flooded by Chinese fish.” She has brought two samples of Kenyan tilapia and the Chinese variant. “You see this one?” she thrusts the darker, smaller version at our faces. “This is the Chinese tilapia. It goes for Kshs 150/- while the Kenyan one goes for Kshs 450/-. But you know what, cheap is expensive!”

 

Mary uttered a snort of derision and continued. “Tell me how my fish cannot stay more than two days without spoiling, yet the Chinese fish in the market right now comes here in boxes marked with an expiry date of 2020. What kind of  chemicals do they put in fish that makes them expire in two years?” She however recognizes that the government ban on imported fish which had been issued a few days earlier, will go a long way in restoring the Kenyan fishing industry value chain that was starting to be destroyed. Mary is rabidly nationalistic and says with the right infrastructural support, the local fish industry can cater to local demand. We attacked our lunch with much relish, washing it down with nothing but hope as it was very apparent that bathroom facilities would be an interesting experience that we were not ready to deal with.

 

From the fish market we moved to “Kachonga” an area in Shauri Moyo that is close to Gikomba. Here over six hundred wood carvers from Kenya and a few from Congo sit in iron sheet covered and wood framed stalls sculpting wood figurines for the tourist market. The same script prevails here: a poverty of infrastructure but an abundance of business zeal. We hopped, skipped and jumped around the muddy puddles, where again the traders covered their raw wood materials with plastic paper. Their cheery disposition belied their infrastructural woes but just like the Gikomba traders, the sculptors have self-organized into a trading community complete with a permanent structure of a showroom where orders can be placed. Across the markets we walked in, we saw nothing but innovation, strength of character and a doggone determination to do business under very difficult circumstances.

 

These markets are cash economies, with the whole working capital cycle represented there. Raw material suppliers, value addition conversion into manufactured goods and then the ultimate customers all in one region. It is an area ripe for trade finance innovation from the financial sector that has traditionally looked at more formally structured businesses that operate within concrete walls and tiled roofs. But all that would need to be backstopped by infrastructural support from the county government that would enable the traders to house their wares securely, operate in a sanitary environment and permit delivery of goods and services (including fire engines for the now ubiquitous Gikomba fires) via an all-weather road network. Creating such a conducive environment ultimately yields the added benefits of an attractive wider taxation bracket.

 

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Twitter: @carolmusyoka

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Gikomba on Steroids

Lying due east of Nairobi’s central business district is the vibrant Gikomba market, fondly referred to by Nairobi’s urban youth as G-Mall. On Google maps it is an amorphously shaped region with a distinct southern boundary buttressed by the Nairobi River that weaves sluggishly past what is described as East Africa’s largest open air market. Google also provides interesting insights about this marketplace. Peak shopping times are from 11 am to 3 pm and people spend between 45 minutes to two hours there. An old friend and unrelenting champion for Kenyan small and medium sized entrepreneurs invited me to join her for a visit to Gikomba last week. The last time I had visited Gikomba was when I was a student at University of Nairobi, and we would go there to shop for second hand clothes.

 

Not much has changed in the last 20 years. Gikomba is a kaleidoscope of smells, textures, indoor and outdoor retail experiences and thousands of people jostling for space. Traders have self-organized themselves into the raw material section for wood, upholstery for furniture, finished furnishings, fish and vegetables, clothing, hardware, you name it, they’ve got it. Sort of like a Nakumatt on raw but incredible steroids. Our first pit stop was at the timber section. To get there we had to weave through a narrow alleyway in between buildings, dodging men carrying plywood sheets on their shoulders as they hissed to clear the pathway ahead of them.

 

There were lots of young men who seemingly idled to the side, but who I later came to discover are a key cog in the selling protocol of the timber section. These young men are brokers who “bring” customers to the timber traders and are rewarded Kshs 3/- per foot of timber that is sold to the converted customers. I asked one of the traders where they were sourcing wood from in light of the logging ban. He shrugged his shoulders and said Malawi, Congo and South Sudan. Business, just like nature, abhors a vacuum.

 

It had rained the night before, so we gingerly made our way through the muddy paths in between the timber sheds as bits of flying wood chips from lathing and planing machines filled the air and our faces. Every inch of space is covered by exposed towers of timber or upholstery sponge stocks. I’m told that the exposure to rain makes the sponges get wet and moldy and, since they are eventually covered by upholstery, buyers of furniture would never know that their couches contain potentially harmful agents. When family members are perpetually sick it is difficult to pinpoint that the problematic source actually stems from the furniture.

 

Eventually we got to a group of timber selling sheds that are on a sliver of land between commercial buildings and the Nairobi River. There is space wide enough for a single motor vehicle to slither through as the mud roads are slick with the previous night’s precipitation. Njuguna is the seasoned trader who blandly answers our questions about the area, as my colleague purchases wood. He points to the building under construction directly opposite us. “That is the result of the last fire that happened in Gikomba. The shops downstairs caught fire and the people in the flats above died from the toxic fumes that resulted as the stocks burnt. Those people were not burnt to death. They died from smoke inhalation.” It is easy to see why fire engines could never and will never get through to stave off fire emergencies. There are simply no paved roads. He points to the next building where the third and fourth floor are blackened with soot and covered with mabati sheets. The lower floors are still occupied. “That is where we buy electricity for our machines.”

 

Njuguna has a machine “ ya kupiga randa” which in plain English is for smoothening the timber planks using an electric plane. He pays Kshs 500/- daily to the building owner who has installed a genuine electricity meter in Njuguna’s shed to measure the daily usage. This scene is replicated down the entire street. Building owners who double up as electricity distributors because business, just like nature, abhors a vacuum.

 

The pulsating business environment that is Gikomba market is a cash economy that turns over hundreds of millions of shillings daily. Business thrives in spite of lack of infrastructural support such as roads, public toilets or permanent sheds to cover traders and their wares as well as. You cannot refer to SMEs in Kenya without picturing a Gikomba trader whose resilience and determination to thrive under incredibly difficult circumstances is unfathomable. Next week I will cover our tour of the fish market and “Kachonga” the home of Nairobi’s wood sculptors.

 

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Twitter: @carolmusyoka

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Artificial Intelligence In The Boardroom

“Algorithm appointed board director” was the title of an article on the BBC News website on 16th May 2014.  “Artificial intelligence gets a seat in the boardroom” was a similar headline three years later on 17th May 2017 on the Nikkei Asian Review news website. Both articles were referring to a computer algorithm called Vital that had been “appointed” to the board of directors of a Hong Kong venture capital firm known as Deep Knowledge Ventures. Citing the Nikkei Asian Review article, “Dmitry Kaminskiy, managing partner of Deep Knowledge Ventures (DKV), believes that the fund would have gone under without Vital because it would have invested in “overhyped projects.” Vital helped the board to make more logical decisions, he said.”

 

By using an algorithm that could sift through masses of data on past investments, the company was able to narrow down on what the least risky investments were in the biotech space that they were playing in. The article continues, “DKV started as a traditional biotechnology fund, with a team of advisers and analysts using traditional methods for trend analysis and due diligence. But the biotech sector has a very high failure rate, with around 96% of drugs not successfully completing clinical trials. DKV then acquired a team of specialists in the analysis of big data – large data sets that can be analyzed by computers to reveal patterns. The team created Vital, the first artificial intelligence system for biotech investment analysis, enabling the fund to identify more than 50 parameters that were critical for assessing risk factors. Kaminsky said: ‘ As we analyzed more and more companies, we were failing to identify those patterns and factors that made a company likely to achieve success. But surprisingly, as we began to analyze thousands of companies, we discovered certain parameters that were good at predicting the risk of failure.’ ”

 

The primary role of a director is twofold: a monitoring and oversight role of past decisions made by management and a forward looking role to oversee formation and execution of strategy. In the DKV example cited above, the role of the algorithm was to help the venture capital board make the right investment decisions. Using big data, the algorithm was able to narrow down which specific drug research areas were yielding better outcomes and provided support to the board on which drug companies to invest in.

 

How could this translate to other non-investing type of companies? It is easy to draw a parallel to the banking industry for example where bank boards have to review and approve lending decisions based on analysis that has been done by a credit manager. While smaller loans have already moved to algorithm based decision making (Mshwari is a good example), the bigger and more complex loans still require human analysis largely due to a poor use of big data within the banking industry. Not sharing historical lending data, which can be easily done on a no-name basis to protect client confidentiality, prevents the banking industry from building a critical database that can be used to provide granular risk patterns for different market and industry segments.

 

While it can be argued that the information is being shared at a credit reference bureau level, what remains to be seen is how this information can be consolidated, analyzed and churned back to the banks to use for determination of probability of repayment. But credit risk analysis which is largely technical, is mainly a management undertaking, and brought to the board for approval. Having AI sort out that decision at management level would significantly reduce the work of the credit committee of the board. One can further argue that AI can also review the entire lending book of the bank, assess the current and potential portfolio at risk, and determine what amount of provisioning is required, as is currently demanded by the new international accounting standards. Which would then eliminate the need for numerous risk analysts within bank management.

 

AI could also potentially review the financial reports produced by management (if not produce the reports themselves) for accuracy. We could go very far with this argument, which is that if machines are able to do a lot more of the monitoring role that management undertakes and reports to the bank’s board, then technically, a lot of the work of the bank board can be reduced to oversight on the formulation and execution of strategy and the more human role of oversight of  key stakeholder engagement such as employees, customers and regulators. The DKV example is really a hyped version of a management decision making tool that is being elevated to board use. But it does spur some thinking for both directors and management on how daily operating decisions can be moved to more accurate algorithm driven processes.

 

[email protected]

Twitter: @carolmusyoka

 

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The Ugly Side of Disruption

Towards the tail end of June 2018 I took a Taxify cab to Jomo Kenyatta International Airport and the driver mentioned that he was working undercover as there was a prevailing strike, yet again, by drivers of both Uber and Taxify. The strike had arisen due to alleged poor pricing policies between the ride hailing tech companies and the drivers who delivered the tech company product while carrying the financial and operational risks.  “So why are you striking again,” I asked the driver. He told me that the last strike had ended up with a memorandum of understanding (MoU) being made between government officials, the ride hailing companies and the union of the cab owners. The aim was that a framework would be designed that captured what the official per kilometer charge was, which would be used as a benchmark for pricing across the ride hailing companies. This would then provide a transparent mechanism for determining how to share out the deep discounts that the ride hailing companies were giving to customers which were allegedly being borne by the drivers whose costs remained flat regardless of any discounts being given. The MoU had never made it to the light of day.

 

If you were tracking the news at that time in June 2018, you’d have read that Taxify and Uber non striking drivers were being stopped, passengers violently being pulled out and, in some extreme cases, oil was being thrown into the vehicle’s interiors to make further use impossible. The irony of the violence was lost on the cab drivers who, in February 2016, were having their own vehicles burnt by the mainstream taxi drivers that had been disrupted by the active take up of Uber by customers, relieved to be paying half the prices and getting a convenient service at the click of a button. The disruptors had met ugly and violent resistance from the disrupted and were now turning that violence onto themselves.

Anyway, I boarded a flight to Johannesburg and went straight to my hotel. The next morning, I called an Uber cab to pick me up from my hotel in the Sandton area. The driver showed up, and promptly asked me to put my bags in the boot of the car and to sit in the front passenger seat. Why, I asked. “Uber and Taxify drivers are on strike. I am not supposed to be picking up any passengers.” Now my full Kenyan-ness checked in. What if we got stopped and I got pulled out? What would happen to my laptop? Had I backed up my data? We were headed to Maboneng Precinct in downtown Johannesburg’s central business district (CBD) and that, I can assure you, is not a visit to the Vatican City. Owethu the driver watched all these questions play out in my mind and gently guided me into the car. “Madam, don’t worry, my car is a Kia Sorento. Uber cars are usually Toyotas. You will just look like my wife,” he chuckled and shut the door.

 

He then called a colleague to ask what the situation was in the CBD. It was safe for now was the terse response, all that the striking drivers were doing was to lean into the cars of offending drivers and grab their phones with the ride hailing app. No passengers were being attacked. Owethu removed the phone with the app from its dashboard holder and slipped it into his pocket while I slipped my passport and credit card wallet into my back pocket as each of us concealed our critical items.

 

We made it to our destination safely but it became manifestly clear that the problem I had left in Kenya was not an isolated problem. It appeared that the ride hailing companies had a different penetration strategy for Africa which did not prioritize partnering with their drivers. What was also manifestly clear is that technology now permitted the communication of mass action across borders. The drivers in Nairobi and Johannesburg were striking simultaneously for the exact same reason: a better share of the proceeds from each trip and upfront engagement regarding discounts and incentives given to customers but whose impact was solely borne by the drivers. The exploitative nature of the ride hailing product is the ugly side of the disruptive technology. As I heard someone mention recently, the aim of this technology was never to grow wealth for the drivers but was to lay the foundation for an eventual driverless ride hailing experience. If this theory is true, then the African market requires some deeper strategic thinking. The disruptors are willing to fight for their rights. Sadly, the customer at the end of the day will become the victim of these wars either via higher prices or simply no ride hailing services at all.

 

[email protected]

Twitter: @carolmusyoka

 

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An Untidy Attempt to Recover Lost Funds

While the wailing and gnashing of teeth that followed the signing of the Finance Bill 2018 into law was going on, another little jab was punched at the banking industry. Our collective national attention was drawn to the brouhaha around the 16% VAT on fuel products and its detrimental effects on the cost of living but tucked away in the Finance Act, was a tiny little section that made changes to Section 31 of the Banking Act. Section 31 generally falls under the part of the Banking Act that relates to information and reporting requirements. The amendment, numbered Section 31A (1), reads, “a bank or financial institution licensed under this Act shall, in respect of all accounts operated at the institution, maintain a register containing particulars of the next of kin of all customers operating such accounts and shall update this register on an annual basis.”

 

So what was the mischief that the parliamentarians were trying to cure when they had that clause inserted? The Unclaimed Financial Assets (UFA) Act that created the Unclaimed Financial Assets Authority (UFAA) has created a cash rich institution that maintains billions of shillings in unclaimed liquid assets that arise from abandoned bank and SACCO deposits, insurance funds, mobile money funds, listed company shares and unclaimed dividends to name a few. In their fairly transparent and data rich website, the UFAA has published its past financial statements and I pulled up the most recent publication which is for the financial year ending June 2017. As at that date, the Authority held in its own name Kshs 8.5 billion in assets received from banks, Saccos, insurance companies etc. and held in trust listed shares valued at Kshs 16.4 billion following notification from other holders such as listed companies. The shares were being held in trust pending transfer of title to the Authority.

 

The UFA Act is an easy to read piece of legislation that is duly prescriptive on when a presumption of asset abandonment occurs. In the case of bank accounts, there is a presumption that the owner of the account has “abandoned” the funds if there has been no communication from the account holder in five years. The assumption being made by this amendment is that requiring banks to keep a record of next of kin will trigger an alert to the next of kin about dormant funds lying in a bank account, which might prevent them being swept into UFAA.

 

Folks, banks are bound by the common law principles of confidentiality as well as statutory requirements relating to non-disclosure of information in the same part of the Banking Act that they are trying to amend. Further north of the newly inserted section lies its cousin Section 31 (2) of the Banking Act which clearly states, inter alia, that “except as provided in this Act, no person shall disclose or publish any information which comes into his possession as a result of the performance of his duties or responsibilities under this Act and, if he does so he shall be deemed to have contravened the provisions of this Act”. The Act later provides exceptions to the rule, which include provision of information to the Central Bank, to credit reference bureaus, to the Kenya Deposit Insurance Corporation , fiscal and tax agencies, fraud investigative agencies and generally any entity whose business it is to have critical information about an account holder. At no point are next of kin (and that word in Kenya is often used quite loosely) envisaged as being of statutory importance for the breach of confidentiality rule to apply.

 

 

So here is why there are two fatal flaws in the drafting of the next of kin rule. Firstly, it is virtually impossible to hand over to any Johnny-and Janey-come-lately funds held in a bank account outside the context of a succession framework. The law of succession assumes such funds to be part of the deceased’s estate and can only be distributed within a testate or intestate framework. Secondly, as earlier stated, both common law principles as well as express legislation require banks to maintain confidentiality of their clients, which requirement is presumed, by common law, to extend beyond the death of the client and is therefore not extinguished by their untimely demise.

 

The upshot? You the owner of a bank account in Kenya will now be bombarded by your bank every year from here on to provide details of your next of kin because if you don’t, your bank is liable to pay Kshs 1 million in fines for default for each account. And did you notice that the wording of the law did not differentiate between individual and business customers? Just grin and bear it. As we’ve been conditioned to say in this beloved country: bora uhai!

 

carol.musyoka@gmail .com

 

Twitter: @carolmusyoka

 

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Voting is the easy way out of consensus building

Democracy is two wolves and a lamb voting on what to have for lunch. Benjamin Franklin (1706-1790) American Statesman.

 

Being a board chairperson is hard. One has to pay rapt attention throughout the meeting rather than zone in and out mentally as some directors are wont to do. One has to speak last so as not to influence the discussions. One has to read the board pack thoroughly and discuss the agenda beforehand with the chief executive officer (CEO) and the company secretary to ensure that there is an understanding of what the desired meeting outcomes are. One has to have quiet but courageous conversations with errant directors or worse, an errant CEO. But what has to be one of the hardest roles of the chairperson is to facilitate board meetings adroitly, allowing everyone to be heard while keeping control of time and most importantly summarizing views from around the table to arrive at a cogent and cohesive outcome where decisions have to be made following extensive debate.

 

Emotional intelligence is a critical if not imperative skill for any chairperson. The chairperson has to be fully aware of the dynamics in the board room, the various motives driving director views and navigate potential minefields skillfully so as not to appear partisan. Such non-partisanship is often demonstrated by allowing all sides of a debate to be heard and to steer the group towards consensus. That’s much easier said than done. In an article from the American facilitation firm Leadership Strategies who have worked with hundreds of groups, group disagreements can be categorized into three.

 

The first type of  disagreement is where the protagonists have not clearly heard and understood the other’s alternative and reasons for supporting the alternative. They call this Level 1: They are not hearing each other. The second type of disagreement is where they have heard and understood, but they have had different experiences or hold different values that result in preferring one alternative to the other. This is Level 2: They have different values or experiences. The last type is where the disagreement is based on personality, past history with one another or other factors that have nothing to do with the alternatives. This is Level 3: Outside factors.

 

While the other directors might bury their noses in their smartphones during a heated debate, or just look longingly outside the window praying that this meeting can come to a glorious end before the dastardly traffic starts to build up, the chairperson has to determine in an internal dialogue with themselves whether this debate is one that can be concluded during the meeting.

 

Are the protagonists debating due to Level 1 or Level 2 differences or is there a deeper manifestation of an external and unrelated fight that is inadvertently playing out in this boardroom? Is a consensus even possible on this side of the moving sun? Three options are available at this anxious point: try and build consensus (highly unlikely if it’s a Level 3 disagreement), bring the matter to a vote (highly divisive) or postpone the matter to a yet to be determined point in the future.

 

If you have had the pleasure of watching seasoned chairpersons in action, option two which is to bring the matter to a vote is rarely, if ever, used. When a matter is brought to a vote, the issue essentially introducers winners and losers. While the minority opinion may have been aired, reducing the matter to a vote leaves that opinion nakedly hanging in the air, exposed and unrequited. It does not foster future unanimity of purpose which is critical for functional board effectiveness. It should therefore be used extremely cautiously, where the chairperson has exhausted all efforts to try and build consensus amongst the protagonists and the urgency of the matter at hand means that the decision cannot be postponed.

 

Option three, to postpone the decision, is used by sagacious chairpersons. They can detect that the hardness of position by the protagonists, despite the clear evidence of a potential consensus, is likely underpinned by external factors. They use the time to understand what the underlying issue driving those external factors is, and broker a handshake in private for purposes of the decision that needs to be made. This is paramount for board effectiveness as it ensures that all parties concerned are now alive to the differences and the chairperson and CEO are aware of how future disputes should be addressed before they flare up in the board room. Voting, to paraphrase Benjamin Franklin, leaves the minority akin to being the majority’s lunch. In a board room, it should therefore rarely be used.

 

Carol.musyoka@gmail

Twitter: @carolmusyoka

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Budgeting for Dummies

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

 

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

 

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

 

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

 

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

 

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

 

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

 

[email protected]

 

Twitter: @carolmusyoka

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Emancipating Yourself from Mental Slavery

While working with a group of bank executives in Johannesburg recently on the now ubiquitous topic of leading change in dynamic institutions, Sihle Shabalala was brought in as the keynote speaker. Sihle is a former member of one of South Africa’s notorious criminal gangs the 26s. He got into the criminal life early, and in his own words lived the life of luxury with cars, apartments and good times. Criminal life is a business enterprise like any other, he told us. He explained criminal risk analysis 101: “When you put a grills on your window, all I have to do is figure out how long it will take to cut them,” he mused. “I viewed that as a hurdle which simply required innovation to overcome. So if you decide to enhance your security by signing up for an armed patrol, I would research by observing how often the patrol van would cruise near the home during its patrol rounds and how many minutes it would take for the van to respond to an alarm. If it takes five minutes to respond, then I knew I only had four minutes to accomplish my task.”

Now you must understand how incongruous the scene was. Sihle standing up front at a luxurious hotel, with a head set microphone, dressed in a slim fitting navy blue designer suit, with a tan leather belt accentuated by matching tan leather shoes and casually talking about the thought process behind breaking into a robbery target. Having started early at the age of 19, he gradually innovated his model into business robberies and cash-in-transit heists: higher risks yielded higher returns. On the proverbial fortieth day of his criminal cycle, he was arrested and sentenced to serve eleven years at a maximum security prison.

“It was nicknamed Afghanistan,” he chuckled, “because no one wanted to serve there, even the prison guards.” But incarceration could not kill his entrepreneurial spirit so he became a key supplier of marijuana within a maximum security geographical market and he was therefore flush with currency. Incarceration also gave him a lot of time to read and think and a quote from a book triggered a process of blue sky thinking: “If you’re looking for a miracle in life and can’t find it, then be that miracle for others.”

There’s not enough space in this column to cover all that he said, but when he was released on parole in 2013, he gathered funds from relatives and bought himself a second hand laptop. The only place with free wifi was the central business district of Johannesburg, so he went and sat in a corner to download self-teaching materials on software coding. He taught himself three coding languages in six weeks and set up a business called Quirky Innovations. He now runs a program in South African prisons in the Western Cape teaching male and female prisoners how to code, and told us that he is a brand ambassador for consumer brands such as Red Bull, Levi Strauss clothing and has been a model for Samsung products in South Africa. He is also a sought after speaker globally including being a TEDx speaker. “People have told me, ehh Sihle, a criminal cannot get a visa. But what is that? I have given talks in Singapore, Sao Paulo in Brazil, Dubai and tonight I’m going to Paris!” The audience were blown away. Here was an entrepreneur who spoke about operational risk assessment, managing cash flows, supply chain management and, most importantly, innovation being the pivot for the success of a business enterprise. While Sihle had used all these parameters in criminal enterprise he had consciously made a change to use the same skills in growing his personal dream to change the lives of poor kids in the townships and prisoners. “I teach the kids to think in 3D,” he said before turning to a flip chart to write “Dream Different Dreams” in large letters. The biggest challenge Sihle left the audience with was that driving change in any way – personal or business – was an individual, mental decision. What drove him to change was an awakening that he now uses as his personal rallying call: “I can be incarcerated physically, but my mental revolution is not.”

I walked away from that session with strains of Bob Marley’s Redemption Song playing in my mind: “Emancipate yourselves from mental slavery, none but ourselves can free our minds.”

[email protected]

Twitter: @carolmusyoka

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Facts versus Emotion Where Interest Rates Are Discussed

A fact is a piece of data subject to objective, independent and sometimes scientific verification. For example, the geographical coordinates for the house of Kenya’s Parliament are 1°17′24″S 36°49′12″E. That is a fact. The Banking Amendment Act (2016), better known as the interest rate capping law, that Parliament passed has been fairly ineffective. That is a feeling, my feeling to be precise. Furthermore, what characterized its drafting, accelerated legislative approval and subsequent conversion into law in August 2016 was largely based on feelings.

Last month, the Central Bank Governor, Dr. Patrick Njoroge, appeared before the Finance, Planning and Trade Committee of Parliament where the subject of the proposed repeal of the interest rates capping law came up. The feedback from members of the Committee was as expected. Beginning with the originator of the law, Mr. Jude Njomo, the media quoted him as saying, “We know banks are not lending to SMEs because that is what they promised to do when we were enacting the law. They are now working as cartels on that promise as they did with high interest rates.” (Feelings!)

Mr Njomo breathlessly continued according to the same media reports – words in parentheses are mine for emphasis: “According to our Constitution, Central Bank Governor and Treasury have no power or mandate to amend laws. (Major Fact!) That is the prerogative of parliamentarians and therefore, the rest who are speaking (on the repeal), are just making noises that will change nothing.” (Major Feelings!)

The intersection between facts and feelings makes the difference between a good piece of legislation that is informed by and designed with credible data at hand and a bad one that is informed by and designed with peurile emotional reaction. Treating feelings as facts, which underpin the creation of legislation that has a far reaching macro-economic impact, is fraught with danger. In March 2018, the Central Bank of Kenya (CBK) launched a report titled “The Impact of Interest Rate Capping on the Kenyan Economy”. The 37-page draft report is a must read for anyone interested in the back story of how the banks have been enjoying a fairly good performance run and is replete with tables and graphs demonstrating data over the last five years on bank interest rate spreads, return on assets and return on equity with a comparison to other countries’ experiences. (A whole bunch of facts!)

The first part of the report does a good job of laying the groundwork to demonstrate that indeed the banks did need to have a courageous conversation with an accountability partner about the relatively generous returns they were enjoying compared to their African and global peers. The second part of the report goes into more detailed facts about the actual impact of interest rate controls in multiple jurisdictions and then provides empirical evidence from a number of surveys done in Kenya on the tightening credit standards in banks and subsequent shrinking of credit extension to borrowers.

Of great concern however, is that in playing its role as a creator of legislation, Parliament has inadvertently usurped the role of CBK as the body charged with formulation and implementation of monetary policy in Kenya. The interest rate capping law directed that the Central Bank Rate (CBR) be the index against which deposits and loans are priced. The CBR is a monetary policy tool used to increase or decrease demand in the economy; a lower rate means it wants to stimulate the economy by lowering prices while a higher rate means it wants reduced lending through higher prices, perhaps due to high inflation and an overheating economy. Monetary policy tools help to drive demand but do not drive supply which is what the interest capping law is trying to achieve dually.
By tying CBR to the lending and deposit rates, Parliament has tied CBK into a veritable knot. If it raises the CBR so that the pricing can get to a level that allows banks to price for the credit risk appropriately, it impacts on the overall monetary policy by raising prices upwards. If it lowers the CBR to jumpstart the economy through signaling lower rates it simply tightens the credit market even further as banks are even more constrained to provide the appropriate cover for the credit risk.
The moral of this story is that while legislative drafting for any economic matters may be motivated by feelings, they must be informed by reams of fact. After all, fact and feelings are like oil and water; they don’t mix too well.
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The Silent Noise of Non Verbal Cues

About nine years ago when I was just starting out as a rookie in the consulting world, I teamed up with a senior consultant to submit a proposal to a mid-sized banking industry client. We were warmly met by the CEO in his office, where he poured each of us pretty decent coffee out of a French press into dainty cups. Once the small talk was over, my senior colleague handed over the proposal which the CEO opened with much flourish. His eyes slightly watered and his shoulders sagged imperceptibly all of which was noticed by my colleague. I, quite frankly, was still marveling at the piquant tones of the French pressed coffee that I was slowly sipping. We chitchatted and concluded the meeting with a promise from the CEO that he would get back to us.

I left the meeting with the presumption that we had the deal in the bag. My senior brought my pipe dreams to a resounding halt by the time the lift hit the ground floor. She described the CEO’s body language which belied the bonhomie that he displayed towards the tail end of the meeting. She was absolutely right. We never heard from him again.

Last week I sat through an interesting executive coaching training session. We undertook some practical exercises and the facilitator brought my own body language to my attention. I had started off my crossing my arms across my chest which is often perceived as a closed and defensive posture in a two person conversation. I was fairly ticked off with myself as I have often called out other people in sessions that I myself have facilitated for doing the exact same thing. But because I was self-conscious and slightly nervous about the exercise we were doing, I unconsciously reacted in a self-preservative manner. The CEO episode and my senior colleague’s instincts were my first true lessons about the subtle power of non-verbal cues in interpersonal encounters. So I learnt to spend less time savoring the coffee more time observing people during meetings which has helped me tremendously in determining if a meeting is making progress or not.

For instance, two colleagues that I have had to interact with in the past will only engage on business matters if I make my pitch within the first two minutes of the conversation. Strangely enough the two, who are completely unrelated but work in the same organization, cannot get past minute three without their eyes glazing over and their mind wandering elsewhere. Now you must understand, I am not there to ask for money or for a business deal. I’m there to discuss an issue in their respective organization that I am trying to sort it on their behalf. It was fairly disconcerting in the beginning as I would end up feeling frustrated and helpless as I nattered on ceaselessly (where ceaselessly would be about five interminable minutes) to an unresponsive counterpart. The options at the beginning were two: adopt the classic Kenyan passive aggressive behavior and simply stop talking mid-sentence or take the more dramatic approach which would be to snap my fingers in front of their faces and demand to be listened to.

But I had to take a step back and ask myself why these two fairly senior fellows both exhibited the same tendencies. Was it something about the organization’s strategic importance that ensured their minds were constantly whirring with activity which precluded their ability to concentrate on anything non-strategic? Their non-verbal cues were as loud as two clashing cymbals in a marching band. My solution to the problem was to speak rapidly in one minute and follow the opening line with a series of questions that start with “What do you think about….?” aimed at eliciting a response and hopefully a resolution within five minutes of the precious time I was being unconsciously allocated.
Non-verbal cues are an integral part of most interpersonal encounters and their recognition is a critical requirement in the emotional intelligence toolkit for team leaders. They often indicate the tone of a meeting and whether a positive outcome has been achieved consensually, rather than one party leaving a meeting feeling that he has achieved what is, in reality, a hollow victory.

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CMA throws down the gauntlet

The 1969 Wild West movie Butch Cassidy and the Sundance Kid, provides classic entertainment as two endearing villains (and one inevitable female lover sidekick) perform numerous robberies, evade the rigorous arm of the law and eventually expire in an ignominious Bolivian conclusion. On Wednesday last week, the Capital Markets Authority published a press release of significant import to the East African corporate governance landscape. “The Board of the Capital Markets Authority (CMA) has taken administrative action against the NBK Board members and former senior managers who served at the bank as at December 31st 2015 for the alleged misrepresentation of financial statements and embezzlement of funds at NBK. The Authority has also recommended to the Office of the Director of Public Prosecutions, the prosecution of some of the senior managers and further criminal investigations of additional individuals.”

A number of erstwhile senior executives was named and shamed, including the former Managing Director, former Chief Finance Officer, former Chief Credit Officer, former head of Treasury, former Director of Corporate and Institutional Banking and one former Relationship Manager in Business Banking. Pretty much half of the bank’s C-Suite was fingered in the financial scandal. The CMA action came as a result of whistle blower information which led the regulator to conduct an inquiry into the affairs of the Bank that led to the commencement of the published enforcement proceedings.

The Capital Markets Authority Code of Corporate Governance Practices for Issuers of Securities to the Public 2015 is a mouthful of a name for a regulatory framework that guides listed companies and issuers of financial instruments to the public. The code mentions the word “whistleblower” three times, addressing it through guidelines and recommendations to boards to ensure that they put into place whistleblowing mechanisms and policies and disclose the same on the company website. In the course of my corporate governance work, I do note that many directors pay fleeting attention to this critical aspect of board supervision. Well the CMA cottoned onto the lackadaisical approach to whistleblowing procedures by boards of regulated companies and put its own whistleblowing mechanism in place.

Last week’s press release finished off on that very note: “Appreciating the critical role which can be played by whistleblowers in drawing attention to areas of irregular, illegal or unethical conduct, the Authority will continue to explore appropriate measures to encourage persons aware of such matters to make reports. The Authority continues to maintain an anonymous whistleblower portal, easily accessible through its website through which tip-offs and reports can be made.”

The NBK scenario is a quintessential case of multiple regulatory intervention. The bank is under the heavy regulation and supervision of the Central Bank of Kenya and was in breach of its statutory total capital to total risk weighted assets ratio by December 2015 when it posted a ratio of 14% against the statutory requirement of 14.5%. The banking supervision unit was clearly paying attention by this time as their own investigations then yielded criminal proceedings against the Chief Financial Officer, Chris Kisire and the acting Chief Financial Officer Wycliff Kivunira which were reported in the Daily Nation’s May 25th 2017 edition. The two were charged with abuse of office for fraudulent procurement practices at the bank.

By dint of this action, the CMA has provided additional support to the CBK’s banking supervision unit by investigating management’s financial malfeasance and poor board oversight over the financial statements. It also should give significant pause for reflection for directors of banks that are also listed on the Nairobi Securities Exchange (NSE) as to the multiple jurisdictional ambit that the companies they sit on endure.

The notable lesson here for directors of companies listed on the NSE, as well as those that issue financial instruments that require to be licenced by the CMA is this: If you don’t provide an independent whistle blowing system that should ideally feed into the audit committee, the regulator is already happily doing that job for you. Independent whistle blowing providers are readily available to provide this critical service. Consequently, board members have to be ready to deal with the outcomes of what might come out of this process; friendly management might end up being Butch Cassidy and the Sundance Kid(s) in disguise.

Next week I will focus on the retributions that have been made on the NBK management and directors and why this should make any sitting director of a listed company think about taking their CEO for a long, long lunch to have a courageous conversation.

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Magic and Miserable Moments

I promised my long suffering copy editor that I would submit a piece for Easter Monday given my regrettable absence last week. I was therefore writing today’s piece on the fly as I’m packing to take a quick Easter break and chose to borrow slightly from a piece I wrote 9 years ago about magic and miserable customer service moments. Many years ago, I walked into a supermarket in Johannesburg’s Rosebank Mall, and arrived at the till at 5:45 pm with less than five items in my shopping basket. The shop was due to close in fifteen minutes. The cashier mumbled something unintelligible to me, to which I responded “Pardon?”
Realizing that I was not a local South African, she repeated her sentence in stilted English, “Why you give me work to do, when you see it is time for closing, neh?” Following which, she reluctantly processed my five items, all the while clicking her tongue and muttering under breath words which I’m sure would turn my grey hairs blonde had I understood them. Until today, I’m not sure what surprised me more: the fact that she was unwilling to work 15 minutes BEFORE the shop was due to close or the fact that she actually articulated her displeasure specifically to me. Miserable moment! Closer to home in the same year, I was doing an inordinate amount of shopping in a leading supermarket in Kenya and my trolley was filled to the brim. The mere thought of parking it aside and walking several aisles back to get a new trolley was enough to make me try and pack the overflowing items in a smarter manner. One of the shop attendants suddenly appeared out of the blue with an empty trolley which he rolled to my side. He promptly took my heaving trolley and told me that he would place it next to the cashier counters where I would find it when I had completed my shopping. Magic moment!
Two years later, I went to the competitor of that leading supermarket. I was about 7 months pregnant and wanted help to get something off the top shelf that was slightly out of reach. So I pulled my “pregnancy privilege” card and stood there, arms akimbo, legs slightly parted while looking totally helpless. [In case you don’t know it, the pregnancy privilege card helps one get away with cutting long queues on election day, being allowed to use the business class toilet on a flight with a packed economy class or getting a seat in a standing room only event. It is a card I, and many of my female gestating colleagues, have used with ruthless abandon!] I stood. I stood some more. I stood for about 5 minutes, but in Greenwich Mean-Pregnancy Time it seems more like an interminable 30 minutes. Absolutely no one came. I then realized that Kenyan supermarket number one had ensured that each aisle in the supermarket had an aisle attendant. Someone who made sure that the shelves were constantly stocked, that any items picked were quickly replaced with items from the back, and that customers would have someone to refer to in case of any peculiar questions like “where can I find that orange black thingy that nani was using on TV to do nini?”

It had never crossed my mind that Kenya’s leading supermarket at the time ensured that most customer touch points consisted of magic moments. Meanwhile back at the competitor of the leading supermarket, a random staff member was three aisles down where I had waddled my way to and found him in a deep conversation on his mobile phone. I gesticulated the universal sign language for “I need help” which is something along the lines of a raised eyebrow and simultaneous shoulder roll with outstretched palms. He continued talking on the phone. I waddled slowly back to my trolley and gazed thoughtfully at the contents. I walked away from that miserable moment and from that miserable supermarket. Unsurprisingly, it is currently swimming in a cesspit of financial doldrums. The attitude of that aisle attendant was a natural reflection of the abject indifference the leadership had to the customer experience and to longevity of the brand. The retail industry is one of the key champions of mystery shopping. Getting an independent person to pose as a genuine customer and get a real feel of what customers go through is a very useful exercise in determining whether you are providing magic or miserable moments. Your wayward staff will never tell or show you the truth. Only your customers will. Happy Easter!

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Banks do not sabotage economies

A man and his wife owned a very special goose. Every day the goose would lay a golden egg, which made the couple very rich.”Just think,” said the man’s wife, “If we could have all the golden eggs that are inside the goose, we could be richer much faster.”So, the couple killed the goose and cut her open, only to find that she was just like every other goose. She had no golden eggs inside of her at all, and they had no more golden eggs.
The Sunday Nation on March 4th 2018 published an article titled “New credit law to help small firms”. The article featured a debatable quote from the Member of Parliament for Kiambu constituency Mr Jude Njomo who shot to the national limelight with his successful Banking Act (Amendment) Bill 2015 that capped interest rates for Kenyan banks.Close to a year and a half later, with credit in the economy at an all time low and a significant drop in the profitability of the entire banking sector, Jude Njomo was quoted as saying,“The credit squeeze to SMEs is a deliberate effort by commercial banks to sabotage the economy so that the government may influence Parliament to remove the interest rate caps.”

Parliament was about as smug as a bug in a rug when they passed the interest rate capping law. The collective view was that banks needed to be taught a lesson and to be dictated to on how to do business. However, the reverse happened. Banks simply stopped lending as it was not worth the risk and the funds that were meant to fuel the economy through lending for working capital and capital expenditure simply moved to the safest borrower of all mankind: the sovereign.

Mr. Jude Njomo and his legislative colleagues need to be disabused of one notion: You cannot juxtapose the word “banks” to the words “sabotage the economy” and expect a logical outcome. If anything, that is a fairly fallacious theory. It is about as oxymoronic as placing the words “parliament” next to the words “bans salary increases for lawmakers”. The two concepts are mutually dependent. Banks need a thriving economy to ensure that there is credit uptake and that those credit facilities are repaid which obviously leads to profitable business. Parliament need never set a ban for legislator salary increases because…well you can fill in the blanks yourself on that one. Aesop’s fable above summarizes it well, one does not kill the goose that lays the golden egg.

Credit is the lifeblood of any economy. Banks take in deposits and use the same to lend out to various sectors based on how much of their own capital they have in the business, what is termed as risk based capital allocation. Lending to the sovereign via treasury bills and bonds consumes minimal capital while lending to Tom, Dick and Harry consumes maximum capital. As banks by nature of regulatory rigour require a lot of capital, their shareholders will demand a significant return on that capital and lending to the ordinary mwananchi is the surest way of sweating that capital more efficiently. In a speech to the Kenya Bankers Association Banking Research Conference last September, the Central Bank Governor Patrick Njoroge reminded the banks about why they were in the position they were in. “There has (sic) been concerns about the Kenyan banking sector’s high average ROA of above 3% and ROE of close to 30%, when compared to similar economies….In any case the high ROAs and ROEs are not sustainable in the long term as customers cannot afford the high cost of banking services indefinitely.”

The Governor has been consistently rapping the knuckles of the Kenyan banking industry and the intervening period between the interest rate capping bill becoming law and its impending demise requires banks to significantly change their mindsets away from the traditional lending models to more innovative ways to make income as well as assess borrower repayment capacity (the fintechcredit algorithm methodologies for non-secured lending are a case in point). The Governorin his speech categorically pronounced the regulator as a key supporter of lenders that are fairly priced, lenders that provide differentiated risk-based pricing based on a borrower’s history and lenders that disclose information in a transparent manner. Legislators needs to be alive to the regulatory premise as the basis on which they should hold the banking industry to account, and not through reckless statements that the banking industry is in any shape or form killing its own economic golden goose.

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Wells Fargo Gets Taken To School

The Wells Fargo two million fake accounts scandal of September 2016 was one of the immediate former Federal Reserve Bank Chair Janet Yellen’s final thoughts as she retired from her position early February 2018. In the last week of January 2018, the Federal Reserve Bank (the Fed) undertook enforcement actions against Wells Fargo to curb any business expansion until the bank was able to demonstrate it had put in place appropriate risk management and customer protection measures. According to a February 2018 article authored by John Heltman in the American Banker onlinemagazine, Janet Yellen is quoted as saying, “We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again.”
The Fed barred Wells Fargo from growing beyond its asset size as at the December 31st 2017 which was $1.95 trillion dollars. It also required that the bank replace three current board members by April 2018 and a fourth board member by the end of the year.
This is a fairly sticky debate I’ve had with many directors during the course of many years of undertaking corporate governance training. How much can a director be expected to know when they only come for board meetings four times a year and likely attend committee meetings the same number of times annually? Should a board member be held responsible for the commissions and omissions of management? The answer is yes absolutely, and this is now expressly provided for by Kenyan Companies Act 2015 which has codified a lot of corporate governance practice that has evolved over the years.
The Fed expressed the same sentiments in its letter to Stephen Sanger, the former lead independent director of the Wells board who was elected as board chair once the scandal broke. According to the American Banker article the letter to Sanger said that there were “many pervasive and serious compliance and conduct failures” during Sanger’s tenure and that he failed to elevate abuses to the rest of the board of directors when he was made aware of them.
“This lack of inquiry and lack of demand for additional information are not consistent with the duties and responsibilities of the Lead Director as described in the firm’s Corporate Governance Guidelines between 2013 and 2016. Your performance in that role is an example of ineffective oversight that is not consistent with the Federal Reserve’s expectations for a firm of WFC’s size and scope of operations.”
Hold on! Did Sanger just get schooled by the regulator on Wells Fargo corporate governance rules that he should have read during his induction and subsequent tenure as the lead independent director? Furthermore, the Fed put the governance monkey squarely on the back of all the directors by describing their oversight as “ineffective”. With a minimum of four board meetings, and various committee meetings during the year, board directors are supposed to provide “effective” oversight over professionals who know the business far better than the directors could ever know.
But again I ask, how were the non-executive board members to know what was going on, especially when their lead director kept them in the dark after learning about the abuses?
The burden to have board directors who can ask the right questions and ensure that an appropriate control environment exists has never been higher than in the 21st century following the massive corporate scandals in both the United States and here in Kenya as well. It is not enough to know that management are “on top of it” like sufuria lids covering the boiling cauldron of business activity. There must be directors who have proven skills in overseeing multi-faceted businesses that have the constantly moving parts of customers, employees, operations, suppliers and other business appendages particularly for publicly listed companies who partly grow their capital off the backs of minority shareholders and banks who take wananchi deposits. These directors then have the duty to ensure that the right reporting standards are applied in the board report, which would include querying compliance and, where necessary, establishing a risk management framework to test exactly what controls management have put in place. Directors also need to be alive to the fact that they are not there “to take one for the team”. Information parity is key, and once a director learns about corporate malfeasance, it is imperative that he alerts his colleagues on the board to the same.
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Uber’s Always Be Hustlin Doctrine

Always be hustlin’ is number seven out of fourteen core cultural values of Uber, the company that has globally transformed the way city residents commute. Well at least those were the 14 core cultural values when founder Travis Kalanick led the organization from 2010 until his game-faced resignation as CEO in 2017 following an embarrassing video recording of an altercation between Kalanick and an Uber driver together with reports of wide spread sexual harassment, bullying and discrimination within the firm. The reports were verified by an independent investigation undertaken by two law firms after interviewing over 400 staff and reviewing more than 3 million internal documents. Kalanick was recorded on video having an argument with one of his drivers about some of the company’s rate reductions. “People are not trusting you anymore,” to which Kalanick replied, “Some people don’t like to take responsibility for their own s***. They blame everything in their life on somebody else.” A conversation that was clearly straight out of the Uber core values play book, of which value number three states “Meritocracy and Toe-Stepping” read together with value number four which states “Principled Confrontation”.
Kalanick’s Oscar award winning apology quickly followed the video’s viral publication. “I must fundamentally change as a leader and grow up. This is the first time I’ve been willing to admit that I need leadership help and I intend to get it.”
Uber’s eight-year exponential growth into a global commuter solution provider, valued at $68 billion as at October 2017, is nothing to sniff at. Even though it came at the great cost of employee well-being and board room governance issues, its impact on the entrepreneurial capacity of ordinary citizens in multiple countries is praise worthy. I recently met Martin (not his real name) in Johannesburg, where he works as a senior manager at one of South Africa’s largest financial institutions. Martin’s 5-year-old son goes to a school about 7 kilometres from where they live and it was costing him 3,000 South African rand a month (Kes 25,800) to pay for school transportation. In an “always be hustlin” spark, Martin purchased a vehicle and recruited a driver. “It was a no-brainer,” Martin tells me. “The driver drops off my son and picks him up from school every day. In between, he makes up to 7,000 rand per week (Kes 60,200). After netting off fuel, the driver gives Martin about 2,000 rand (Kes 17,200) weekly which Martin entirely uses to pay for the car’s financing and insurance and the driver keeps the rest as his earnings which amount can range from 2,000-4,000 rand (Kes 17,200 – Kes 35,400) per week. “I will be breaking even for 18 months, after which the car will be fully paid off and then I can see profit,” he surmises. “But most importantly, I’ve found a cheaper solution to transport my son to school that gives someone employment and also puts money in my pocket.”I’m sure this story is replicated here in Kenya too.
One of the recommendations that came out of the Uber investigations were to reformulatethe company’s values (14 values are unusually many and quite difficult to inculcate as an organizational culture) especially seeing as some were seemingly promoting self-seeking (such as toe-stepping) at the expense of building a team spirit. More importantly, following protracted board room struggles to reduce Kalanick’s power on the board that culminated in a law suit, a refreshed governance structure was formulated following a billion-dollar investment by Softbank.The Uber board has now been expanded from eleven to seventeen members, four of whom are independent directors.
While a seventeen-member board is unwieldy at best, and a strain for any normal person to chair, it is the unintended outcome of a founder CEO’s unfettered grip to power over a fast growing global organization that has had an inarguable impact on urban commutes, entrepreneurship and employment. The jury remains out as to whether this new governance structure at the top, together with a new CEO Dara Khosrowshahi will be sufficient to change an unhealthy organizational culture while maintaining the strong growth momentum it has enjoyed. “Culture is written bottoms up,” was one of Khosrowshahi’s initial statements upon taking up the CEO job. Only time will tell whether the new CEO can upend the trend that cultural norms start at, and are set by, the apex of an organization.
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How a successful interview candidate shows up

Last week I summarized a few past experiences as a job interview panelist, some of which experiences ranged from simply utter frustration to the more extreme stab-my-neck-with-a-blunt-fork boredom. The common denominator in all those experiences was a stark lack of self-awareness amongst many of the unsuccessful candidates, some of which can be cured by undertaking interview rehearsals with a trusted person while being filmed with a smart phone. Today I want to share the attributes of some of the best interview candidates I have seen.

Susan walked into the room shortly after lunch for a c-suite interview. The panelists were interview weary, having seen at least seven candidates before that, none of whom had engendered confidence. She was smartly dressed in a calf length dress and jacket, hair neatly tied back and wearing muted jewelry. She had a quiet disposition to her and sat with her back ramrod straight during the entire interview. Every time a question was put to her, she would write it down and then carefully reflect for a few heartbeats before answering softly yet supremely confidently. She knew her subject matter extremely well and peppered her answers with instances of when she had experienced the item under discussion during her career. Susan knocked the ball out of the park, and when we re-grouped as a panel once she had left the room we all unanimously agreed that we knew she had the job within the first five minutes of the interview. What’s interesting about Susan was that her whole demeanour was counter-intuitive to what panelists look for in a c-suite executive. She didn’t command attention as soon as she walked into the room, neither did she speak loudly and assertively to establish her place.

However, Susan had an unconscious personal mastery of self. Even though she was soft spoken, she looked all the panelists in the eye and took a moment to reflect on her answers before she began to speak. She knew her subject matter very well and established her credentials with the panelists by drawing on actual experiences rather than postulating theorems. By the end of the interview I wanted Susan to be my neurosurgeon if I ever had a cranial surgery or my cardiologist if I ever need acoronary stent.

John was interviewing for a c-suite role a few years ago. He walked into the room sharply dressed, giving all the panelists a firm handshake before he sat down. He said all the right things that we needed to hear and he knew the business very well. We all noted one thing though: John was a little bit too cocky and much too smooth. But he was the best interview candidate on the technical score and so he was awarded the role as the other candidates came nowhere near that score.

When the rubber met the road, it wasn’t long before we realized that John’s suavely delivered technical knowledge was all hat and no cattle when it came to execution. He knew what needed to be done but couldn’t get out of the office to light a fire under the troops even if he was hit with a rocket propelled grenade. This experience, I must admit, has stayed with me and imprinted a negative bias during subsequent interviews which have smooth talking, cocky candidates: will they stand the test of time when they get past the interview post? Hence the benefit of an interview panel, especially one with seasoned panelists including a human resource practitioner who can challenge each other on visibly demonstrated bias.

Some of the best interview candidates I have seen do a lot of research on the organization before attending the interview. They know who the organization’s key stakeholders are be it clients, suppliers, regulators, shareholders and competitors. They’ve googled what are the hot items bothering the organization or its industry in the media and are careful to maintain neutrality of opinion as they discuss the issue. They are quickly willing to admit when they don’t know the answer to a question posted to them but assure the panelists that they could possibly find out the answer if given an opportunity to. They are confident, without necessarily being loud and they are knowledgeable about their subject matter without being condescending. And finally, but most importantly, they are remarkably self-aware.

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How Not To Interview For A Job

I recently started following a prominent politician on Instagram for no other reason than the entertainment value derived when seated for interminable hours in Nairobi traffic. I concluded that if he spends as much time delivering on his mandate to his county constituents as he spends on his personal and highly publicized grooming, he will certainly introduce a much-needed amalgamation of diametrically opposite precepts: Yves St. Laurent please meet Lee Kwan Yew? Over my professional life, I have had the opportunity to sit in on interviews for various roles from junior clerks to c-suite executives. The variety of individual approaches to this grave endeavor runs the whole gamut of human intellectual effort, much like the fashion-meets-county-governance convergence.

Take for example Mary* who was once interviewing for a c-suite role. She walked into the interview room and was greeted by name by the lead interviewer. She very loudly and pointedly corrected the lead interviewer that her name was preceded by the title “Dr.” as she was a PhD holder. Alright then, the interview was off to an intellectually snobbish start. As the interview proceeded, Mary circulated a neat folder with copies of her original academic certificates individually encased in the transparent plastic compartments that made up the folder’s pages. However, the first three pages were full of photographs of the same Mary in various work-related functions, meeting prominent personalities within her industry. The photographs were individually labelled with a blurb noting who was in the picture, which faces were fairly unfamiliar to the interview panelists but clearly of profound import to Mary.

From its intellectually snobbish start, the interview was now galloping at full braggadocio speed. Key lesson to any potential interviewee: humility is not a biblical concept. Interview panelists are more impressed by the interviewee’s grasp of industry knowledge and personal mastery of her craft, rather than who she’s met and what she wants to be referred to. Calling an interviewee by the wrong name or title can in some cases be a deliberate tactic to see how the interviewee will react in the face of social provocation.

One conclusion I can draw from the countless interviews I have participated in as a panelist is that many of us are greatly lacking in the significant personality trait called self- awareness.Executing a breathless monologue for 7 wretched minuteswhile completing ignoring the body language of panelists who are slowly sliding off their seats and under the table in despair is a key pointer to lack of self-awareness. Learning to watch out for verbal and non-verbal cues to stop talking is critical. Verbal cues would include “ok, right” or “that’s fine” and are usually accompanied by a grim expression that should not in any way be misinterpreted as encouragement to prattle on. Non-verbal cues would include the panelists losing eye contact with the interviewee, panelists enviously looking through the window at the guy mowing the hotel lawn outside or the panelist writing long shopping lists on the side of their interview score sheet.

A good trick I’ve learnt along the years is to get a trusted friend or relative to take a video of you as you answer some questions during a pre-interview rehearsal. With even the most basic smartphone today, you can take a few minutes of video that will play back some interesting self-revelations. Videos demonstrate what unconscious idiosyncrasies you have like inserting your left finger into your right nostril when your nervous, your use of verbal anchors like “umm” and “err” before you answer any questions or as you string an answer together which may come off as being unsure or just verbally incoherent, or your habit of speaking to the screen when undertaking a presentation rather than looking at the panelists and building a connection through eye contact. A video also helps you see how you pace yourself as you speak and whether you think before you answer or just rush into giving an answer through a rambling monologue that hopes to arrive at a triumphant result somewhere near minute 6. It will also reveal distracting inclinations to cover your mouth with your hands as you speak, which means that panelists don’t quite hear what you’re saying. Next week I will cover how some of the best (and therefore successful) interviewees have shown up at their interviews.

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Twitter: @carolmusyoka

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Sights and Sounds of New Delhi

Incredible India. That is the marketing slogan that great country uses on its advertising campaigns on international media such as CNN. You can’t describe India to anyone in less than a few hours or several precious newspaper paragraphs but I can summarize my recent January visit to the city of New Delhi thus: it is incredibly populated, incredibly progressive, incredibly diverse and incredibly cold during the winter.

The National Capital Territory of Delhi has a population of almost 22 million people. That’s at least 4 million more than the giant metropolis of Mumbai. Inevitably, Delhi has one of the highest pollution rates in the world.

In the district in which we were staying, very few of the roads have marked lanes and even where the lanes are marked, drivers do not maintainlane discipline. The driving rules are fairly simple: find your space, own it even if it means coming to within a bacteria’s finger width between you and the next car, and just keep on moving. Consequently, the roadside kerbs are about a foot high to avoid the universal temptation to over-lap and lane climbers. While there is fairly good network of highways (which in Kenyan-speak would be termed as super highways since anything bigger than two lanes warrants an entry into the Kenyan mega project hall of fame), Delhi motor cycle riders – many of whom carry the same DNA as their Nairobi counterparts – have absolutely no issue riding into the darkness of a highway underpass facing oncoming traffic. With no headlights!

Delhi’s stomach churning traffic heaves in unsynchronized waves of pollution generating saloon cars, buses, trucks, motorcycles and taxis. In all that madness we never encountered a single accident, nor found anyone shaking their fists or flipping birdies at each other.

Anil, our designated taxi driver, drove a gas propelled Maruti. We asked him to take us to a mall and he zipped around for twenty minutes before coming to a triumphant halt in front of a sterile building, faceless except for a solitary staircase that rolls its steel tongue out to greet us.
Up another staircase and we then stumbled upon multiple shops selling fabric, suits that are stitched in 24 hours, jewelry, scarves, handbags, and beautifully hand-woven rugs. Around us were Africans of various extractions in multiple stages of retail nirvana as they did mental conversions of the prices. Kapur,a 25-year-old fast talking salesman, latched himself to us and never left our side until we had made several purchases of various goods. He speaks token Swahili, randomly interspersing his sentences with “kabisa” “asante”, “sawa sawa” and“kwaheri” which was enough to tell us that he’s had multiple East African clients cross his slick salesman’s path.

Back at the hotel, our retail therapy curbed only by the dread of facing the inscrutable faces of the Customs officials at Jomo Kenyatta International Airport upon our return, we found a very chatty waiter Amir as we ordered dinner. The next day was his off day and he happily told us how he was going to spend the day catching up on Netflix and Amazon Prime shows. Say what now? “Yes madam. Internet is very cheap in India, I only pay 900 Indian rupees a month for wifi at home.” For Kshs 1,440 a month, Amir our waiter had high speed internet in his house. It goes without saying that in the 21st century access to internet, just like access to water, is life.

Cheap internet democratizes information by ensuring that it is accessible to a far wider population reach and provides a fantastic opportunity for local content producers to find markets for both entertainment and educational content. One observation I made in India is that due to its sheer size, a lot of content on television was local as there were multiple news channels as well as movie and entertainment channels in Hindi and local dialects. Anil our taxi driver had his phone on his dashboard most times, tuned interchangeably between local music videos and local movie channels. And yes, before you judge Anil, ceaseless traffic warrants distracting entertainment. The bigger opportunity I saw was how low cost internet can generate a whole vertical supply chain just from local content provision because at the end of the day, your ordinary mwananchi relates faster to stories that narrate his own reality. You don’t have to look far: Nollywood and Bollywood are live examples.

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Twitter: @carolmusyoka

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How to assess your risk appetite

Last week I touched on the topic of risk management and why boards of directors need to familiarize themselves with the topic. A risk is an uncertain event or condition that, if it occurs, can cause significant negative impact for an entity or individual.

Take the example of a member of parliament (MP). He is a fairly well paid public officer earning a six-figure salary, as well as pretty good perks like car grants and sitting allowances. The risk that he faces is that in five years, come the next election, he will have to expend an inordinate amount of time and resources to ensure his re-election. Since he has achieved a certain taste in lifestyle such as all expenses paid foreign trips, mileage allowances, state sponsored security etcetera, a loss will cause a significant negative impact for him. One way to mitigate such risk is to undertake a risk versus reward calculation. As chances of re-election are almost slim to none without pouring massive investment into the next party nomination process, the next best thing is to ensure that he acquires as much wealth as possible in the shortest time so help him God and may the Salaries and Remuneration Commission be damned. He would therefore support all efforts to reduce mileage allowances as well as salaries and gorge himself silly at the trough of state coffers while the belt of austerity girdles all other public expenditure. A high risk of being thrown out at the next election is matched by the commensurate quest for high reward.

Organizations require to regularly map out all the risks appertaining to their existence such asrevenues, costs, operations, facilities, taxation, fraud, cybersecurity, regulatory interventions amongst myriad others. Typically, each department should map out its risks and then the executive should map out what the overall key risks are and map them out on a table to determine their probability of occurrence versus the impact of such occurrence. (See image). This table is referred to as a risk heat map which visually illustrates what the risks faced by the organization at regular points in time are.

Thus a company that deals with plastic packaging would have identified and mapped out the risk of a regulatory intervention from the first time Kenya attempted the plastics ban during the Kibaki administration through various tools such as punitive tax and eventually an attempt at an all-out ban in 2011. Once the ambient noise about a ban began to get louder, that risk would have moved to the top right quadrant of high probability and high impact. When the ban was revoked, it should have remained in the high impact, but moved lower down the Y axisto medium likelihood. A well -informed board would put management to task as to what mitigants they are putting in place to diminish the risk. Hope is not a strategy, and a sheepish response from management that they’re hoping for an eventual change of government should never pass muster at the board level. Particularly since in subsequent years there was a successfully enforced plastic ban in Rwanda. Management would have done well to start looking at alternative packaging materials in the likely event that the risk of a total plastics ban would materialize.

But it’s not only the plastic packaging manufacturers that should have been watching the government moves with a tremulous lower lip and beads of perspiration speckled above their upper lip. Soft drink and bottled water manufacturers should have upgraded the regulatory risk of a total plastics ban to a high probability faster than they could spell polyethylene terephthalate, commonly referred to as PET. PET, which is used to manufacture many of the soft drink and water bottles, is a much-maligned material due to its primary inability to biodegrade.

It is noteworthy that while a risk heat map tries to identify the key risks that management faces in running the organization, it should be a dynamic rather than a static tool as risks shift constantly in likelihood and impact, with some extinguishing entirely while new ones appear in the ordinary course of time. The greatest danger for organizations is a risk agnostic board. There is no sustainability in adopting a high risk, high reward strategy for the short term. Unless of course, you’re an MP.

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Boring but critical role of operational risk

A few years ago, I went to visit a client’s team manager at their site off Mombasa Road. The client who was in the manufacturing business, had an extremely convoluted walkway from the car park to the main offices, with clearly marked lanes that were deliberately placed adjacent to building walls. Being a former boarding school resident, where breaking (what seemed to be unfathomable) rules was de rigueur, I promptly started to cross the car park in what appeared to be the most direct, sensible and shortest path to the main reception. A security guard yelled out at me and hurriedly came to redirect my delinquency to the luminous yellow painted pedestrian walkway. Grumbling to myself, I humbly made my way down the well-trodden path. About a month later, I met the team manager walking on crutches, with a heavily bandaged left foot. Apparently she had been hit by a fork lift whose driver had breached the company rules and driven on the clearly marked pedestrian walkway. An operational risk in the area of safety had materialized.

While training some board directors on risk management a few years ago, a few muttered under their breadth about just how boring the whole subject was with their eyes darting about the room lookingfor the nearest exit from the risk management educative hell.Look,it is boring. Roll your eyes into the back of your sockets kind of boring! Determining key risk factors and the probability of their materializing versus impact of such materialization as well as the resultant bottom line effect that may occur is not as exciting as discussing strategy and innovation of an organization.

In a 2001 operational risk paper by Hans-Ulrich Doreig, then vice chairman of the Credit Suisse Group, he summarized what many bank managements and boards reduce themselves to: only what is measured, observed and recognized gets attention.Board member expertise on day to day management of the organization is significantly exceeded by the management who are in a much better position to determine what should get measured, observed and recognized as they live, breathe and eat the organization. Doreig demonstrates the struggle to define what operational risk and concludes it thus: Operational risk is the risk of losses resulting from inadequate or failed processes, people and systems or from external events.

It therefore becomes imperative for boards of not only financial institutions, but other organizations as well, that directors must have the capacity to interrogate the process by which management has arrived at its recognition of what the organization’s risks are and therefore what the key focus for risk mitigation is. A good example would be Nakumatt Supermarket chain. With the benefit of hindsight, the company was running its cash flow operation off the backs of suppliers. Just like banks actively track liquidity risk, a good Nakumatt board would have identified that cash – the lifeblood of any retail entity – or lack thereof is a real risk worth tracking and would have placed key triggers for monitoring the company’s liquidity at the audit and risk committee level. But such risks related to day to day management like liquidity or health and safety, while easy to identify and track, cannot tame the ghost of fraud that floats through the ignominious collapse of Chase, Dubai and Imperial banks.

As regulated institutions on a risk based supervisory system that allocates capital to identified risks such as credit, liquidity or market risk, in plain and simple terms no amount of capital can be allocated to fraud. Which is why corporate governance developments in the western economies are pushing for the requirement that Chief Risk Officers report directly to the board where they are able to clearly articulate why and how they have chosen the specific risks to measure, place limits and approval structures without such voices getting swallowed in the layers of bureaucratic cotton wool that exist between management and the board.

The team manager on crutches did eventually recover and her accident exposed me to my ignorance about why risk mitigants, such as a clearly demarcated pedestrian walkway is created. It turned out that the forklift driver, despite being very well trained on the health and safety rules of the organization, had been having personal problems that caused him to be highly distracted as he drove the forklift. Risk management can indeed be boring to non-risk practitioners but it does and has saved lives and institutions. Board directors are well advised to be alive to this critical oversight aspect.

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Medical tourism on steroids

“Huduma zote za utafsiri kwa wagonjwa wa kimataifa ni za kusaidia. Hupaswi kulipa kwa sababu ya huduma yoyote ya mtafsiri.”

The same sentence that informed Swahili readers on the availability of free translator services was replicated in Russian, French, Portuguese plus five other Asian language scripts and was posted high on the wall at the International Patients Lounge of a Delhi hospital.Adjacent to it was amuch bigger notice board that provided details of over a hundred guest houses and hotels whose price ranged from US $ 15 to US$ 300 a night. Between Russians, Afghans, Kazakhstani nationals, Kenyans, Ugandans, Ethiopians,Tanzanians, Nigerians and Zambians, the lounge is a veritable mini United Nations of arriving international patients seated in rows of seats not too different from a railway station waiting area.
The Indians have nailed medical tourism down pat. It’s not anoh-by-the-way you can pop into a hospital when you get to an Indian city. The “international” hospitals have a dedicated wing for international patients that organizes their visa invitation letters, airport pickup, hotel reservations, money exchange, translator services and provide a dedicated hospital staffer to walk the visitor through each and every part of their check-up and fast track the international patient past the hundreds of local Indian patients. This particular hospital that is the subject matter of today’s column even has a local office in Nairobi with regular visiting specialists. Dr. KR is an ear, nose and throat specialist who has specialized in robotics. “I’ve been to Kenya many times and have even trained some of your doctors on robotic surgery,” she says desultorily. When asked what tools she uses, she doesn’t miss a beat, “No tools. Kenya doesn’t have the tools so I teach the theory only. We have the best robotics here at this Delhi hospital.”

When you see the rates charged by the specialists, you understand why middle-class Africans are coming to India in droves. A whole body check-up which includes visits with a cardiologist, gynaecologists (for ladies), mammograms, ultrasounds, ECG tests etc costs $180 or Kshs 18,540. If you wish to see a specialist outside of the program, the specialist charges INR 1,000 or Kshs 1,600. What the Indians have successfully done is to leverage on their existing medical capacity due to their large volume of local needs, relatively low pricing and best in class medical technology to tweak it into a service export.

If we can’t beat them, let’s join them. Our local private medical industry has been anecdotally known to throw all manner of spoilers to the entry of the large Indian hospital groups. I don’t blame them; no business wants a bigger, more advanced and cheaper competitor at their doorstep chomping at their heels.

It may be a useful exercise to redesign our national policy on provision of medical services. With multitudes of Kenyans leaving the country, (to the extent that the Government now requires a Kenyan to provide the Indian High Commission with a letter from a doctor validating the need to go to India for medical services as part of the visa application documentation) we might consider creating an Export Processing Zone of sorts for medical services. We provide an area where the Indian hospitals can come and build facilities and provide their low-cost services to allow for Africans from other countries to come and enjoy the same. With our “no visa policy” for Africans, the benefits will be monumental for the hotel, taxi and ancillary services that come with foreign visitors. In order for this to be acceptable to local private medical providers, we could pass a rule that Kenyan citizens are not allowed to use the medical services except for surgical procedures of a specialized nature.

Of course there is the chance of controversy that other Africans are enjoying the benefits of world class medical services that local Kenyans are not. But the benefits can be spread by permitting local medical students as well as practicing doctors to undertake residencies and training programs at the medical EPZs to ensure that the technical knowledge is disseminated locally. I’m not a medic and will not attempt to know the solution to this, but judging from the African Union general assembly that I found at that Delhi hospital, there’s potential for Kenya to take its place as a regional medical center, while uplifting the local medical training and expertise that has caused its citizens, including senior government officials, to seek medical attention outside its borders.
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Cemeteries are a serious business

“I am ready to meet my maker, but whether my maker is prepared for the great ordeal of meeting me is another matter” Winston Churchill 1874-1965

Dying is a serious business. With Nairobi’s current population of about 4 million, our one public cemetery in Langata was officially declared full in 1996. Folks, we are talking about twenty-one odd years ago. If you’ve attended a burial in Langata, you can easily see why. Graves have been created at every single corner, squeezed up against the fence or randomly placed on former pathways. As you make your way towards the burial site, it’s fairly common to find that your walking on top of unmarked, old graves and the crunching of leaves beneath your gingerly placed feet often leaves you pondering whether the soundis coming from old bones that are yielding to your unwelcome trespass.

It doesn’t help when some media reports about the cemetery are published laced with the cultural bias of the writers. Take this quote out of an article about Langata Cemetery in The Star Newspaper on March 6th 2017: “Traditionally, most Kenyans transport their dead back to their village, the so- called ancestral home, to perform ritual and religious burial rights. However, broken families, poverty and expenses have forced Nairobi dwellers to bury their dead in cemeteries.” The graveassumption –pun fully intended- that the writer makes is that it is primarily negative circumstances that force the African native to be buried in the purported ignominy of a public cemetery.

I’m a native myself, and I know the obsession we have with land. I also know the obsession we have with disturbing the spirits of those gone before us. Thus burying ourselves in our ancestral homes means that we tie up that land for the singular and uneconomic use of the family for the foreseeable future. Here’s the challenge: we will not be here in the future to determine if that land will be maintained by our future generations of young whippersnappers who have absolutely no memories of us except what we may have posted on Facebook or Whatsapp that may or may not exist by then. Given the demand for residential and commercial buildingsthat devolution is now creating in urban centres within previous rural counties, our ancestral homes could very well be in the next densely populated Ongata Rongai-equivalent of those urban centres and our great great grandchildren will have no qualms selling the plots to the first private developer that sashays into town with hard cash. Which is why the Business Daily article on December 28th 2017, whose headline “Mailu gives nod to Shs 800m cemetery for rich Kenyans”caught my undying attention (as you can see I’m going to town with these puns). The article described a proposed private cemetery where an individual who, quite frankly speaking, is an organized and methodical person that wants to save his family from debating about how many matatus need to be hired to transport mourners to far flung areas of this beautiful country can buy a plot for about Shs 130,000 and rest in peace for at least 50 years. In the interim, ongoing negotiations by the dearly departed with their Ultimate Creator as to whether they can gain entry into the Kingdom of Glory should render thoughts of what happens to their physical body fairly obsolete. This organized individual is considered by the article as “fabulously rich”.

On September 30th2014, this very newspaper reported that the Nairobi County Assembly was mulling over proposals to increase the cost of a Langata Cemetery burial by up to 50%. Demand and supply folks; those prices are going to continue to rise as long as supply of land remains finite. It goes without saying that more private cemeteries will begin to emerge, as the Kenyan cultural ethic of private solutions to public problems flows into the business of burial grounds. One doesn’t have to be fabulously rich to see that the concept of the “ancestral home” will diminish at a rate converse to the growth of county municipal areas.

Future generations will dilute our native obsession with burials at our rural homes, and become comfortable with public cemetery interments especially if zoning regulations transcend into county urban planning. It is also worth considering promotingcremation as a Nairobi county driven option for the rapidly depleting resource of public burial grounds. Let me stop here, before this piece is burnt to a crisp by the cremation haters!
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Legislative Help for Suppliers against Wayward Retailers

The following announcement came over the supermarket’s Public Address system: “If someone here has a convertible car with the top down, it just started raining. Towels are however located in aisle number five.”

In July 2017, the State Department for Trade in the Ministry of Industry, Trade and Cooperatives issued a document titled “Study on Kenya Retail Sector Prompt Payment” in response to challenges faced by agricultural and manufacturing producers that had and have continued to face various problems with late payment from retailers. The aim of the paper is to create a base for the creation of a legal and regulatory framework for the retail sector. In simple terms: tame rogue supermarkets that have siphoned off cash meant to pay suppliers and placed it in dodgy side hustles. Working in close collaboration with the Ministry were the Retail Trade Association of Kenya (RETRAK), Association of Kenya Suppliers (AKS) and the Kenya Association of Manufacturers (KAM).

The report makes for very interesting reading if you’re seated in the confounding Uhuru Highway gridlock with nothing else to do other than twiddle your thumbs. The upshot is that there are various reasons for the delayed payment of suppliers by supermarkets (Nakumatt and Uchumi are obviously top of the heap in the culprit pile) some of which reasons are demonstrative of a predatory culture of bullying that some of the supermarkets have inculcated. The suppliers list 12 reasons of which I will repeat a few here: a) Lack of written agreements due to retailer refusal to collapse contractual terms into writing; b) Refusal to receive specifically ordered goods; c) Transferring commercial risks that are supposed to be borne by the retailer to the supplier; d) Unjust return of unsold goods at the supplier’s expense, including fresh produce that cannot be resold. The fifth reason is perhaps the most revealing, which is e) Use of delisting threats to obtain undue advantage and suppress suppliers from raising genuine complaints against retailers.
Look, just like any marriage there are two sides to every story and I am sure the retailers have their own sorry tales to narrate but were fairly unwilling to participate in the questionnaire issued by the report’s writers. It is however fairly revealing that, similarly, very few of the AKS and KAM members chose to volunteer the information for fear of backlash through delisting. Only 22 out of 1,000 members of AKS chose to provide information while only 37 out of 650 companies that are KAM members chose to participate in the survey. The report estimates that the total outstanding debt to all the suppliers is in the range of Kes 40 billion at the time of publishing. What’s more, 5 supermarkets accounted for 92% of the debt owed above 60 days with Nakumatt and Uchumi taking up the lion’s share at 73% of the total debt.
Of course the million dollar question is: who are the other 3 supermarkets? Well you would have to get the report to find out, but I would be very worried if I was their banker as a stretched creditor status is always a sign of distressed cash flows and an underlying management problem specifically when over 90% of cashier till payments are made in cash or cash equivalents like mpesa. And with the carcasses of Nakumatt and Uchumi currently floating in the river of ignominy, the banks are certainly breathing hard over the shoulder of these supermarkets. The supermarkets, in their defence, can argue that delayed creditor payments is their way of financing their own working capital and has, quite spuriously, become an industry norm. But one shouldn’t have to suck the blood of a weaker party to grow one’s wealth unless one is a mosquito.
The report concludes by proposing a Supplier and Retailer Code of Practice that draws from practice in other international jurisdictions as well as local experience to ensure a fair trade playing ground that enables prompt payment and respect for contractual terms whether written or otherwise. The plan is to have the State Department on Trade embed the same in regulations for prompt payment in the retail sector once alignment is found between all the stakeholders. If there ever was a time needed for a regulatory towel to absorb the mess created in a declining retail sector, it is now. We leave it to the Ministry of Industry, Trade and Cooperatives to restore much needed sanity on a critical part of Kenya’s economy.
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Kenya’s Visa Open Door Policy is a Gamechanger

Earlier this year, I went to Londonfor a work assignment and only encountered a living, breathing English native a full 24 hours after landing. The immigration officer at Heathrowairport was a lady of Indian extraction, who happily described her last holiday in Kenya a few years ago and shared how she was a first generation Indian but naturalized UK citizen. The driver who drove me to my hotel was a Hungarian who was now working in London under the free labor movement that the European Union policies provided. I was checked into the hotel by a Polish receptionist, and found that most of the hotel staff were largely from Poland and the Czech Republic. It was only when I went to the client offices the next morning when I finally encountered native English speakers.

In a paper titled “Brexit and the Impact of Immigration on the UK” by Jonathan Wadsworth, Swati Dhingra, Gianmarco Ottaviano and John Van Reenen, the writers research revealed that European Union (EU) immigration has tripled in numbers in the last twenty years. In 2015, there were around 3.3 million EU immigrants living in the UK up form 0.9 million in 1995. Around 2.5 million of these immigrants are aged between 16-64 and about 2 million are productively working. EU countries account for 35% of all immigrants living in the UK with the greatest concentration in London. EU immigrants are on average more educated than the UK-born and almost twice as many of them have some form of higher education (43% compared with 23% UK born).
Why is this relevant to Kenya and the East African Community (EAC)? President Uhuru Kenyatta’s speech at his November 28th 2017 inauguration generated food for immigration thought. Assuming his speech is expeditiously turned into policy, EAC nationals will only need an identity card to work, do business, own property farm, marry and settle in Kenya. This is regardless of whether their own governments reciprocate the same benefits.

Within three hours of that speech, a friend of mine from one of the EAC countriessent me a clip of the President’sspeech and said that she could now buy a farm in Nanyuki as she had always desired. Clearly, the speech got some excitable EAC traction and one that demonstrates the potential for significant intellectual and financial capital for Kenya. Save for our incessant 5 -year political bickering, we do have a stable economy, a well educated populace and a reasonably good infrastructure to attract EAC nationals to live, work and do business here especially considering that our national carrier’s network connectivity ensures you are a maximum of ninety minutes away from every EAC capital.

Together with the policy to provide visas on arrival for African passport holders, the President’s proposals can be interpreted through the futuristic lens of making Nairobi an international financial centre as well as the region’s foremost conference destination. The fact that we will be able to attract EAC’s top talent to work makes us an even more attractive destination for foreign direct investment as the talent gene pool just got that much more enriched. Multinationals and international agencies operating in Africa looking to do their conferences should now consider Kenya as their first choice of conferencing due to the ease of visas for conference attendees.

Notably, there is also a potential knock on effect on the residential real estate as demand for good quality housing for the incoming business and professionals should increase, as the buyer and tenant pot has now expanded beyond Kenyan borders. However an unintended consequence will be that it may provide a potential avenue for “regional hot money” investments which may drive up the cost of real estate for genuine Kenyans as we saw with the Somalia piracy proceeds that had a direct knock on effect on prices of land in Karen, Nairobi and Nyali in Mombasa. London has also experienced the same with the average native Englishman unable to afford central London housing due to Arab, Russian and Chinese demand driving up property prices.

Strengthening of county economies will be critical so that native Kenyans still have opportunities for employment and business outside of Nairobi, which will ensure that competition for jobs, as well as xenophobic tendencies do not start to prevail. If successfully executed, the “Kenya Open Door Policy” will dilute Nairobi’sstatus as belonging to Kenyans only and elevate its stature as an African economic hub which will be a big game changer for the politics of this country.
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Geographical Indications Drive Economic Value

I recently attended a whisky-tasting event and came to discover that I now have a proclivity towards single malt vintages that are light and floral with notes of grassy organics. (I had to google that descriptor by the way, I’m not yet that erudite!). My key learning though was that the words “Scotch Whisky” are actually intellectually protected as a geographical indication. The World Intellectual Property Organization (WIPO) defines a geographical indication as a right that enables those who have the right to use the indication to prevent its use by a third party whose product does not conform to the applicable standards.

Scotch Whisky means a whisky produced in Scotland that has been distilled in Scotland from water and malted barley to which only whole grains of other cereals may be added, all of which have been processed at that distillery into a mash, converted into a fermentable substrate only by endogenous enzyme systems and fermented by the addition of yeast. It has to be distilled at an alcoholic strength by volume of less than 94.8% and its production has been matured only in oak casks of a capacity not exceeding 700 litres, which maturation has taken place only in Scotland for a period of not less than three years. It must maintain the colour of plain caramel that has a minimum alcoholic strength by volume of 40%.

By ensuring this strict definition, which is then backstopped by a UK government driven verification framework, the product is provided a high brand quality that allows for premium pricing and global recognition. With a value of about £ 4 billion(Kshs 550 billion) to the Scottish economy annually, and employing over 10,000 people, it’s not hard to see why intellectual property protection via the geographical indication route makes economic sense not only to protect Scottish jobs but to also deter a booming counterfeit industry trading on a centuries old distinct product.

The Ethiopian government ran into a similar issue when they discovered that the global coffee retail chain Starbucks were selling “Ethiopian coffee” at a high premium with very little benefit trickling down to the Ethiopian coffee farmer and zero control on whether that coffee was indeed originating in Ethiopia. In 2004, the Ethiopian government launched an initiative to bridge the gap between what global retailers were charging and what the Ethiopian farmer was receiving for a sack of the same beans. The Ethiopian Intellectual Property Office’s objective was to generate high retail prices for the most famous Ethiopian coffee brands Harrar®, Sidamo® and Yirgacheffe®. However going the geographical indication route was going to be prohibitively expensive since it would require quality control at all points of the coffee production in the region where that geographical indication was being sought.

A good illustration of this can be seen in Scotland where all business that are involved in any stage of the production of Scotch Whisky must first register with Her Majesty’s Revenue and Customs by listing all their relevant sites within and outside Scotland, including distilleries, maturation facilities, blending and bottling plants. Consequently, the total annual cost of the verification scheme of around £350,000 (Kshs 48 million) is being shared across the Scotch Whisky industry in accordance with European Union rules.
The Ethiopians opted to go the trademark registration route instead, as it did not require a specific coffee to be produced in a specific region or have a particular quality connected to that region. Trademark registrations allow the owner to exploit, license and use the trademarked names in relation to coffee goods to the exclusion of all other traders. It does however require that trademark to be registered in multiple jurisdictions in order to provide protection, which is also an expensive undertaking. Before the Ethiopians went this route, coffee farmers were receiving as little as US$1 per kilogram and this is expected to grow to US$6-8 eventually, after their income doubled following the trademark registration.

Registering geographical indications is expensive in the short term but highly beneficial to the local producers in the long term as has been seen with terms like “Swiss made” for watches made in Switzerland or “Cognac” for brandy produced in the Cognac region of France.In light of our undeniably high quality tea, there remains a case to be made on whether it is worth the energy to be applied by an entity like Kenya Tea Development Agency to push for global recognition and resultant higher prices for Kenyan produced tea.

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Twitter: @carolmusyoka

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A Bulgarian’s Unlikely Success Story in South Africa

I recently went to South Africa on a work assignment and was met at Johannesburg’s Oliver Tambo Airport by a gentleman called George for the transfer to my hotel.George is a Bulgarian who came to South Africa in 1994 aged twenty-eight years with just $500 dollars in his pocket. He had just left the army after being tired of the growing sense of helplessness and poverty in a struggling economy following the collapse of the Soviet Eastern Bloc at the tail end of the last decade. He landed at Johannesburg’s airport and asked the first taxi driver to take him to the cheapest hotel he knew. That hotel ended up being in Hillbrow, a rough, crime ridden Johannesburg suburb where his was the only white face for miles around. Armed with his $500 and ten or so words of English which included “cheap hotel” he walked around the neighborhood and bought a map so that he could get a lay of the land, as he wanted to figure out what he could do to earn a living. After walking for several blocks that took him beyond the confines of the dangerous Hillbrow zone, he found a butcher’s shop owned by a Serbian. Speaking Russian, which was a secondary language for former Eastern Bloc countries, George was able to find that therewere other Bulgarians who were working as food delivery riders for Nandos.

“I only knew two things: the map of Johannesburg and how to ride a motorcycle,” he said with a chuckle as he proceeded to tell me how he found that his country mates, ten in number, all lived in one house and welcomed him with open arms. They told him that all he had to do was buy a motorcycle and they would introduce him to the owner of the Nandos restaurant so that he could get a job as a delivery guy, which didn’t require much English. He spent his few remaining dollars to buy a second hand motorcycle and began working. After a few yearshe moved to work at another Bulgarian’s coffee shop, who eventually sold the restaurant to him which he ran successfully and subsequently sold in 2002.

A random chat he had with an acquaintance led him to discover that hotels in Johannesburg’s commercial district of Sandton were looking for clean, executive vehicles to transfer their guests to the airport. He bought a Mercedes Benz, “I incentivized the concierges in the hotels to call me whenever a guest wanted to go to the airport,” he said. George now has over 30 luxury vehicles and, according to him, he’s made a lot of money from the transport business as he has a few blue chip South African companies on retainer to transfer their executives.

“What are your key lessons?” I asked him as we approached my hotel. He looked straight ahead, lost in deep thought and I almost thought he hadn’t heard my question. Sighing loudly he answered after about a minute. “I’ve never taken my family on holiday ever,” he said. The intensity of the business has never permitted him to take a day off. “To get one really good and responsible driver, I have to endure almost fifty recruits,” he said. George speaks good English now and his two children are playing competitive tennis, with his eldest son representing South Africa at junior global tennis meets. But he is well aware that the tenuous socio-economic threads that bind the rainbow nation can easily become undone. His family fell victim to armed robbers at their home a few years ago. “I want my children to finish school and then will see where to go from here,” he summarized as we pulled up at the entrance to my hotel.

George’s story is one of sheer gumption, hard work and the power of drawing on traditional social networks to grow himself into a successful business owner. But that growth, as he ruefully ruminates, has come at great personal cost to the quality of life with his family, children in particular as they only have a few more years before they move on to university. Time, particularly quality family time, is a precious commodity that absolutely no money can buy was my conclusion as I stepped out of that interesting discourse.

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Twitter: @carolmusyoka

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Sights and Sounds of Zanzibar

About three years ago, we chose to spend part of the December holidays as tourists in Zanzibar. It was still at the time when the travel advisories against Kenya were in full effect following the Westgate terrorist assault. We flew into Zanzibar’s Kisauni airport, where, quite blissfully, there was a separate immigration counter for East African Community(EAC) citizens, contrary to the Dar es Salaam Julius Nyerere International Airport’s legacy of treating all arriving visitors as one heaving block of unwelcome travellers.

It took about an hour to drive to our destination in the northern part of the island, where we were going to stay at a villa belonging to a South African owner. We did however get pulled over twice on the otherwise uneventful journey. The first time was by the Zanzibar tourist police who wanted to check the “papers” of our van. The “papers” were found to be in good order and we were happily waved along.The next incident was not so easy. Two regular policemen wearing the full white Zanzibari police uniform, buttons agonizingly stretched across their corpulent bellies, asked Kiba our driver for his driving license, PSV license and rate card in that order after taking a long, languorous look at the license stickers on the windscreen and finding no fault. Of course, Kiba couldn’t produce a rate card since the van belonged to the villa’s owner, so he was told that the policemen would keep his driving license until he could find it. The cops were quite pragmatic and told Kiba to take down their mobile numbers and give it to any cop who might stop us ahead so that they could explain that they were in possession of the license.

After a few minutes, one cop asked Kiba to step out of the vehicle for a “conversation”. Money changed hands, the driving license was released and we were dispatched on our merry way. Total time taken for the transaction: 15 glorious minutes of our precious holiday. Kiba was visibly embarrassed and bristling with anger at the capricious display of greed in front of his visitors. We chuckled and consoled his morose spirit with the fact that we were coming from a country where our own Kenyan traffic cops would make his Zanzibari traffic cops look like omena at a Nile Perch beauty parade.

View of Stone Town, Zanzibar
Image from http://theseyyida-zanzibar.com/

Zanzibar is a beautiful island with a heritage quite similar to Lamu. Arab, African and Indian influences have melted into a traditional, conservative Islamic culture. Stone Town, which is the main city on the island is a tourist haven with several narrow winding streets dotted by the ubiquitous curio hustlers cajoling you to visit their shops that have the same kikoys, African traditional masks, paintings and batiks. I spoke to one boutique owner, marveling at how they were lucky to still have tourists in Zanzibar, as our villa owner had told us that they enjoyed bookings eleven out of twelve months in a year. She was not as bullish, however.

She told us that most of the tourists to Zanzibar were typically on a Kenya-Tanzania-Zanzibar circuit and the events in Kenya had significantly impacted the numbers coming through to Zanzibar at that time in 2014. This conversation was replicated two months ago when I was on a working visit to Kigali, shortly after the August 8th 2017 elections here in Nairobi. The general manager at the hotel I was staying at was lamenting at the impact the Kenyan elections were having on visitors to a city some 1,200 kilometres south west of Nairobi. He said the exact same thing as the Zanzibari boutique owner. A large number of tourists to Rwanda were usually partaking in a circuit that started in Kenya. Cancellations to Kenya therefore meant that the whole circuit, including Rwanda would be cancelled.


Image from https://www.neverendingfootsteps.com

That our fortunes (and our sticky-fingered traffic cops) are intertwined within the East African Community is an unassailable fact. The intangible but very apparent influence that Kenya has on the region’s economy should give some pause to the proponents of the monetary (and doubtful political) union for the EAC.Our seeming inability to arrive at a mutually agreeable political solution is one that is of our own Kenyan making, and should never be exposed to the wider, unsuspecting regional citizenry. Or perhaps the opposite is true: a regional constituency might require a very different big picture thinking at the political level, making Kenyan tribal issues the non-issues that they need to eventually become.

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Twitter: @carolmusyoka

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Elvis has left the IEBC building

Following the dramatic resignation of Commissioner Roselyn Akombe mid last week, the immediate thought that came to mind to summarize the sensational exit was:“Ladies and gentlemen, Elvis has left the building. Thank you and goodnight!”

The phrase “Elvis has left the building” was often announced at the end of Elvis Presley’s concerts to encourage rabid fans to accept that there would be no further encores, and that they should pack up and go home. The phrase has morphed from its American pop culture origins into a generally accepted euphemism for someone’s departure, dramatic or otherwise.

On August 14th 2017, shortly after the elections, I opined in this column that the corporate governance structure of Kenyan constitutional commissions and the Interim Electoral and Boundaries Commission (IEBC) in particular, was a unique mongrelization of the executive and oversight roles of a body corporate. The IEBC Act creates a commission made up of 8 members and a chairperson. The Act also creates the role of a secretary to the commission, who shall be the accounting officer of the institution.

A look at the act makes for fairly interesting reading. At no point is the chairman referred to as an executive chairman, nor are the commissioners defined as executive. This executive role can be viewed as being derived from both Article 88 (4) of the Constitution read together with Section 4 of the IEBC Act which states the role of the commission is to oversee the mandate of providing elections and referendums as well as and determining electoral boundaries in Kenya. Section 5(4) of the IEBC Act then gives the executive power to the commissioners when it states that the chairperson and members of the commission shall perform their functions as provided in the Constitution, and the secretariat shall perform the day to day administrative functions. And just for avoidance of doubt, Section 7 (2) of the IEBC Act, states that the commissioners are expected to serve on a full time basis.

Section 10 creates the role of the secretary to the commission who, under subsection (7) (a),shall be the Chief Executive Officer, under subsection (7) (c) shall be the accounting officer and, most importantly, under subsection (7) (e)(i) shall be responsible for executing the decisions of the commission.

The act thus blesses the CEO with full time commissioners whose decisions he is responsible for executing, while he remains the accounting officer for the financial outcomes of the organization. But the events of last week, following Ms. Akombe’s resignation and the Chairman Chebukati’s stinging indictment of his own commissioners displayed the inherent weaknesses in the mongrel governance structure.

In an ordinary public or private corporate institution, a non-executive board provides oversight and strategic direction to the executive management who undertake the day-to-day operations. By separating the two, it creates a layer of accountability for the executives as well as a point of reference for major decisions that need “independent” eyes to probe the justification and rationale that guided the thinking behind the decision. Equally important, it allows the chief executive a safe landing in the event that external stakeholders question the decision, as the CEO can simply point upwards and say:“the board approved the resolution.” If you need a recent illustration, look no further than the recent case of the Kenya Airways chairman Michael Joseph who vigorously defended the airline’s CEO’s decision to hire five Polish nationals.

However in the case of the IEBC, Chairman Chebukati is, for all intents and purposes, a CEO of an executive team of commissioners who do not have the safety structure of an oversight board to provide strategic guidance and independent thinking that questions those very decisions.

Those decisions must be taken in utmost good faith. Article 250(9) of the Constitution of Kenya states that a member of a commission, or the holder of an independent office, is not liable for anything done in good faith in the performance of a function of office. This is further entrenched in Section 15 of the IEBC Act that provides the same protection from personal liability for commissioners and officers for acts done in good faith. If Ms. Akombe and Mr. Chebukati’s allegations last Wednesday are to be believed, then good faith has also left the building. All the commissioners and the officers of the IEBC must remember that they will be personally liable for any action, claims or demands that may arise in future for decisions taken in bad faith.

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Twitter: @carolmusyoka

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Strategy is not business as usual

[vc_row][vc_column width=”2/3″][vc_column_text]I recently sat with a group of senior managers from multiple organizations talking about the difference between strategy and business-as-usual. It never ceases to amaze me how many managers believe that their strategic initiatives as defined by the organization are actually business as usual objectives dressed in ball gowns and glass slippers. An example was thrown into the discussion of one of the participant’s employer’s strategic pillars: customer centricity. How is that a strategic objective, I asked? Well, we know look at the customer as special and we focus on them to deliver a good service, was the earnest response. Wait, what? But isn’t the customer the very reason every single person in the organization comes to work, from the cleaner on the shop floor to the CEO? Yes, I was told, but by having customer centricity as a strategic objective we will now get the appropriate focus etcetera, etcetera. The reason for doing any kind of business is to get money from a customer and convert it as efficiently as possible into a profit from the shareholder. So claiming customer centricity as a strategic objective is as good as saying getting staff to come to work is a strategic objective: they are both matters in the ordinary course of doing business.

Targeting a hitherto untargeted customer segment using a differentiated delivery framework is a strategy. Serving existing clients is business as usual. Creating new service delivery mechanisms such as digital is a strategy; focusing on giving existing clients a wow experience is and should be business as usual. Looking out into the Kenyan business horizon, Safaricom makes an interesting case study on what strategy in motion looks like. Following its 2008 IPO, Safaricom entered the realm of publicly publishing its results. In the results for the financial year ending March 2009 which was the financial year during with the IPO took place, its revenue from voice was 83.4% while data which represented SMS, mpesa and other data revenue generated 12.9% to the bottom line.

By financial year 2013, Safaricom reported that voice now contributed 64% of service revenues.Five short years later the upward trajectory of non-voice data continued with voice contributing only 45% of service revenues by March 2017 compared with mpesa at 27% of service revenue and fixed and mobile data revenue at 16.8% of service revenue. Combined, mpesa and data revenue add up to 43.8%, which is slightly below what the voice data brings in. That’s a telling number right there.

You may not have noticed it, but Safaricom has stealthily crept into your life at multiple touch points during the course of your daily routine. From the way 72% of Kenyan market share communicates by voice, to the way Kshs 6.9 trillion in value goes through the mpesa payment system in the form of money transfers, business to business payments as well as customer to business payments. Somewhere along that chain are the funds you sent to your family, farm workers, payment at the supermarket till, barber bill, bar bill, church or funeral harambee contribution or fuel payment. 83,000 Kenyans now use Safaricom’s fibre for their internet connections at home, with 1,500 buildings fully wired for Safaricom internet. Those fibre numbers are only projected to grow. This strategy to ensure multiple touch points in the dawn to dusk cycle of a consumer’s life is very similar to global giant Procter and Gamble’s strategy to be immersed in the lives of their customers throughout the day which is the bedrock of their innovation strategy. From Crest toothpaste and Oral B toothbrushes, to Gillette razors and Head and Shoulders shampoo will carry the consumer through their morning routines. Pampers diapers, Vicks vaporub, Olay lotions and Always feminine products feature through that brand base as well as various dishwashing liquids and household detergents such as Ariel and Tide.

Speaking about consumers on their website, they say: “We gain insights into their everyday lives so we can combine “what’s needed” with “what’s possible.” Our goal is to offer them product options at all pricing tiers to drive preference for our brands and provide meaningful value.” That mind set ends up deriving $65 billion of annual revenue by the end of financial year 2016.

The numbers never lie. It’s fairly evident that Safaricom is headed on the same trajectory of impacting its customers from dawn to dusk as it strategically morphs itself from being a mobile phone company to the primary financial and data services provider for the Kenyan individual.

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

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IFRS 9 knocks the wind out of banks

[vc_row][vc_column width=”2/3″][vc_column_text]Banks just can’t catch a break, can they? In December 2015, Honorable Jude Njomo introduced a bill to ostensibly tame obscene profits that banks in Kenya were deemed to be enjoying. Having appealed to the hearts and pockets of his fellow legislators, who had unfettered and exclusive access to their own parliamentary low rate mortgages with a Kshs 20 million limit, free car privilege for the first car and Kshs 7 million low rate loan for the second car, the interest rate-capping bill sailed through and was signed into law in August 2016.

The mischief that the legislators should have sought to cure was the undifferentiated risk pricing that banks were levying on borrowers. A borrower who had a long history of taking loans and repaying them successfully would be charged at the same rate as a new borrower with zero credit history, which was in the range of 19 to 30 per cent depending on the bank.

What Honorable Njomo had no idea was the double whammy that banks were going to get once the International Financial Reporting Standard 9 (IFRS 9) replaces the International Accounting Standard 39 (IAS 39) with effect from January 2018. IFRS 9 aims at helping banks become more rigorous and prudent in the management of their existing stock of loans by setting an even higher standard on the amounts they must set aside as provisions for those loans, what accountants call impairment. While the previous standard IAS 39 required banks to make provisions only if the client started to demonstrate loan repayment stress, in other words reactively, IFRS 9 requires banks to look ahead, anticipate repayment stress and start making the provisions from the first day that the loan is booked.

What does this mean? Say John has a credit limit of Kshs 1 million issued on 1st January 2016. Under the previous standard of IAS 39, if he did not demonstrate any repayment stress then there was no requirement to set aside a provision for his loan. However, at the first sign of stress, say for instance he was retrenched and missed a payment that was due on 30th April 2016, the bank would be required to assume a probability of default of 5% from May 2016 and a provision would have to be made. Under IFRS 9, that probability of default has now been increased to a mandatory 10% in the first year of the loan whether or not the customer has demonstrated repayment stress. It doesn’t end there. There is an assumption that if John has a loan limit of Kshs 1 million but is only currently utilizing half of that, the unutilized portion of that loan is also included in the calculation for impairment. Thus the mandatory provisions for all loans regardless of their performance, as well as the inclusion of unutilized facilities means that the provisioning can go up to three times or more of the amount required before IFRS 9 standard was applied. This therefore applies to customers with credit card facilities or for those business borrowers who have working capital facilities like overdrafts or revolvers that tend to have fluctuating amounts during their lifetime. It gets even better. Even unutilized off balance sheet items like letters of credit and guarantees largely used by business borrowers, which previously did not need to be included in the calculations for provisions will now be required to be incorporated in the total calculations.

Simply put, banks will have to set aside income to create a bigger buffer for the loan stocks they have on their balance sheet, whether that committed loan is fully drawn or not. Setting aside that income can only be mitigated either through pricing, reducing availability of undrawn limits or both. Whatever the case, the current interest cap at 14% ensures that the pricing option is simply unavailable on most existing facilities. The danger that now lies on the horizon come January 2018 is that even overdraft and trade facilities that were previously being enjoyed by the privileged few business borrowers that survived the Njomo chop, will now either be removed or renegotiated as to be available on application rather than on available on standby as is currently the case.Trade is the oil that drives the economic engine of a country. When the instruments that enable that trade such as overdrafts, letters of credit and guarantees are imperiled, we can no longer make banks the whipping boys of our warped sense of social injustice.

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

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Kenya Airways Rises From The Ashes

[vc_row][vc_column width=”2/3″][vc_column_text]OTP in airline speak means on time performance. Kenya Airways (KQ) has been operating on a fairly good OTP for departures and arrivals over the last 3 months of my frequent regional usage within the East African Community circuit. I mentioned this to the flight purser on my KQ flight from Nairobi to Kigali via Bujumbura a couple of weeks ago. We were chatting while parked on the tarmac on a brief stopover at the dusty pink colored Bujumbura airport. He was amazingly sanguine about KQ’s future, something I had not seen in a long time as I often chat with the staff on the flights who have been typically morose following the poor financial fortunes of the airlines in the recent past. So Juma, as I’ve chosen to call the flight purser for now, explained that the airline has set an OTP target for departure as 15 minutes before the scheduled time so that they can make allowances for delays caused by flight engineering or operations.Out of 8 flights in 4 weeks I only suffered one delay for an Entebbe to Nairobi flight and was informed of the same via a text message as I left for the airport.

Juma mentioned that staff morale is climbing following retrenchments of about 150 last year. Why, I asked? He said that staff were getting incentives for ticket sales, and quite clearly for on board duty free sales given the renewed vigor that I have observed cabin crew flogging those overpriced items lately. “All our pilots are Kenyans,” he said chest bursting with a pride that almost made the buttons of his red blazer pop off as he pointed out another KQ plane that had just landed from Kigali en route to Nairobi via Bujumbura. “Can you see how busy we are, we have two planes on the tarmac of a foreign airport simultaneously!’’

I shared his infectious enthusiasm. KQ had finally reported an operating profit of Kshs 897 million in the financial year ending March 2017. This was compared to the operating loss of Kshs 4 billion the previous financial year. Clearly something had started to fundamentally change in KQ even before the June 2017 appointment of the new Managing Director Sebastian Mikosz, an acclaimed turnaround expert.

Unfortunately for Mr. Mikosz, disgruntled staff leaked a memo last week revealing the appointment of five senior expatriate managers. At a hastily convened press briefing following the contents of the memo’s publication in mainstream media, Mr. Mikosz seemed to be at pains to say how long the 5 managers, all from Poland and former work colleagues of his at his last employer Lot Airlines, would be staying in Kenya. While explaining what looks like an OTP (Only Through Poles) turnaround strategy he told the media that they were initially hired for 3 months. I admire the five senior managers who would quit full time paying jobs at a recently turned around airline in a fast growing European economy to take up a shortterm contract in a piddling, election bickering East African backwater.

In keeping with good corporate governance, his chairman Michael Joseph stepped in to take one for the team. “ I was involved, together with the board, the HR members of the Board, on the decision to support Sebastian in bringing this team here, I personally approved it. It was because those guys, Sebastian knows those guys expertise and that they can hit the ground running. They are not here to take anybody’s jobs; they are here to provide Sebastian with the knowledge and information he needs in order to turn around the airline.”

It’s great that the board chairman (himself a former expatriate – how’s that for visuals?) quickly stepped up to provide much needed support for the managing director on an emotive issue of staff at a national flag carrier. Mr. Mikosz will need a lot of such support especially when some disgruntled staff will continue to use inappropriate means to embarrass him such as leaked memos to the media. There will certainly be significant internal resistance to both him and his “pentagon” as they execute the painful changes that are required to turn around the company. As a rabidly proud Kenyan, I support what the board and management are doing to restore the pride in the Pride of Africa. I do however wish that they would be sensitive to the not so subtle messaging that adopting an “OTP strategy” demonstrates: ‘We couldn’t find other nationals, let alone Kenyans, to do what needs to be done.’

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

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Governance helps you to see around corners

[vc_row][vc_column width=”2/3″][vc_column_text]The CEO asked his Chief Financial Officer whether he had tripled the training budget for the next financial year as he had requested. “What if the employees that we spend money training leave us?” asked the accountant. “And what if we don’t train them and they stay?” retorted the CEO.
The role of a company’s board is two pronged: to ensure conformance and to drive performance. Conformance is like driving while looking through the rear view mirror as the board spends time monitoring and supervising management performance. Are the operations on track? Have the financial numbers been met? Was policy followed and did management execute within the realm of their delegated authority?

Performance is quite simply looking way ahead of the road before the driver. What might lie around that corner? Will the company drop off a cliff because the road has ended? This is the strategic outlook that directors cannot shy away from as the existential basis of the company relies primarily on the strategic decisions or omissions that they make. We don’t have to go far to find local examples. On 28th August 2017, Kenya said “it’s a wrap” and plastic bags were banned in a monumental environmental win for the country.

The Kenya Association of Manufacturers (KAM) adopted a heavyweight boxing champion’s stance – it ain’t over till it’s over –and went to court to challenge the notice placed by Ms. Judi Wakhungu, Kenya’s Environment Cabinet Secretary, that gave a six month notice of a ban on plastic bags on 28th of March 2017. You must understand the thinking that they had a snowball’s chance in hell since there had been two previous unsuccessful plastic bag bans in 2007 and 2011. According to KAM, 176 companies were facing a grim future of potential closure.

So let’s assume that even 10% of those companies had a fully functional board of directors with non-executive directors of an independent extraction. Seventeen company boards that should have undoubtedly asked the CEO at the April 2017 board meeting: “What if this plastic ban is here to stay?” The fatal response that the CEO would have provided would have been “What if it’s not? We have seen this happen twice before in the past and we know it will not take effect.”

In the book authored by R. Monks and N. Minow titled “Corporate Governance”, this situation is aptly summarized thus: value is created or destroyed at the point where decisions are made. These companies should have made an assumption that they needed a back up plan in the (what seemed to be unlikely) event that the ban would be effected. Hope is not a strategy. In this case, Judge Bernard Eboso of the Environmental and Land Court ruled that the juice was not worth the squeeze. “Granting the orders sought will severely undermine the protection of the environment while serving commercial interests,” he said.

Good boards are about good decisions write Monks and Minow. A good board would have asked management to start executing a plan just in case the ban took place. Actually, a good board would have started pushing management to create an alternative packaging line after the second attempt at banning plastic bags occurred in 2011.

The second illustration of the strategic role of boards is the Nakumatt supermarket chain implosion. A company does not suddenly begin to unravel one sunny East African morning. The conformance role of a non-existing Nakumatt board would have noted the spiraling supplier and landlord debt and raked management through the coals on what was the cause of the cash flow shrinkage. If a strategy had been tabled to the board years before to begin an expansion that quite clearly was going to suck valuable cash out of the business, the board would have asked management to provide a plan on how this expansion was going to be financed to avoid the current ignominy of landlord’s distressing for rent or, in the Ugandan case, the revenue authority auctioning assets to recover tax arrears.

Good boards are about good decisions. The value of a forward thinking board is infinitesimal.

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

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Governance fights lead to ungovernable behavior

[vc_row][vc_column width=”2/3″][vc_column_text]“Cabin crew, disarm doors and cross check,”said the Captain of Kenya Airways’ flight KQ444 that had flown from Nairobi, via Bujumbura and landed at Kigali International Airport last Tuesday. The time was 18:36 precisely. Exactly ten amazingly short minutes later I boarded the hotel’s shuttle to begin my ride to Serena Kigali. It had taken about 8 minutes to deplane, walk into a gleaming airport terminal where six immigration counters were fully manned by young, blue suited officers, get mildly grilled as to the purpose of my visit and walk through with my hand luggage straight out of the terminal. To the right of the immigration counters were two E-Gates, where Rwandese nationals could pass through with just their passports and no human intervention.

We drove out of the airport with the twinkling lights of the beautiful city laid out bare in front of the airport gates and straight into the busy but moving vehicular traffic. Having just arrived from the Ghost of Kidero’s Past,the clean streets were a stark reminder of how Nairobi continues to heave under the collective weight of uncollected garbage and unbanked cash collections. There had already been indications of the Rwandese obsession with health when we departed from Bujumbura about an hour before that. The crew had walked through the cabin of the plane releasing insecticide spray that the Rwandan health authorities required for any incoming air traffic to exterminate potentially harmful insects. Not so in Kenya, we welcome you and your frequent flying vermin.

I was in Kigali to attend a training program where the attendees were citizens of the East African Community member states. Tanzanian, Ugandan and Rwandese attendees brought my unceasing wonderment to a crashing halt as they bombarded the Kenyan attendees with questions about our prevailing political situation, particularly about a bold judiciary, an electoral commission in doldrums and two perennial protagonists that were both sure of victory come October 17th 2017. It was apt that the subject matter of the training – corporate governance- was being tested on a daily, if not hourly basis at the Independent Electoral and Boundaries Commission(IEBC) later in the week. As at the time of writing this piece, 5 out of 6 commissioners had issued a press statement disowning a memo allegedly written by the Chairman Wafula Chebukati censuring the Chief Executive Officer Ezra Chiloba on the handling of the elections.

It is curious that the commissioners did not draw any attention as to the veracity of the leaked memo, which the more sober social media pundits had begun to question. In fact they inadvertently affirmed its authenticity by declaring that they had neither discussed nor sanctioned the memo’s contents, which they only learnt about through the media. What the five commissioners clearly demonstrated was that they were only standing behind their leader long enough to throw him under a bus, which is any chairman’s worst nightmare.

Add to that the fact that there is a communication leak of a confidential memo makes for the script of a Kenyan edition of The Poltergeist. It is unfortunate that a governing body like the IEBC’s commissioners has resorted to lifting up its skirts to reveal the family jewels through the media. There can be no winners with media wars.A chairman’s job is fairly difficult and requires high levels of emotional intelligence, diplomatic speak and consensus building amongst the various internal and external stakeholders that a board has to deal with including its own members.
This could only have happened if some of the Commissioners felt that their Chairman was not building consensus and getting the collective view of the Commission as the governing entity before making critical decisions, especially if he is not an Executive Chairman. I doubt that it was the intention of the drafters of the constitution to give executive powers to the IEBC chair by dint of his being the returning officer for presidential elections as provided for in Article 138 (10) of the Constitution of Kenya.

Our constitutional commissions seem to have created a mongrel of a governance framework that creates a blurred line between oversight of the administrative roles played by secretariats and the execution of the mandate for the constitutional commissions which some commissioners actually undertake. The governance incongruence that this electoral crisis has surfaced at the IEBC, which is quite likely replicated at the nine other constitutional commissions, is one that requires some reflection and urgent clarification by lawmakers of the next parliament.
[email protected]

Twitter: @carolmusyoka

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Hotel expansion leads to talent contraction

[vc_row][vc_column width=”2/3″][vc_column_text]Two weeks ago today, at or about 11 o’clock in the evening, I arrived in Canaan. The Golden Tulip Canaan to be precise. It’s a brand spanking new hotel that is less than 2 months old, built in the heart of Kampala’s Nakasero district. Having arrived late in the night the hotel’s unmistakable silhouette could be seen from a distance due to the exterior glowing LED lights cleverly positioned to create a picture frame on the entire front of the edifice. A very friendly staff checked my tired bones in but not even exhaustion could stop me from appreciating what a new hotel smells and feels like in the beautifully furnished rooms and spacious bathrooms. But the promised land of four-star hospitality came to a crashing halt the next morning at breakfast.The receptionist had informed me that breakfast would be served from 6:30 a.m. but having walked in at 7:00 a.m for a client breakfast meeting, I found little sign of life or food in the dining room. It went down Joshua’s hill from that point on and only a fairly responsive manager helped to stem the unraveling crisis that ensued.

On that same morning, this newspaper in an article titled “13 new hotels to enter Kenya in next 5 years” quoted a PriceWaterhouseCoopers (PWC) Hotel Outlook report that predicted 13 new hotels opening in Kenya by the year 2021 which would add 2,400 rooms and expand hotel capacity in Kenya by 13%.This creates an oxymoronic impact: good news for the industry, bad news for the industry. The good news is the fact that Nairobi’s continued growth as a regional business hub and conference destination could only be sustained with the necessary supporting infrastructure of an expanded airport, feeder roads and international business grade hotels.

The impending entry of international hotel brands such as Sheraton, Mövenpick, Ramada, Hilton, Best Western, Radisson and Marriott is a testimony to the country’s growing international business stature and provides an excellent opportunity for overall service in the hotel industry to upscale. The bad news is the fact that such rapid growth in the same industry will lead to significant movement of experienced hotel staff in an extremely limited four and five star hospitality segment.

Business human resource strategies take one of three forms: build, buy or a combination of both. A build strategy may be more cost efficient in the short term as the organization hires low experienced staff but it requires massive investment in training to up skill employees to the service levels required. A buy strategy is effective in the short term as the organization hires experienced staff typically at a premium over their current salaries at their existing places of work. But such premiums add a cost to the overall payroll and create discrepancies in pay scales for staff at the same level within the buying organization. A combined strategy allows for a careful balancing and targeted acquisitions, while ensuring the “bought” resources are embedded as part of the training strategy required to maintain the service levels.

Whatever the HR strategy, existing four and five star hotels will have to adopt a defensive mechanism to stem the impending talent attrition.Throwing money at this problem is not a viable option as our hospitality industry is still recovering from the effects of terrorist attacks and the subsequent travel advisories leveled against Kenya in the last four years. This will require some scratching of heads to find and develop golden handcuffs to lock down experienced and talented resources while also preparing to lose the second layer beneath them who are chomping at the career growth bit and are the obvious targets for new employers. The good news is that Utalii College should see a resurgence in activity and demand for training from new recruits.Even better news is that there are now homegrown options for the many Kenyans working in the Middle East hospitality hubs of Dubai and Qatar. For all the money used to build a hotel, the last thing a hotel investor wants to create is my recent Canaanite experience: all the lights are on, but no one is home. People drive a business, not just posh facilities.

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

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Open Data Open Innovation

[vc_row][vc_column width=”2/3″][vc_column_text]I had an interesting lunch with a Tweep the other day, an indefatigable mobile Wikipedia on technology trends both locally and globally. Our conversation turned to open data and how it can be applied in the banking industry. I have to admit I had heard of the term open data but never really paid any attention to its potentially game changing application in the financial industry. “If Kenyan banks converted their records into open data, it would lead to greater financial innovation and a better product experience for customers,” said the tech pundit. I put on my fairly ignorant and thoroughly obtuse nitpicking hat on. “Banks cannot share such sensitive data, there’s customer confidentiality to be maintained and quite frankly, such information is a key intangible asset that the bank has,” I retorted. He proved to be quite unflappable and converted my healthy skepticism into acquiescence with just one question: who said that the data provided should be given with the client name?
I was an immediate convert. If banks openly shared customer data to fintech providers, the third party would have a treasure trove of information on customer spending habits, borrowing tendencies, repayment history, saving culture and basically the whole kit and caboodle of a client’s behavior. According to the Central Bank of Kenya’s latest annual banking supervision report, for the year ending December 2015, there were about 34.6 million banking accounts in Kenya and these numbers include mobile banking accounts of the Mshwari and KCB M-pesa extraction. That is 34.6 million data sets that can clearly demonstrate spending, borrowing and savings behavior within a certain age, gender, regional demographicor business segment, which can lead to finer product targeting and pricing.
The United Kingdom (UK) is a trailblazer in this area and in January 2015, Her Majesty’s Treasury launched a “call to evidence” asking stakeholders in the financial industry on how best to deliver an open standard for application programming interfaces (APIs) in UK banking and to ask whether more open data in banking could benefit consumers.
Application programming interfaces, or APIs, allow two pieces of software to interact with each other. In banking, APIs can be used to enable financial technology (fintech) firms to make use of customers’ bank data on their behalf and with their permission in innovative and helpful ways. For instance mpesa payment platforms for businesses make use of APIs supported by Safaricom.
The aim was to produce an open API standard for UK banks to drive more competition in banking and help the UK remain at the forefront of financial technology. The report was published less than 3 short months later in March 2015.
In summary the responses from the forty respondents who included a number of banks, fintechs, the Law Society of Scotland, the Association of Accounting Technicians and the British Banking Association raised concerns around privacy of customer data and fraudulent use of that data. The need for appropriate security and vetting systems for third party providers was a key concern. The respondents did note that open data in banking would enable customers make more informed decisions on which banking products to purchase and who to bank with. An Open Banking Working Group, bringing together key stakeholders such as banks, fintechs, consumer bodies and government, was then created and an Open Banking Standard (OBS) was produced. The OBS is a guide for how banking data should be created, shared and used.The group recommended that an independent authority should be established to ensure standards and obligations between participants are upheld. The authority would govern how data is secured once shared and the security, usability, reliability and scalability of APIs. It would also vet third parties, accredit solutions and maintain a whitelist of approved firms. The UK is cautiously but steadily moving towards this standard, with the key premise being that customers will have to consent to their data being shared.
Back in the +254, we have already established ourselves as early adopters in the fintech space with the amazing innovations that have been generated by the mpesa phenomena. Moving towards open data may perhaps be the key that will unlock the risk based customer loan pricing that the interest rate capping has miserably failed to deliver. It would also provide much needed customer portability on banking services generated by product pricing sense rather than brand affinity.

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

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Our past defines our future

[vc_row][vc_column width=”2/3″][vc_column_text]I woke up to the bright glare of a flashlight in my face and a rough hand pulling me out of bed. For a split second I thought it was my younger brother pulling a nocturnal stunt of the century and opened my mouth to yell at him. But seeing the silhouette of a long rungu and the shadowy features of two other adult males present in my room made me realize that this was no childhood prank. I was dragged to my parents’ room and watched the intruders kick my father as my mother begged them to leave him and us alone. I can’t tell if it was thirty minutes or an hour or two. But the robbers swept through the house having tied us in a bathroom and left with electronic items and whatever little cash they found. It was the early morning hours of August 29th 1986, my 14th birthday and one I will never forget as they took a watch that my parents had planned to give me as a birthday present. Four of the robbers were all eventually killed in the course of their chosen professions. The fifth one, who was the leader, was captured alive and interrogated in the presence of my father.

When asked why they had chosen to rob our house, he replied that they had actually tried to rob a neighbor’s house and had been repelled by the guards. As they ran away they looked over the ridge and saw the bright security lights of our house. That, and only that, was the reason why they chose to come to our house as they mistakenly figured that there must be a lot of valuables inside to warrant the amount of lighting outside. This traumatic event took place virtually 31 years ago, but I still remember the stomach churning terror I felt as a child while the painful grimace on my father’s face with every kick that landed on his body was forever seared into my memory. As a result, to date I cannot sleep comfortably in a house that doesn’t have a metal grill door somewhere between the external realm and my bedroom.

Human beings are the sum total of their singular experiences. Therefore every one of us has a story, a sum total of our past experiences that have defined who we are today and which guide a lot of our decision making in the course of our personal and professional lives. In last Thursday’s Daily Nation newspaper, the Council of Governors put a full two-page spread of the incoming governors and their deputies. Out of 47 counties, only 10 governors, or 21%, had deputy governors of the opposite gender. The veritable list consists of Governors Salim Mvurya of Kwale, Granton Samboja in Taita Taveta, Stephen Sang in Kericho, Samuel Tunai in Narok, Prof Paul Chepkwony in Kericho, Dr. Joyce Laboso in Bomet, Charity Ngilu in Kitui, Prof. Kivutha Kibwana in Makueni, Francis Kimemia in Nyandarua and Ann Waiguru in Kirinyaga. Let’s assume political expediency as a reason for selection of the opposite gender amongst the three women governor candidates, since an all female team is even harder to sell in a fairly patriarchal society such as ours. We are then left with 7 governors or 15% of the total counties with varied leadership teams, 7 governors who saw “bright lights” across the political ridge that attracted them to a different leadership template. Are these leaders then a function of their own past experiences that have allowed them to sidestep the patriarchal quicksand and choose women partners? Or can the same political expediency lens be applied to them perhaps due to the realization that the bulk of their voters are of a female extract and are moved by such displays of gender sensitivity? I will give them the benefit of doubt and say that the 7 governors have clearly had a positive experience in the past in working with female colleagues to the extent that they are willing to hitch their political fortunes, successfully I must add, to female candidates on their tickets. Of course it would be fallacious to argue that the remaining 37 governors have had negative experiences with females. But the question remains hanging in the air: what would it take to get more governor candidates to take on more women as deputies? Because their past experience, or lack thereof, with women in leadership cannot be ignored as a key driver of this anomaly.

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

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Corporate governance in Constitutional commissions

[vc_row][vc_column width=”2/3″][vc_column_text]As I was glued to my television last Wednesday following the election results that were trickling in, I was distracted by a niggling thought at the back of my mind. Since the Independent Electoral and Boundaries Commission (IEBC) became centre stage in the run up to, during and post the August 8th 2017 elections, the Commission Chairman, Wafula Chebukati, has largely been the media face and the voice of the institution. From a corporate governance perspective, it is usually the chief executive of an organization who addresses the public on operational matters related to the institution, as the chief executive is the head honcho of all administrative matters and the executive buck stops with him or her. The chairpersons and their board provide monitoring and oversight over management’s activities so that the accountability buck ends up with them.

But the architects of the Constitution of Kenya 2010 had an alternative governance framework when they designed the ten constitutional commissions of which the IEBC is one. From a corporate governance perspective, it is difficult to align the IEBC with what other statutory corporate entities like parastatals have, namely a board of directors headed by a chair and a chief executive officer who is often the secretary to the board. In the IEBC case, the organization is legally designed to have a chairperson and 8 members. These 9 persons are assisted in their work by a secretariat that is supposed to perform the day-to-day administrative functions of the organization.

Using a standard corporate governance lens – which I recognize is fallacious in light of the intentions of the constitution’s architects – the chairperson and his commissioners seem to have executive roles rather than oversight roles. The assumption is that they will take on the roles on a full time basis, but the Constitution takes into account that some of its constitutional commissions may not warrant full time work as Article 250 (5) provides that a member of a commission may serve on a part time basis. Since the IEBC commissioners take on full time jobs for the six years they are in office, it bears noting then that it becomes difficult to separate the executive from the oversight and they are therefore fully answerable for the acts and commissions of the institution as executives, without a further protective layer of a “board” above them. It also provides for a unique working framework as they take on executive roles working side by side with a Chief Executive who oversees the administration as well. Section 10(7)(e) (iii) of the Independent Electoral Boundaries Commission Act, 2011 provides one of the roles of the Chief Executive as facilitating, coordinating and ensuring the execution of the Commission’s mandate.It’s therefore quite curious to see how the Chief Executive can hold a Commissioner to account for failing to execute the mandate that I am assuming they have assigned themselves as full time commissioners.

The architects of the Kenyan constitution recognized the unique position of liability that it was putting the constitutional commissioners in and provided in Article 250(9) that a member of a commission, or the holder of an independent office, is not liable for anything done in good faith in the performance of a function of office. This is further entrenched in the IEBC Act in Section 15 which provides the same protection from personal liability for commissioners and officers for acts done in good faith.

Back to last week: watching Chairman Wabukati’s performance during the media briefings at Bomas and his almost utter relief at handing over the microphone to the CEO Ezra Chiloba to answer “operational questions”, it was quite apparent that the unique governance framework that constitutional commissions exist in create a “political” face of the institution, and an “administrative” face. The Chairperson is the political face, the one who takes one or several hits for the team in the face of public scrutiny and who existentially provides cover to the administrative team to buckle down and do the work as the bullets fly above them. However, Chiloba’s calm disposition and obvious knowledge of the operational matters, which may be as a result of having been in office longer, shone a bright light on the unique governance structure of this constitutional commission.At best, the chairperson should have let the chief executive receive all the potshots during the main media slugfests, and then step in to do the clean up and bandaging once the hard questions had been parried.

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

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Election Promises and Pipe Dreams

[vc_row][vc_column width=”2/3″][vc_column_text]Read my lips: no new taxes” was the watershed statement of George Bush Senior’s presidential career. He first stated it at the August 1988 Republican National Convention as a pledge not to tax the American people further, as per his campaign platform. It is believed to have helped him win the election in November that year. However in 1990, the Democrat controlled Congress came to a budget agreement with his administration that ended up increasing taxes in order to reduce the existing budget deficit. His Republican opponents during party primaries, and Democratic Party candidate Bill Clinton in the main presidential campaigns, derisively reminded him of his failure to live up to the campaign promise. “Read my lips: I lied” was their snarky counter claim.
Sneaking in between Bush Senior and Clinton was Texan billionaire Ross Perot who was running as an independent candidate. The growing federal budget deficit and fears of professional politicians allowed Perot’s candidacy to flourish as a credible alternative. By June 1992, Perot led national public opinion polls by 39% compared to 31% for Bush and 25% for Clinton. The presidency was his to lose if pollsters were to be believed. Part of his campaign bellowed against the growing levels of internal and external debt that were driving the enormous budget deficit. A few fatal missteps led him a drop in popularity, including dropping out of the race in July and re-entering the race in October. He still finished with a decent 19% of the popular vote in the main November 1992 election which was the most won by a third party presidential candidate since Theodore Roosevelt in 1912.

The first part of the July 24th 2017 Kenyan presidential debate featured three independent candidates. On the podium was the potentially fiery intellectual collective of Dr. Ekuru Aukot, Dr. Japhet Kaluyu and Professor Michael Wainaina. But alas, if anything, what we saw was that collective intellect being cremated, ignited largely in part by the fire of moderator Yvonne Okwara’s sunny disposition. Just as I was thinking: I can’t see the difference in any of you, Yvonne stepped into the realm of my audience world and noted how all the candidates sounded the same. From the Rhumba hit: “I will get all youth laptops” to the country music song: “I will cut the cost of living” and the reggae riddim: “I will reduce taxes” we were treated to promise after eye rolling promise of what they would do. The ubiquitous cherry on the icing of the political promise cake was the “I will get rid of corruption” mantra that only lacked strains of Bach’s Cello concerto in G minor playing in the background, to give it the gravitas it struggled to generate.
What would have made a significant difference in the candidate rhetoric would have been the “how”, not the “what”. How will all those promises be met, particularly where economic impact is being dangled like a cold can of beer at a crowd of rugby fans? Dr. Aukot slyly asked the audience to check out his manifesto on his website ekurunzai.com during his talk time which I did. On the site, Dr. Aukot leads with what he will do with taxes in four bullet points that each start with the words abolish, waive, waive and abolish. I can hear the guys in the hallowed Treasury building snorting with derision. How can you run, let alone grow your economy by abolishing and waiving all manner of taxes unless you’ve got some new ones hidden under your collar? Neither Dr. Kaluyu nor Professor Wainaina provided additional insight on how they would deliver on what they were promising for the economy nor did they provide links to any websites.
Ross Perot’s 50-page economic proposal included cuts in domestic spending, an increase in income taxes for the wealth and an increase in petrol tax in order to eliminate the budget deficit in five years. According to exit polls, majority of Perot’s supporters were white males, with 63% aged between 18 and 44 and about two thirds had not received a college degree. Wanjiku would understand if you told her that in order to improve her life, you would tax wealthy Kenyans more and use those taxes to pay for her kid’s education or her health.
Bill Clinton aptly campaigned that year: “it’s the economy, stupid!” to summarize everything wrong with George Bush. Future independents would do well to hire economists as key campaign consultants. In the meantime, vote wisely tomorrow.

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

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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.

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

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Governance lessons from Kenya Pipeline

[vc_row][vc_column][vc_column_text]Being a director on a company board is not and should never be for the faint hearted. An article in last Wednesday’s edition of the Business Daily caught my corporate governance side eye. The story titled “Ochuodho, 3 others to face charges over Kshs 827m fraud” highlighted a court case that has dragged for years with the protagonists avoiding criminal conviction for what, on the face of it, appears to be an ordinary financing transaction. Kenya Pipeline Company had allegedly paid a third party company a large amount of money to enable the third party company make payments on its behalf to its international creditors. The former managing director Shem Ochuodho, and the third party company’s executive directors were in trouble for getting the Attorney General, finance and energy ministries to approve a transaction, only to execute an entirely different transaction.

Within the story is a hyperlink to an older story dated January 10th, 2010 where a magistrate’s court issued a summons to the same Shem Ochuodho and the former board chairman Maurice Dantas to come to the anti-corruption court to answer to fraud charges over the same case. There are a number of corporate governance issues that this old Kenya Pipeline Company (KPC) case bring to fore. To begin with, a transaction was approved by the KPC board (since borrowing has to be typically approved by an institution’s board) but the board chairman (who is responsible for oversight and monitoring via the board) was on the fraud hook together with the managing director (who is responsible for execution). The lesson here: a board of directors is never immune from the actions of management. Secondly, the necessary external approvals seem to have been obtained from the relevant government officials, but management went ahead to allegedly execute a completely different transaction. The lesson here: if your mother sends you to the kiosk to buy flour but you choose to buy Patco sweets instead, you’ll be in very deep trouble.

Based on the newspaper articles however, it would appear that the board chairman’s case seems to have dissolved somewhere along the way but should not distract from the fact that sitting on a board, and keeping a keen eye on what management is asking you to approve, is imperative.

But the second issue is of more relevance. What the third party was supposed to do was to pay the external creditors on behalf of KPC and sit on the debt for as long as it would contractually take for KPC to pay the third party back. Why would this deal make sense to the ordinary man sitting in the Rongai matatu? If the deal enabled KPC to postpone its payments to the external creditors past their due date, it would ease the pressure on KPC’s cashflows thereby enabling it to apply that cash to more pressing current commitments. Secondly, if the deal enabled KPC to convert a foreign currency commitment into a long-term local currency one, it would assist KPC to mitigate against future currency depreciation which would come into play if the Kenya shilling slid south against the US dollar making the foreign currency loan that much more expensive to pay off. (Assuming, of course, that KPC’s revenue model was based in shillings, because if its revenues were in US dollars then there would be a natural hedge).

The story begs the question about what transpired at the KPC board meeting that approved the transaction back in the early years of this century. Did they ask the following questions: Does this third party have the capacity to undertake this transaction on its own balance sheet? No? Then where is it getting the money to fund the transaction? From a bank, you say? So why don’t we just go to that bank directly ourselves? At this point a fairly flushed managing director would be waxing lyrical about how the third party company has a better relationship with the bank and can negotiate a far better deal. Director X, who’s known not to suffer fools gladly, should have raised an eyebrow and asked: “But isn’t the bank that is financing this third-party-knight-in-shining-armour…..our very own bank?”Clearly this didn’t happen, leading to the current court cases. Directors on company boards, kaa chonjo (stay alert)!

[email protected]
Twitter:Twitter: @carolmusyoka[/vc_column_text][/vc_column][/vc_row]

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Pesalink Can Change Our Economy

[vc_row][vc_column width=”2/3″][vc_column_text]I recently ran a survey in Kenya’s 48th county, “Kenyans-on-Twitter” to see what people know about Pesalink and came to find out that most of them have heard of, but have never used the product. So I did some research and found that Pesalink is an initiative of the Kenya Bankers Association (KBA) to help Kenyans move funds from bank X to bank Y in a safe and convenient manner using their mobile phones. Assuming your bank operates in the 21st century, your phone number should be linked to your bank account. With that alone, you can use the Pesalink portal on your banking app to send money to buy your Toyota Probox (assuming it’s below Kes 999,999) to the car seller as you quaff a few drinks late Saturday night. Or send Kes 600,000 to Pastor Juma who’s selling that 100 by 50 plot in Kitengela, while you prepare your morning devotions at 4 a.m. on Sunday morning. Pesalink is also available on your internet banking app, ATM machine, banking agent and bank branch.

Straight through processing is what Pesalink is all about. It’s big brother RTGS – or real time gross settlement as it’s called – is also an initiative of KBA, and was created to allow faster settlement of large value transactions through a same day processing mechanism. Today you can’t issue a cheque for amounts over Kes 1 million as such a transaction has to go via RTGS. The direct beneficiary is the customer as the bank can no longer sit on the “float” as it waits to give the customer value for the cheque that has already cleared. The difference between RTGS and Pesalink is that the former requires you to walk into your bank branch and fill out a tedious form. The latter, however, is a few keystrokes from the comfort of your bar stool or Slumberland mattress 24-7. Both are KBA initiatives, which, when working optimally, should significantly reduce footfall as well as cash holding requirements in branches, the latter of which creates a trading opportunity cost for bank treasuries as it’s idle cash sitting in a vault.

I spoke to the team at the KBA-owned Integrated Payments Services Limited (IPSL), who operate the switch that runs Pesalink. The process is supposed to take at most 7 seconds for the transaction to go through. Since its launch in March 2017 until June 1st, the system has processed about Kes 2 billion between the 26 banks that have signed up to the system. Client ignorance on the one part and bank reluctance on the other are some of the reasons for the slow take up of the product. The bank reluctance, some say, comes from wanting to see stability in the system before launching big bang. My cheeky side wants to provoke and say the potential loss of float that banks will endure, as funds move real time, 24 hours a day, is something that would make any bank drag its feet to market this product. It also adds a new, but manageable challenge, for bank treasuries in squaring their cash positions once overnight fund movements become frequent.

Why should you consider moving funds this way? First it beats the exasperating Kes 70,000 transaction limit and Kes 140,000 daily limit on Mpesa. (Although it’s said that some banks have,counter intuitively, put in transaction limits. Why for the love of God?)Secondly, the fees have been capped at Kes 200/- no matter what amount is being sent. Thirdly, in case you missed it, the banks are running a no-Pesalink-charges campaign for the next two months to get customers onto the product. Fourthly, you can do it 24 hours a day 7 days a week. Finally there are no limits on the number of times you can send funds in a day.

The product is being launched in phases, primarily to get system stability and knock out the kinks before going full throttle. Today it’s serving Peer-to-Peer clients but the ultimate aim is for Business-to-Peer and vice versa, which would include government payments such as taxes and rates, or utility payments from businesses and individuals to KPLC and Nairobi Water. Pesalink provides one less reason to go to the bank physically and will be a key cog in the 24-hour economy wheel that we all wax lyrical about.

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

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Short Term Leadership Airline Style

Now I may have failed to mention that we were not riding in a devil-sitting-behind-the-wheel-Probox. This was an expensive piece of equipment flown by KQ’s finest, carrying human lives. Meaning that this team of pilots had to work well together, whether they were friends or not. They had to have an unspoken protocol of command that was established the minute they took their respective seats on the flight deck, devoid of ego and showing off who had more flight hours logged under their belts. The Captain was the captain. Period. I sat back and marveled at their professional waltz through the flight, with no raised voices and no hubris inspired instructions. It brought to fore that there are two kinds of leadership styles: command and control on the one hand and collaborate and influence on the other.

Different situations require different leadership styles. Say for example Mary has been promoted to become the head of a division in a manufacturing firm and is now leading what used to be her peers. Trying to command and control such a team will be extremely difficult in light of the fact that some team members may still be bristling at not being the ones to have gotten the promotion themselves. Some team members may have had more years on the job and, therefore, a sense of entitlement and misplaced expectations of respect. Mary has to navigate her leadership journey carefully, as trying to run the team through issuing edicts and driving hard for results may completely backfire on her.She will be better off trying to ensure collaboration within the team and influencing her former peers towards a common goal in order to establish her stamp of authority. Joanne, on the other hand, has just been hired from another firm, to come and head a division whose performance has been dwindling, has low staff morale and has got numerous outstanding audit issues that need to be resolved. Her leadership style in this case might have to first be command and control in order to establish new ground rules and set a certain standard, before moving into a collaborate and influence mindset once the division’s performance has been restored.

I came to learn that the command and control structure actually extends to the whole cabin crew when I spoke to one of the flight attendants. The flight purser and their team of flight attendants were most likely meeting for the first time as well. The flight purser takes charge at the beginning of the flight when they have a team meeting before passengers board. Everyone knows what to do, from simulating the instructions regarding emergency procedures to heating and serving food and drinks. A command and control leadership style is required in highly repetitive, process oriented jobs with multiple team members that may never have worked together, such as a surgical theatre. Order and not hubris is what keeps people alive at the end of the day.

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Chasing Banking Criminals To The End

Earlier this month I penned a piece about Iceland and Ireland being the only two known countries that had jailed bankers following the 2008 global financial crisis. As fate would have it, I visited Dublin a few weeks ago and got to chatting with a very friendly driver on my way back to the airport. First things first, the Irish people are as warm as Kenyans, and remarkably welcoming and hospitable. “We are not like the French,” said my driver with his tongue in cheek, “so we don’t go protesting in the streets when we are unhappy about something.” By this time, we were talking about the effect of the global financial crisis and the Irish economy’s painful but steady recovery over the last 9 years following property price crashes and banking failures.

According to my driver, the public was not satisfied with the arrest and subsequent jailing of the three bankers I wrote about a few weeks ago. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. But David Drumm, the CEO of Anglo Irish Bank, fled to Boston in the United States in 2009 when it became clear that the bank was going to collapse and filed for bankruptcy under Massachusetts law in 2010. The Irish public wanted justice. They wanted Drumm to come home and answer for his crimes.

According to Wikipedia, the hearing at the Boston-based court heard from the Irish Bank Resolution Corporation, which fought Drumm’s claims for bankruptcy, as he owed it €9 million. It was alleged during the case that Drumm had transferred money and assets to his wife, so they could not be seized during the bankruptcy proceedings. In early 2015, the court ruled the application inadmissible, ruling that he could be held liable for debts of €10.5m in Ireland.
Subsequently, the Irish Office of the Director of Public Prosecutions (DPP) recommended a number of charges be brought against Drumm. In 2015, the DPP successfully sought the extradition of Drumm who was arrested by US Marshals based in Boston in October and extradited back to Ireland in March 2016. Drumm was charged with 33 counts including forgery, counterfeiting documents, conspiracy to defraud, the unlawful giving of financial assistance in association with the purchase of shares, and disclosing false or misleading information in a management report.
Collective Irish indignation, coupled with dogged determination on the part of the Irish DPP, led to the arrest and extradition of one man who played a part in the collapse of an Irish bank that cost the Irish taxpayer € 29 billion (Kshs 3.3 trillion). He is currently out on bail awaiting trial later this year, with part of his bail terms having him report to his local police station twice daily. “People are angry and they want to see justice,” my driver went on. “No one will ever forget what that Drumm chap and his colleagues did to us.”

We have spent an inordinate amount of time in Kenya focusing on the role of the regulator in the case of Dubai, Chase and Imperial banks. We have waxed lyrical and railed continuously about how the regulator, being the Central Bank, is not doing enough to bring the perpetrators of the malfeasances in the respective banks to book. But the regulator has played a big part, via Kenya Deposit Insurance Corporation, in attempting to get justice by filing civil suits against senior management, directors and shareholders of both Imperial and Chase Bank this year. The buck for criminal charges sits squarely in the office of the Director of Public Prosecution who is supposed to represent the collective Kenyan indignation, anger and thirst for retribution. But given our growing Kenyan apathy to the corruption that bestrides both the public and private sector like a colossus, such righteous indignation may be lacking. And just like that, the fraudulent bankers will walk away into the sunset, having paid a monetary price for their crimes if the civil cases are successful, but free to walk amongst us.

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Low Corporate Governance for Controlled Companies Part II

[vc_row][vc_column width=”2/3″][vc_column_text]Last week I demonstrated the interesting phenomenon of stock market investors who were willing to buy shares, and, in some cases, at a high price to earnings ratio, of companies that had openly stated that they were not interested in having independent directors, having a committee to nominate directors or a committee to review compensation terms for management. One more thing, these companies had little to no shareholder rights. Amongst the egregious governance dodgers are the little known Google (or rather, Alphabet, its parent), Berkshire Hathaway and Facebook.

ISS Governance, an independent corporate governance rating agency, gives NYSE and NASDAQ traded companies a quality governance score based on four pillars: audit and risk oversight, board structure, shareholder rights and Compensation. On a graduating scale of 1 to 10 with the latter being the lowest score and therefore demonstrating higher governance risk, Facebook’s governance score is a resounding 10! It gets a good score of 2 for audit but everything else slides into governance oblivion when board structure rated a 10, shareholder rights rated a 9 and compensation rated a 10.

How do these companies do this? Their capital structure typically has two classes of shares: Class A and Class B. So the owners of a private company who wish to go public to raise present or future capital, or help establish price discovery for the value of their shares, can still maintain tight control over decisions, while diluting their ownership using a dual class share structure. In a case like Facebook, Mark Zuckerberg owns only 18% of the common stock but has over of the 50% voting power, largely by structuring the class B shares that he owns to have ten times more voting power than the regular class A shares. According to a Forbes magazine May 2012 article titled “ Facebook Ownership Structure Should Scare Investors More Than Botched IPO”, these kinds of structures are fairly commonplace in Silicon Valley with the likes of Google, LinkedIn and Zynga. It is also noteworthy that other big brand names like Nike, Ralph Lauren and Estee Lauder have similar structures.
According to Investopedia, the common practice is to assign more voting rights to one class of shares than the other to give key company insiders greater control over the board and corporate actions. These super voting share structures are also good defenses against hostile takeovers where a party can purchase a significant quantity of shares on the open market as to demand a seat at the board table.

Controlled companies are able to do this because NYSE and NASDAQ rules permit these structures for as long as there is full disclosure at the Initial Public Offering stage, and further ongoing filing disclosures. These disclosures should state exactly what corporate governance standards the company is failing to comply with. Thus the American stock investor has to be savvy enough to research the share structures of the companies they wish to purchase before rocking up at the Annual General Meeting and making a fool of themselves demanding to see compensation policies for senior management and all that independent director nonsense that good corporate governance dictates.
But why should the ordinary Kenyan business owner care about all of this? Were such structures permissible on this side of the pond, then it’s fairly safe to assume that we would see more family owned businesses view the Nairobi Stock Exchange as a viable option for capital raising and price discovery without the requisite nuisance value that external shareholders are viewed to bring. A good example would be the supermarket chains such as Nakumatt, Tuskys and Naivas. Or the big local manufacturers like Bidco and Menengai Oil. The flip side of the argument is that without good corporate governance, the current cash flow issues clearly facing Nakumatt’s management would severely infect investor perceptions of other family owned businesses with opaque board structures and have a knock on effect on their market valuation. Controlled company structures require tightly run management practices that stand the test of economic vagaries. With only about 6% of American companies having these kinds of structures it demonstrates that it takes a special kind of owner to convince external shareholders to just forget about governance and put your money where our mouth is!
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Twitter @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Low Corporate Governance for Controlled Companies

Western Refining is an American company that operates as an independent crude oil refiner and marketer of refined products. The New York Stock Exchange (NYSE) traded company commands a price/earning ratio of 33.3, a dividend yield of 4.23% and a market capitalization of almost US$4 billion. In November last year its share price rose by 28% on the back of news that it was being acquired by another company Tesoro, its attractiveness being an efficiently run set of refining and distribution assets that were well distributed between wholesale and retail segments. But here is the interesting bit: Western Refining is a controlled company.

The NYSE defines a controlled company as a company of which more than 50% of the voting power for the election of its directors is held by a single person, entity or group and has rules for controlled companies.
So in one of their regulatory filings, this is what Western Refinery disclosed:
“Under these (NYSE) rules, a company of which more than 50% of the voting power is held by an individual, a group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the NYSE, including:

• the requirement that a majority of our board of directors consist of independent directors;
• the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors
• the requirement that we have a compensation committee that is composed entirely of independent directors

We presently do not have a majority of independent directors on our board and are relying on the exemptions from the NYSE corporate governance requirements set forth in the first bullet point above. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Mr. Paul Foster [and others] own approximately 55% of our common stock. As a result, Mr. Foster and the other members of this group will be able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales, and other significant corporate transactions. ….The interests of Mr. Foster and the other members of this group may not coincide with the interests of other holders of our common stock.”

As of the time of writing this, Western Refining’s share was trading at $35.94 with an annual average daily volume of shares traded slightly above 1 million. The point is that there is a certain investor who cares less about how management is being compensated or monitored by an independent board and more about what their return on investment is, via capital gain on the share or dividend yields. I know you’re probably thinking who the black Jack is Western Refining anyway? It’s a random company I picked because it plays by the same rules as Warren Buffet’s Berkshire Hathaway, Facebook and Google. All these companies, and many more, are controlled companies trading on the NYSE. ISS Governance, an independent corporate governance rating agency, gives NYSE and NASDAQ traded companies a quality governance score based on four pillars: audit and risk oversight, board structure, shareholder rights and Compensation. On a graduating scale of 1 to 10 with the latter being the lowest score and evidence of higher corporate governance risk, Western Refining fares pretty well as it gets an overall score of 3, and pillar scores of 2 for audit, 7 for board structure, 2 for shareholder rights and 5 for compensation. Meanwhile, the Sage of Omaha Mr. Warren Buffet’s Berkshire Hathaway has an overall governance score of 8, with pillar scores of 1 for audit, 9 for board, 9 for shareholder rights and 4 for compensation. Alphabet, which is Google’s parent company has an overall governance score of 10, yes you read that right, 10 which is the lowest score, with pillar scores of 2 for audit, 10 for board, 10 for shareholder rights and 10 for compensation! Next week I’ll delve deeper into why this information should interest the ordinary Kenyan business.

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Iceland’s Breaking Bad

In a hodgepodge of squat low slung single storeyed buildings, which were built more for function than for aesthetics, sit some of Iceland’s finest bankers. According to a March 2016 Bloomberg article titled “This Is Where Bad Bankers Go To Prison” by Edward Robinson and Omar Valdimarsson, Kviabryggja Prison is a converted farmhouse nestled in between the frigid North Atlantic ocean on one side and fields of bare, unyielding lava rock on the other. Sigurdur Einarsson who was the chairman of Kaupthing Bank, Iceland’s largest bank before the 2008 financial crisis, and Hreidar Mar Sigurdsson who was the bank’s former chief executive officer were convicted of market manipulation and fraud leading up to the collapse of the former top bank.

The same article highlights that they are kept in the good company of Magnus Gudmundsoon who was the former CEO of Kaupthing’s Luxembourg unit and Olafur Olafsson who was the second largest shareholder in the bank at the time of its demise. The dream team is serving sentences up to five and a half years, which may be low in criminal conviction terms but huge in a global financial industry that saw not a single individual jailed in the United States or the United Kingdom for misdeeds arising out of the greed derived financial crisis. Starting in 2010, the special prosecutor for the Iceland banking cases had successfully prosecuted 26 banking officials by March 2016.

Following deregulation in the early turn of the 21st Century, Iceland’s top 3 banks had accessed European money markets and borrowed €14 billion in 2005 alone, which was double their intake in 2004 and paying 0.2% over benchmark interest rates. The banks lent the funds back out to Icelanders at high interest rates, raking in huge profits. Flush with easy credit, Icelandic households bought flats in London, took shopping trips to Paris and jammed Reykjavik’s streets with Range Rovers. By 2008 the banks’ assets had swollen to ten times the Icelandic $17.5 billion economy. Once the 2008 financial crisis hit, the Icelandic banks lost their short term funding and could no longer service their own debts. The local currency’s value fell, making loans denominated in foreign currencies more expensive and leading to the top 3 banks defaulting on more than $85 billion in debt and households losing more than a fifth of their purchasing power, conclude Robinson and Valdirmasson.

Further south in the Atlantic Ocean, Ireland joined Iceland as the only other country to criminally convict bankers for their pre-financial crisis misdeeds. According to a July 2016 article in the Irish Times by Ruadhan MacCormaic, three former bankers were jailed for terms ranging from 3.5 years to two years for their roles in a €7 billion fraud at the height of the financial crisis. Willie McAteer and John Bowe from Anglo Irish Bank and Denis Casey the former CEO of Irish Life and Permanent (ILP) were involved in setting up a circular scheme where Anglo moved money to ILP and ILP sent the money ban, via their assurance firm Irish Life Assurance, to Anglo. The article describes further that the scheme was designed so that the deposits came from the assurance company and would be treated as customer deposits, which are considered a better measure of a bank’s strength than inter bank loans. The sham transactions were aimed at demonstrating that “Anglo Irish Bank had €7.2 billion more in corporate deposits than it had.”

Kenya stands head and shoulders with its Icelandic and Irish banking counterparts who have had executives accused of market manipulation and fraud. Some shareholders and executives of Imperial Bank and Chase Bank have been taken to court by the Kenya Deposit Insurance Corporation for corporate malfeasance. However, these are civil suits aimed at recovering the money and levying monetary penalties rather than extracting criminal convictions for actions that have caused manifest pain and suffering to both depositors and genuine borrowers. These cases may drag in court for years as history has shown us, rendering very little present value vindication to those suffering today. But for what it’s worth, it’s a good start and a large prick on the conscience of many Kenyan bank boards today.

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Can You Learn To Unlearn

“The illiterate of the 21st century will not be those who cannot read or write, but those who cannot learn, unlearn and relearn.” Alvin Toffler, Futurist

I recently attended a talk by a South African futurist, Craig Wing, who began his talk with the quote above. Learn, unlearn and relearn. Craig walked the audience through technological megatrends that should keep every single corporate leader’s nose glued to their smartphone. To begin with, a 2014 study of the average life span of American companies on the S&P 500 Index by Standard and Poor’s yielded interesting results. In 1955 the average life span of an American company on the index was 61 years. In 2016 the average life span was 21 years and by 2027, projections based on current data estimate that the average life span would be 14 years. There is no better evidence of how this happens than outgoing Nokia CEO Stephen Elop’s quote in 2013 following the takeover of the company by Microsoft: “We didn’t do anything wrong, but somehow we lost.” The seemingly defeatist statement understated the myopic nature of the firm as it cruise controlled itself from relevance while Apple and Samsung were flat footing the accelerator in the smartphone space.

Another industry at a confluence of shifting consumer preferences and channel disruption is the retail industry. Singles Day in China falls on November 11th every year, or, more aptly 11.11 as the digit one purportedly looks like a solitary individual. The festival is a product of Chinese social culture amongst the youth to celebrate the fact that they are proud of being single. It has evolved into the biggest online shopping day in the world and a wonderful thumb up the nose to the more insular Valentine’s Day culture. Alibaba, the Chinese largest online shopping portal has registered phenomenal growth on this day alone. Sales in 2013 were US$ 5.8 billion, $9.3 billion the year after [when Facebook’s annual revenues were US$ 12.5 billion], $14.3billion in 2015 and tripling the 2013 numbers to a whopping $17.8billion in 2016. I forgot to mention one notable point: These were sales taking place within 24 hours, translating into processing numbers of 175,000 orders per second and 120,000 payments per second on their own payment platform Alipay. In the digital payments world this is the great grandmother of server challenges!

A pivotal part of Alibaba’s strategy is vertical integration, essentially ensuring a transaction gestates from an online conception into a physical delivery. Consequently 1.7 million couriers from 4,000 different retailers shipped 657 million packages out of 5,000 warehouses as a result of Singles Day 2016.
A Forbes magazine article covering the spectacular sales summarized the phenomena thus: A day in China is now bigger than a year’s online sales in Brazil.
Here’s the clincher: 82% of those sales were on smart phones!

The average life span of companies is shrinking largely due to the colossal analogue thinking that straddles boardrooms. Our “normal” as we know it no longer holds true, not when we can drive across Kenya from Mombasa to Busia carrying nothing but a toothbrush, an empty wallet and a mobile money filled phone while never lacking food, fuel and shelter.With the youth bulge that all African economies are facing, the current and future customer for a Kenyan business is more likely to be under 35 years of age, and doing most of their utility payments, banking, social interaction and entertainment off a smart phone. They are the ones who will ensure that Kenyan companies’ life spans shrink unless the corporate thinkers unlearn their current ways and relearn the rapidly shifting customer preferences. The unlearning is not only limited to customer preferences though, a highly differentiated approach will have to be taken towards the employee value proposition too. Employees are no longer in it for life, that’s been left to the KANU stalwarts. Keeping youthful talent is less a question of how much you pay, and more a debate of whether your company has a cause they believe in. Because the minute the values are diametrically opposed to what management actually does, many of these young folk walk. The question to ask yourself this week is, can you learn to unlearn?

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Kenyans are savers not gamblers

Last week, my General Manager Domestic Affairs(aka GMDA) decided to change her bank provider. GMDA came home that evening gushing praises about how the new Bank X had told her that she could set aside Kshs 1,000 every month to save for school fees and it would be automatically deducted from her salary account. No bank had ever taken an interest in her life, or in providing her with an automated way of saving for this critical aspect of her children’s security

As GMDA was talking, a news item appeared on the television about the uptake of the M-Akiba bond. I turned up the volume, as this could potentially be an option I could provide to my the-savings-scales-have-fallen-from-my-eyes GMDA.

The product is beautiful in its simplicity. Dial a number, register, place Kshs 3,000 for 3 years and earn tax -free interest twice a year. In my view, someone in Serikal is finally using data the way it’s supposed to be done: not to gather dust in shelves at the bureau of statistics but to drive behavior and economic growth. And nowhere is there more rich data than in the Financial Access Household Survey issued February 2016 by FSD Kenya working in collaboration with the Central Bank of Kenya and the Kenya National Bureau of Statistics.

The report finds that 75.3% of Kenyans are now formally included, with the giant leap being taken by women where formal inclusion leapt between 2009 and 2013 driven by the spread of mobile financial services.Formally inclusion is defined as use of banks, mobile financial services, SACCOs and microfinance institutions. Why would there be such a quantum leap in the growth of women users? I daresay that the convenience and the absolute privacy that mobile financial services provide make it a key attraction for the women. Not having to make a trip into a commercial centre to deposit or withdraw from a bank and not having a debit card or statement lying around that can generate heated arguments as to “hidden resources” is a major draw.

While the FSD report doesn’t go into the abominable aspects of betting, it does delve into it’s divine counterparty: savings. The FSD report finds that the number of Kenyans using at least one savings or deposit instrument continues to rise and at least 66.4% of the adults sampled have a savings instrument. Almost half of those adults use savings for meeting ordinary day-to-day needs, a third save for education and 40% also save for medical emergencies and burial expenses.

One more critical finding: 42.6% of business owners and 87.7% of farmers rely heavily on their savings to finance their livelihoods.

It is on the back of this data that we should critically look at the potential of M-Akiba to provide a viable savings platform. M-Akiba has the potential to pull funds sitting tied in a knot in the corner of a leso or under the cooking hearth into the formal economy especially since the FSD report finds that the top two most valued storage places for Kenyans are their mobile financial services accounts and saving in a secret place!

Meanwhile, I tried registering for M-Akiba, so that I could sell it to GMDA. After jumping through several hoops, I ended up feeling like a hamster on a wheel so I jumped off. I called the number provided online and a lovely lady called Brenda answered on the third ring, telling me the system was experience downtime. By the time of submitting this piece it wasn’t yet up. I trust that the developers of M-Akiba will make this an iterative product, tweaking it as they get more and more customer usage data to determine how and why Kenyans are using it. Just like how M-Pesa was launched as a money transfer system but ended up being a virtual repository of cash, M-Akiba might not be used for what its creators envisaged it for. Customers use your product to do a job. Time will tell what the true job of M-Akiba will be, but the ultimate winner will be the government with a new, and far less interest rate demanding investor in its securities.

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Managers Are Not Always Leaders

I recently had a very interesting conversation with a European expatriate who has been working in Africa for a number of years. Bruno (not his real name) is German, but grew up in the chocolate and wristwatch producing capital of the world, Switzerland and posits that the problem we have on the continent is using the word “leadership” fairly loosely when what we should be demanding from those in charge of both public and private institutions is “management”. I had to pause for a moment and reflect on his words. “So what would you call Angela Merkel then?” I asked. “In light of the craziness of Donald Trump, wouldn’t she be regarded as the leader of the free world?”

Bruno was very unambiguous in his response. “Germans don’t consider Angela Merkel as a leader. They view anyone in government as being managers, there to take care of the country’s resources. Angela is therefore the chief manager for German resources and has built a very strong track record around that.” He quickly scribbled a bell curve to illustrate his point. “Leadership is a very rare quality and it is reserved for people who make a big difference in the lives of their followers.” Pointing to the tapering right hand side of the bell curve, he continued,“Only about 10% of a population is made up of true leaders. The majority sits in the middle as people who manage.” He chuckled as he pointed to the left tapering side of the bell curve. “This 10% or so are not worth mentioning. Most of us sit in the middle, we are given the responsibility of managing institutions or countries and that is what we are capable of.”

By now my curiousity was really piqued and I urged him to continue. “Germans don’t like the tag leader, since the whole Adolf Hitler thing, and it’s the same with the Swiss. Do you ever hear about Swiss leaders?” Hmm. That stopped me dead in my seated tracks. I’d never heard about a Swiss leader, come to think of it. So Bruno threw me a challenge to read up on Swiss politics in order to see where the concept of management versus leadership was well executed.

The national government of Switzerland known as the “Federal Council” has only seven members, who are elected by Parliament for a four-year renewable term. The seven members are drawn from the political parties with the highest political base. On an annual basis, a “President” is elected from amongst the Federal Councilors to serve a one-year term. The Federal President chairs the sessions of the executive and undertakes special ceremonial duties, particularly abroad. Each Federal Councilor, including the President, heads one of the departments (ministries) of the Federal Council. The Federal Council is a collegial body and everyone is deemed to share power.

In Switzerland and Germany therefore, according to Bruno, politicians are considered to be managers who are there to manage and oversee the resources entrusted to them by the citizenry. You only need a leader in a crisis, but if an organization is well managed, then you don’t need a permanent leader. He paused to watch a variety of emotions, particularly discernment, play on my face. He concluded, “It’s wrong to ask managers to lead when they are simply not capable of doing so. When one is in office, one should ask themselves: Am I supposed to be a leader in this situation or am I supposed to be a manager?” If Bruno’s argument is valid, and we pressed ctrl+alt+del to reboot our country, imagine the standard we would hold our political and corporate “leaders” to? Deliver the simple mandate to utilize resources well and produce a return and you will be considered successful. Fail on that mandate and, well, keep on Johnny Walking.
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Last week I erroneously stated that the KCB Mpesa loan product was fee based rather than interest rate based. I wish to clarify that the KCB Mpesa loan is interest rate based, charging 1.16% per month with a one off negotiation fee of 2.5%. The cost for a one-month loan therefore is 3.66%. My sincere apologies for the misstatement.

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Banks have to go mobile to stay relevant

The 2016 FinAccess Household Survey – published in February 2016 by Financial Sector Deepening (FSD) Kenya – provides the most recent data of Kenyan behavior around consumption of financial products and services and is a treasure trove of information for any banking strategist.One key finding was the use of credit. In what reflects the wealth distribution within the Kenyan population, 57.3% of the survey respondents in the research reported that they take credit to meet their day-to-day needs. The second highest need for credit was to pay school fees at 21.5% and only 15.8% were using credit to generate wealth in the form of business loans.

Having a customer who has insatiable credit needs is banking nirvana. The question is how to do so in a manner that will be cost effective with minimal loan loss potential. The FinAccess Household Survey should be read together with yet another FSD research paper titled the Financial Access Geospatial Mapping Report launched in October 2015. The report essentially tracks access to financial services across the Kenyan geography, using data from Kenya National Bureau of Statistics, with unsurprising results.

Answering the question as to how many service access points exists per 100,000 people, the report finds that there are 3 banks, 1.5 ATMs and 32 bank agents serving that population. It gets more interesting as you start to look at the extent of mobile money penetration. Mobile money access points are 54 times that of banks at 163 with mobile money agents growing from approximately 48,000 locations in 2013 to nearly 66,000 locations in 2015 which is a 37% growth. Meanwhile, population within 3 kilometers of an ATM remained stagnant at 23% in the two years. Bank branches grew a paltry 1% from 26% to 27%, while bank agents grew from 53% to 60% in the same radius.

What is the data saying? The average Kenyan uses credit heavily to support his basic lifestyle and is nearer a mobile money access point than to a bank. The growth of mobile money agents demonstrates very low barriers to entry and should inform a bank’s decision on whether to purchase an ATM – whose price ranges from Kshs 2 million to Kshs 4 million depending on whether it has deposit taking capabilities – or whether to invest in deepening its mobile banking platform to deliver products through a wider customer delivery channel (at no cost to the bank) that is growing exponentially year on year.The interest rate capping on loans may have curtailed bank appetite for formal unsecured lending, but the two mobile loan products of KCB Mpesa and Mshwari continue to enjoy unfettered demand and have survived the interest capping law due to their fee based rather than interest rate based pricing which the average borrower is apparently indifferent to. The lesson here for the proponents of the interest capping law is that the average Kenyan who is trying to survive is more interested in access to credit than in the actual cost of that credit. The growth of mobile access points demonstrates that it is the preferred mode of not only transferring money but also storing that monetary value.
The critical question bank strategists should be asking themselves is how to piggyback off the cheap mobile agent network to provide loans and take deposits. The evidence already points to the need for smaller branches, fewer ATMS and greater use of historical mobile use data to generate personal credit ratings. Developing mobile banking applications for the average Kenyan is what will separate the chaff from the rice in the future banking industry.

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Poaching is not a strategy

The Chief Financial Officer of a company asked his Chief Executive Officer, “What happens if we invest in developing our people and then they leave the company?” The Chief Executive answered, “What happens if we don’t, and they stay?”

From the age of three I started to get my daughter’s hair professionally braided following utter and complete failure on my part to tame her African locks into a respectable and worthy outcome at home. But it was a nightmare trying to find a braider who could get my daughter to sit still until I mercifully discovered Rose. Rose and her team at Salon V specialized primarily in professionally attending to children’s hair and had magic touch with kids. Within a year of getting used to her benevolent services, she sent a text saying she had moved to Salon W about 1 km away as the crow flies. We moved with her. Nine short months later, another text message saying she had moved to Salon X. Then Salon Y and now we are on Salon Z, which mercifully is about 100 metres from my house. Rose moves around with the same five other ladies: three stylists and one washer. All their salon moves have been within a two kilometer square radius. I don’t know about others, but I have and will continue to move with Rose for no other reason than that she’s figured out how to get my now six year old daughter to sit still for the two hours it takes to get her hair washed and braided.

To buy, borrow or build is a human resource strategy that many organizations grapple with unsuccessfully. Buying means you pay a premium to poach talent from the competition. It works perfectly, especially where they come already trained and carrying a mobile phone full of customer contacts. The problem is, they encounter colleagues at your organization who are at the same job grade but at a significantly lower pay grade. Then the murmurings of staff dissent begin, and the pressure to deliver results immediately to justify the higher pay ensues. Borrowing means setting up alliances with key partners to lend you resources for a defined period or entering into contract agreements with relevant resources to deliver the task within a stipulated time. Building requires you to invest in your talent by first identifying the individuals and then designing a career track for them that requires detailed training and work assignments whose objective is to hone the skills required for the target job.

The professional football industry has honed combining these HR strategies to a fine art. Professor Laurence Capron from Insead Business School and Muhammad Tousif a bank executive and football writer jointly penned an article titled “Build, borrow or buy your talent” that featured in the May 2014 issue of Insead’s Knowledge magazine. The article captures the reasons for the success behind English Premier League’s Manchester United. “Manchester United is one of the best talent factories in the world. Internal innovation is engrained in the Red Devils. Players such as Duncan Edwards, Bobby Charlton, George Best, Nobby Stiles, Mark Hughes, Ryan Giggs, Paul Scholes, David Beckham and Johnny Giles were all spotted as youngsters and came up through the ranks of the club. Yet, despite its internal development culture, Manchester United actively loans out its players to other clubs to accelerate their development, providing more game time and diverse sources of learning. And it has complemented its internal pool by buying high-profile players like Robin van Persie (from Arsenal), Shinji Kagawa (Dortmund) and more recently Marouane Fellaini (Everton).”

If you’re like me and couldn’t differentiate a football player from a jar of jam, don’t worry. This article is not about football, rather it is about consciously being aware that buying or poaching as we call it locally, can not be the sole HR strategy for your business as it comes at a detrimental cost. It’s not only expensive in the long run, but it also destroys your customer service proposition when the poached talent invariably moves on. That’s not to say that poached talent is only motivated by higher remuneration, there is often other motivational planks such as working for an organization with a good social responsibility platform or one that provides international work opportunities. The act of loaning out players is fairly widespread in the European football industry and is one that can be replicated within an alliance of non-competing companies. It allows for talent to expand its wings by working in a different industry with different challenges at an extremely negligible training cost to the source employer. The talent gets exposure and can take or bring back best practice to the organization. Of course, requisite “do-not-poach-at-the-end-of-the-assignment” contracts will have to be signed by participating companies in such an alliance. But putting together such a system requires a group of CEOs and their HR directors who put the talent squarely in the centre of their company’s overarching growth strategy.

Rose and her crew of four have developed a fairly lucrative scam: get hired by a new salon owner, work, disagree on terms and keep on Johnny walking. However, it is unsustainable in the long term and it is only a matter of time before their reputation as being blow-dryers for hire catches up with them, hopefully by which time my daughter will be able to sit still for the 2 or so hours it takes to do her hair and can move to a more stable environment. The salon owner where I get attended to cottoned onto this fact eight years ago and trained the entire staff on hair and beauty techniques. Her aim was to reduce the reliance on a few “stars” running the show and holding her hostage. It worked and there has never been a time that a mass exodus has left her with an empty salon as Rose’s crew have now specialized in doing. Poaching can never be an effective strategy if you are not building your own talent simultaneously.

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Mpesa is a key economic engine

I have a little farm on the sweeping eastern Laikipia plains that has me visiting at least once a month. The singular cause of blinding migraines for the many telephone farmers is farm worker fraud. Those fellows will find a way to skim money, farm inputs or farm outputs at any given opportunity and trust me, as soon as you plug one leak they’re ten steps ahead of you preparing for the next scam. So one has to, as a telephone farmer, accept a certain level of pilferage as part of the business-as-usual operations, or opting to move and reside permanently in the farm. Irritated and exhausted by one certain input request, I set up a system that didn’t require the farm worker’s intervention. I got a trustworthy boda boda operator in Nanyuki (where trustworthy is a fairly fluid virtue) to be purchasing the input on my behalf. But I don’t send him the cash. He goes to the outlet, sends me the “Lipa Na Mpesa” till number where I pay and he takes the goods together with an electronic receipt to the farm. I specifically chose the outlet for those two reasons: they have an mpesa till number and they issue electronic receipts. I then pay him, using mpesa, for delivery of the goods and have peace of mind, knowing full well that another scheme is likely being hatched at the farm since I blocked what had been a lucrative cash cow for the workers before.

Two things that are critical to the urban telephone farmer: a local boda boda “guy” and mpesa. While I don’t have any data on the impact that boda bodas have had on the transport economy – which must be undeniably high – more data on mpesa is readily available. In the latest published Safaricom financials for the half year ended 30th September 2016, the company had 26.6 million registered customers out of which 24.8 million or 93% were mpesa customers. However, a more accurate number is yielded by looking at the 30-day active customers which registered as 23 million, with 17.6 million active mpesa customers or 76.5% of total active customers. Safaricom made more money from mpesa at Kshs 25.9 billion than it did from mobile data, which generated Kshs 13.4 billion. Mpesa revenue was equivalent to 43.3% of the voice revenue data of Kshs 45.7 billion. In simple words, mobile money is no bread and butter; it’s the cream with a cherry on top!

What were these mpesa customers doing, you ask? Well telephone farmers like me were a piddly fraction of the mpesa volumes. Three quarters of the total Kshs 25.9 billion in revenue that Safaricom received from mpesa was from what they call “bread and butter” business, which are the person-to-person transfers and withdrawals: John sends Mary a thousand shillings, who promptly goes to an agent to withdraw the same in cash and purchase food items for the house. Telephone farmers like me are to be found in what Safaricom calls “new business” which accounts for 24% of their mpesa revenue or about Kshs 6.2 billion.
New business includes customer to business (individuals paying for services using mpesa), business to customer (businesses sending money to individuals for example Kenya Tea Development Agency paying farmers their tea bonuses), Business to Business (Distributors paying a manufacturer for goods delivered) and the rapidly expanding Lipa Na Mpesa that has saved many urban dwellers the pain of having to send cash to purchase items via fundis, rogue relatives and even more rogue workers. But mpesa revenue aside, it is the sheer transaction volumes that are simply eye watering. By September 2016, mpesa had transacted Kshs 3.2 trillion. Kenya’s Gross Domestic Product or GDP, according to World Bank figures is US $ 63.4 billion or Kshs 6.34 trillion. The mpesa volumes are virtually 50% of Kenya’s GDP. However, hang on to your hat please as there is some double counting in the mpesa transaction volumes since they include deposits, withdrawals, person-to-person transfers and the business volumes. The bigger question is whether mpesa then poses a systemic risk in the event it is out of commission for whatever reason.

Firstly, mpesa is a methodology of transferring cash virtually. The actual cash sits in various mpesa trust accounts in Kenyan commercial banks. The bigger concern is not whether one’s funds are safe if mpesa goes down, it’s how to access a system that will release those funds which are sitting safely in a bank. Central Bank data from 2014 demonstrates that while mobile money volumes are extremely high at 66.5% or two thirds of the national payment system, they only account for 6.6% of the throughput value. It’s definitely a case of more bark than bite where systemic risk proponents are concerned.

But having said that, the attraction to track the mpesa movements from a tax collection perspective goes without saying. Even though the values may be low, mpesa provides an excellent opportunity for the taxman to bring in smaller businesses into the taxpayer net as each transaction has an electronic signature and trail. Designing and applying resources to create that tracking framework may perhaps be where the challenge lies.

That mpesa has changed lives goes without saying. We live in a country where one can literally take a trip from Mombasa to Malaba carrying zero cash, zero plastic card and with just her phone be able to eat, drink and seek lodging for that entire trip. The growth of the Lipa Na Mpesa payment points was 73% year on year in the half-year 2016 Safaricom financials. This means that there is rapid uptake by commercial establishments of the mpesa payment option, which quite honestly presents a better cash flow option than credit cards as there is no lag time between customer transactions and when the funds are deposited into the business account (typically 2-3 days in the case of credit cards).

Mpesa’s metamorphosis is not inclined to stop here and a banking licence may end up being required at the rate mpesa is transforming.

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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.

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Insurance Industry Sips A Bitter Lemonade

“Everyone has a plan, until they get punched in the mouth,” Mike Tyson – world famous boxer.

The internet was lit up last month when insurance history was shaken to its roots by a nondescript New York based startup called Lemonade. The urban legend is quoted thus:

“At seven seconds past 5:47pm on December 23, 2016, Brandon Pham, a Lemonade customer, hit ‘Submit’ on a claim for a $979 Canada Goose Langford Parka. By ten seconds past the minute, A.I. Jim, Lemonade’s claims bot, had reviewed the claim, cross-referenced it with the policy, ran 18 anti-fraud algorithms on it, approved the claim, sent wiring instructions to the bank, and informed Brandon the claim was closed.”

In Kenyan-speak, Brandon lost his fairly expensive winter jacket valued at about Kshs 98,000 two days before Christmas. He submitted a claim on his phone using his insurance company’s app. Within 3 seconds, a robot had reviewed and approved the claim, sent EFT instructions to his bank and closed the whole unpleasant maneno. Brandon breathlessly gave his side of the story thus:

“I signed up for Lemonade because it was no frills, the most affordable option, and took no more than two minutes on my couch. I try to avoid making claims but the process with Lemonade was so simple. I already assumed there was no way that I’d recover my losses: other insurers either pile paperwork or deduct tons of charges that I don’t understand. But this time was different. I signed an honesty pledge, answered a few questions, and Lemonade reimbursed me in a matter of seconds! Their service is amazing and I am so happy that I signed up!”

I see my insurance industry friends rolling their eyes as they read this. I would too if I worked for an industry that had more gobbledygook than an advanced fluid mechanics class in Swedish. “We provide WIBA cover with a minimal excess payable”. How in the name of logic does that sentence make sense to the ordinary man on the Rongai matatu? And no matter how many times you speak to insurance industry managers and tell them to communicate simpler to customers, you’re more likely to get an underwritten, indemnified ode to jargon.

Lemonade is a young company, set up less than two years ago and funded with $13 million (About Kshs 1.3 billion) of seed capital. Its premise is peer-to-peer insurance (P2P) aiming at reducing costs by cutting out the middle fat made up of brokers and agents and issuing policies directly to clients. It donates unclaimed money to good causes. Yes: it gives away what the ordinary insurer on the Syokimau train would deem as profit. According to Paul Sawyer writing on the Venture Beat blog, clients select a cause that they care about through the app that they use to sign up. Clients who select similar causes are bundled into peer groups. Premiums from this group cover any claims by individuals and any money left over is sent to the common cause. Lemonade makes money by taking a 20 percent flat fee from monthly policy payments. The whole premise of the Lemonade model is understanding human behavior so they hired the renowned behavioural economist Dan Ariely as the company’s Chief Behavioral Officer. “Since we don’t pocket unclaimed money, we can be trusted to pay claims fast and hassle free,” says Ariely. “As for our customers, knowing fraud harms a cause they believe in, rather than an insurance company they don’t, brings out their better nature too. Everyone wins.” The policy that Brandon had cost him $5 (Kshs 500) per month and, according to the Lemonade website, was 5.6 times less than what a similar policy from a legacy insurer cost. Unlike many other insurance start-ups, which have focused on distribution, Lemonade has become a fully-fledged insurance company. It takes on the risk from the policies it writes, but also has reinsurance deals at Lloyd’s and with Berkshire Hathaway.

Look, we are not there. Yet. But Kenya is on the global map of fintech innovation and has demonstrated a population that is inarguably made up of large-scale early adopters across a wide spectrum of age groups. Shifting to insure-tech, particularly in matters that are pertinent to Kenyans and inexorably linked such as road transportation and health is simply a matter of when, not if. The number of road accidents caused by the public transport industry be it via matatu or bodaboda transport lends itself to short term, bite sized policies that are cheap and fit well into our “kadogo” economic model. One insurance company has already began to pilot this. However the problem in the Kenyan insurance industry today is the middleman legacy system made up of brokers and agents that create a fairly healthy cost layer that tags onto the fractious margins. Add to that the high level of frauds as well as increasing regulation and you see an industry that has to die and be cremated before any practical innovative solutions can ever emerge that make sustainable financial sense to Victorian age balance sheets.

Before 1954, the athletic world did not believe that a man could run a mile in under 4 minutes. However, on 6th May of that year, Roger Bannister broke that psychological barrier by running a mile in 3:59:4. I call it a psychological barrier because within a year of Bannister’s achievement, 24 other people had followed suit in running the sub-four minute mile. What Lemonade has done is to break the psychological barrier where a claim is paid out without filling in reams and reams of paper, and answering all manner of questions short of what color underwear one was wearing when the event leading up to the claim occurred. I don’t think legacy insurers will fall over themselves to copy this new model. But new insuretechs can and will. The barriers to entry for insuretech are fairly low. And that would be a resounding blow to the old school insurers. To be precise, it would be a punch in the mouth for even the best laid strategic plans.

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The Life and Times of Whistle Blowers

Do you remember that annoying classmate in primary school who always provided to the teacher unsolicited reports of those who were “making noise” when the teacher had stepped out of class? Or the one in boarding school who reported to the dorm master when colleagues had scaled the fence using military grade subterfuge and sneaked out of school to have a good time? In school we referred to these dystopian citizens as “snitches” or “tattle tales” but this was largely informed by the folly of youth where everyone was supposed to be bound by the Mafian oath of omerta or silence when such indiscretions were being perpetuated. However in adulthood, the role of these informers in an organization is absolutely critical in providing information about criminal activities that are being perpetuated by staff, management or, in extreme cases, the board of the organization itself.

Such an informer is called a whistle blower and is defined as a person who informs on a person or organization that is engaged in an illicit activity. A bank I know had a whistle blower call in to say that the branch manager was stealing from the branch. An auditor was sent over to the branch but he couldn’t find any evidence of the stealing. The whistle blower was tenacious and called again, this time saying “tell the auditor to put a camera in the backroom where the ATM is loaded with cash. He will see.” Sure enough a hidden camera was placed and the branch manager was busted in all his glory skimming money from the ATM cassettes as he ostensibly loaded them with cash.
The Capital Markets Authority (CMA) code of corporate governance practices for issuers of securities to the public 2015(we should probably reduce that mouthful to two words: “The Code”) specifically mentions whistle blowers three times. Some context around its genesis would be useful here. The Kenyan private and public sector space has a litany of cases of gross malfeasance perpetuated by senior management, very often leading to the eventual collapse of institutions for lack of cash flow. More often than not, staff knew what was going on but did not have the avenue to report such activities, as it would lead to instant dismissal, or in some extreme cases, grave personal injury. Imperial and Chase Banks are classic cases of organizations that could have done with a whistle blower policy, but they also beg the question: who do you whistle blow to, when it’s the owners or key officers of the institution perpetuating the fraud? The CMA Code tries to address this, on the premise that companies issuing securities to the public – such as shares via the Nairobi Securities Exchange (NSE) or bonds – have the basic corporate governance framework of a board of directors where the buck should stop. Section 4.2.1 provides that the board shall establish whistle-blowing mechanisms that encourage stakeholders to bring out information helpful in enforcing good corporate governance practices. Sounds a bit la-di-da right? Like some flowery language meant to incorporate current buzzwords such as “good corporate governance” and “stakeholders”.
But a second and far more robust attempt is made further down the Code under Section 5.2.5 which states that the board shall establish and put into effect a Whistleblowing Policy for the company whose aim shall be:
a) To ensure all employees feel supported in speaking up in confidence and reporting matters they suspect may involve anything improper, unethical or inappropriate; b) To encourage all improper, unethical or inappropriate behavior to be identified and challenged at all levels in the company; c) To provide clear procedures for reporting of such matters; d) To manage all disclosures in a timely, consistent and professional manner; and e) To provide assurance that all disclosures shall be taken seriously, treated as confidential and managed without fear of retaliation.

Why should you wake up and take notice if your company is not listed on the NSE? The CMA Code covers any company that has issued securities to the public. Therefore an Imperial Bank, which had issued a CMA approved bond to the public not too long before it crashed and burned, would have been expected to be applying the code within its own corporate governance framework had it lasted long enough. Section 7.1.1 (w) of the Code gets even more prescriptive by declaring that the board shall disclose the company’s Whistleblowing Policy on its annual report and website.

The CMA Code is a fairly modern and well thought out regulatory framework that encourages issuers of securities to “apply or explain” the guidelines provided therein. It will therefore require an inordinate amount of CMA supervision to ensure that issuers of securities are religiously submitting annual returns where they undertake the self-evaluation mechanism that an “apply or explain” framework presumes. If the CMA does this well, it then provides a second level of scrutiny to banks that may have inadvertently escaped the Central Bank of Kenya’s statutory hawk eyes and wish to take money from the public in a different form.

The institutions that do this well outsource the whistleblowing framework to an independent third party whose number is widely circulated within the organization. Staff members are encouraged to call that number or send an email with the assurance that the information will be handled sensibly by a non-aligned entity. The third party entity provides these reports directly to the organization’s board audit committee for directive action to be taken. It is imperative that the feedback loop on the whistleblowing falls outside of current management for obvious reasons: management might be part of the problem. Outsiders have no way of knowing what rot goes on inside an institution until the crap hits the fan. What the CMA Code has done is provide a way to protect investors and enable them to hold issuers of securities to a higher standard of transparency. However, this can only work successfully if the CMA plays its enforcement role judiciously.

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Shadow Directors

Maneno Ltd is a Nairobi Stock Exchange Listed company in the business of manufacturing consumer products. The founder, Michael Monga, was a well-respected businessman with multiple interests in various industries some of which interests have led to obvious potential conflicts. As Monga was quite alive to the effect of negative publicity on his business interests, he often appointed proxies to the boards of companies in which he was a substantial owner. Maneno Ltd had three such directors, who were senior employees in Monga’s other companies. Monga, being a very shrewd player, was also careful to select independent non-executive directors that could be prevailed upon to play ball where required.
Due to a fairly loose enforcement regime, cheap imports of the same consumer products that Maneno manufactured had started to flood the Kenyan market and management were spending valuable time firefighting with the relevant government agencies. Prudent past management had ensured that a significant amount of cash had been set aside and invested in money market instruments in anticipation of a strategic plant expansion that had been planned in the 5 year strategy. Monga instructed his three directors to support the Managing Director’s board paper recommending an interim dividend. That seemed strange as the financial projections indicated that the company was going to make a loss that year due to shrinking sales. The paper was approved and a special dividend was paid. The company went ahead to make losses and the following year a hefty final dividend was declared that essentially wiped out the healthy cash reserves that Maneno had been holding. As sordid stories go, within no time Maneno was bleeding cash, as management was unable to stem the effect of cheap imports versus their own locally manufactured products in an aging plant with high labor costs. The company filed for insolvency within two years of the final hefty dividend payout.
What potential remedies exist for the minority shareholders who were held at glorious ransom by the corporate shenanigans of Michael Monga? Both Kenya and Uganda have recently revamped their company laws from the archaic 1948 UK Companies Act that formed the basis of local company law. Uganda passed the Companies Act 2012 and Kenya followed suit with the Companies Act 2015 both of which laws essentially aligned company law with modern norms such as the concept of a shadow director. Company law defines a shadow director as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
If you’re struggling to picture one, think of a multinational company in Kenya, whose board is regularly instructed by “group” via the managing director, on when to declare dividends or when to postpone making critical provisions on their financial statements. It can also be the finance director of a Kenyan company that has regional subsidiaries and demands the same financial behavior of the subsidiary boards. [It bears noting that the Tanzanian Company Act 2002 does not expressly define shadow directors.] It can be a cabinet secretary who regularly issues instructions to the board of a limited liability company with significant government ownership. In the Maneno Ltd example, Michael Monga is a classic example of a shadow director. Not only was he giving express instructions to the non-executive directors, but he also ensured that he indirectly controlled the board through the appointment process. For all intents and purposes, Monga was the board.
Company law recognizes that while de jure directors (directors by law) have fiduciary duties to the company including the duty to act in the best interests and promote the success of the company, de facto directors (directors in fact) also owe the company fiduciary duties and can therefore be held accountable for their acts in the same vein as the directors on record. This premise was established in the 2013 landmark United Kingdom case of Vivendi SA and Centenary Holdings Ltd versus Murray Richards and Stephen Bloch. In the case, as succinctly summarized on the Helix Law website, a shareholder of a company in trouble used his influence to make the sole director of the company pay him a salary and other money from the company, without providing any benefit or services back. These payments were made while the company was insolvent. The company went into liquidation and its receiver claimed compensation from the shareholder claiming that a) he was a shadow director b) a shadow director owed the company fiduciary duties as if he had been formally appointed as a full de jure director and c) the shareholder had breached those duties. A Burges- Salmon blog on the shadow director subject matter summarized the court’s findings thus: On the first issue, the court found that the sole director was accustomed to acting in accordance with the shareholder’s instructions and therefore the shareholder satisfied the test for shadow directorship. On the second issue it was found that in giving instructions to de jure directors, a shadow director assumed responsibility for a company’s affairs. However while a shadow director’s duties were not statutorily provided for, the consequences of being found to be a shadow director must evidence Parliament’s perception that a shadow director could bear responsibility for a company’s affairs. The court also observed that a shadow director’s role in a company’s affairs might be just as significant as a de jure director, and that public policy pointed towards statutory duties being imposed on shadow directors.
What does this mean for Michael Monga and many like him?
Company Law now provides extraordinary personal consequences to the shadow director including: a liability to contribute to the company’s assets following the company’s insolvency, disqualification from being a director of any company in Kenya following the company’s insolvency as well as criminal sanctions and personal liability for violations of director’s duties.
As a parting shot, while de jure directors may rely on Directors and Officers insurance cover, the shadow director is most definitely not covered under the same. If you sit on a Kenyan or Ugandan board, now would be a good time to look over your shoulder and find those shadows.
[email protected].
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Innovation Comes In Different Forms

Thabo has been my official airport transfer resource in Johannesburg for the last two or so years. With a medium build and dark brown complexion, his eyes are always dancing even when the rest of his face is cast in a serious expression. When Thabo first came to pick me up, we hit it off even before his Toyota Camry had left the gates of Oliver Tambo International Airport because his first question to me was “How do you think the Kenyan economy will perform with the new government?” I whipped my head to my right to take a keener look at this South African who, having just picked me up from the airport, was engaging me in an economic discussion about my own country. I couldn’t even get to the answer as curiosity abounded. “How do you know I am Kenyan?” was my intrigued reply. “Oh I usually like to Google my clients before they arrive so I can know what makes them tick. I found your website and I saw you write a lot about the Kenyan economy, so I thought I could learn some more from you.”

If you visit South Africa often, you will understand why this random conversation with an airport transfer driver would be generate a certain level of astonishment. Let me leave it there before I’m accused of hate speech. Within the first ten kilometers I came to understand that Thabo owns his own company with a fleet of cars that he prefers to lease rather than outright buy, as the cash flow benefits as well as tax efficiency from leasing were much higher. In the two years since I first met Thabo, his business has grown leaps and bounds simply because of his personal touch which I personally experience as he now ensures that he’s the one who always picks me from the airport, rather than his other drivers, whenever I visit Johannesburg for work. On my last visit in November, he proudly showed me his new app called “Africa Ride”. The app allows both him and his travel agent clients to show what time the passenger was picked up, what route the driver used and what time the passenger was dropped off. It then sends an invoice immediately to the client. In a city that experiences “Nairoberry” levels of insecurity, this app provides much peace of mind for his clients.

More importantly, the app gives Thabo greater control over his drivers all over the country. He chuckled as he told me that he can now see where the drivers are at any given time and the excuse that “I got lost” no longer washes with him as passenger destinations are automatically linked to Google maps which every driver’s smart phone has. I gently chided him for his hubris, as earlier in the year I had flown to Cape Town and used his driver there for the airport transfer in what ended up being a disastrous trip. The driver had no clue where my hotel was, despite it being on the iconic V&A waterfront and he got lost several times much to my chagrin (and mild panic at being in the company of a male driver late at night). “Ahh Kerol,” he drawled, “no worries, this app now fixes that nonsense the driver was giving you. And I fired that guy anyway, he was ruining my business!”

On a completely different innovative note, a close relative of mine lives and works in the United States. On my last visit there in 2015, he took a week off to spend time with us and completely switched off his phone. When we asked him whether his boss would be offended if he needed to reach him urgently, Close Relative shrugged his shoulders and said that he was on mandatory unpaid leave. “What’s that?” we asked. Apparently his employer was going through a fairly rough financial period. Sales were flat while costs were creeping up in line with inflation. The company had a mandated inflationary salary increments on everyone’s employment contracts. An effective way to manage these costs was simply to ensure that every single employee took about a month a year (broken down into maximum periods of one week at a time) of mandatory unpaid leave. The immediate effect would be to reduce the entire company’s payroll by the equivalent of one month by the year end. The overall impact would be to effectively cancel out the annual salary increment that had to be given to employees.

“So even if my boss calls, I don’t have to call him back or answer his emails because I am not being paid to,” was Close Relative’s defensive conclusion. “Even my own boss doesn’t answer his calls or emails when he’s on unpaid leave.” Close Relative is a smart one, and he ensured that he aligned his last 2016 unpaid leave week to the Christmas season. “How long can this last?” I asked him during a Christmas Day call. “Well, as a company we only have two choices. We can increase sales by either volume or innovation. Higher volume of sales of course leads to higher costs. Innovation is more desirable as new products have higher margins. But there’s no innovation taking place right now.” I chuckled. There was innovation taking place alright, specifically on the employee costs line. The mandatory unpaid leave was an excellent way of keeping that cost line flat while ensuring that the more unpleasant retrenchment option was kept at bay. The flip side of this innovation was its morale killing effect. While employees were relieved that there were no retrenchments – yet – the culture forming was one that if one was not being paid then one was simply not going to engage or be engaged whatsoever during such time. Innovation evidently takes many forms; some that lead to higher employee and client engagement and others leading to the exact opposite. Have an innovative 2017!

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Uchumi Directors are not living happily ever after

[vc_row][vc_column width=”2/3″][vc_column_text]It’s one thing to see the law being created. It’s another to see it being applied. The outcome of the Uchumi Supermarkets Ltd (USL) enforcement action by the Board of the Capital Markets Authority (CMA) was one of the best precedents set by the regulator since John Hanning Speke discovered Lake Victoria as the source of the Nile. As a corporate governance educator, I am constantly asked for local case studies since our curriculum is replete with American and European examples, as those are more mature markets that have built up a significant jurisprudence of corporate scandals and enforcement actions thereafter. Kenya itself has a litany of white-collar scandals, but very little in the form of punishment for the perpetrators of corporate malfeasance.

The CMA has undoubtedly set the tone for board directors and key officers of listed and non-listed public companies in this town which tone is as clear as the waters in a baptismal font as evidenced by the allegorical language used. “The Chairman and the directors will be required to “disgorge” their director allowances.” A dictionary meaning of disgorge is to “yield or give up funds, especially funds that have been dishonestly acquired.” Another definition of the same word is “to eject food from the throat or mouth.” And therein lies the allegory, the hidden meaning. Directors who allow malfeasance to occur on their watch and are remunerated during such time are feeding from the wrong trough and will be asked to regurgitate those emoluments swiftly, unashamedly and unequivocally.

The former chairperson and two former non-executive directors of USL were disqualified from holding office as directors or key officers of a publicly listed company, a company that has issued securities, or a company that is licensed or approved by the CMA for a period of two years. They were also asked to return the director allowances paid to them for the financial years 2014 and 2015. Finally, they were instructed that if ever a listed company saw it fit to appoint them to a board after they had atoned for their sins and sat in director purgatory for two years, they would be required to attend corporate governance training before being eligible for appointment.

The former chief executive officer and the former finance manager were also disqualified from holding office as a directors or key officers of companies that are regulated by the CMA. The regulator will also be filing a complaint at the Institute of Certified Public Accountants regarding the professional conduct of the two who are registered Certified Public Accountants.

In retrospect, what the named Uchumi directors and officers have gotten is a rap on the knuckles. They dodged a bullet provided by the current and newly operationalized Companies Act 2015 that allows a shareholder to bring a derivative action against a director for negligence, default, breach of duty or breach of trust. And the regulatory outcome would set enough of a precedence to warrant a shareholder to pursue this course of action in our highly litigious country. The new Companies Act 2015 has given a lot of teeth to stakeholders – including the company itself – to seek retribution for malfeasance or wrong doing on the part of the very parties supposed to maintain the best interests of the company. In light of the fact that a law cannot be applied retrospectively, and the fact that these breaches happened before 2015, the main worry for the named directors is how to mpesa those funds back to base and, for the officers, what color tie to wear to the disciplinary hearing at ICPAK.

The CMA itself issued a new corporate governance code in 2015 (CMA Code), and relied on its fairly modern tenets, that codified director fiduciary duties, in its conclusions about the creative accounting undertaken by the officers of Uchumi and overseen by the non executive directors. Quoting the CMA press release on the Uchumi decision: “The inquiry further established that in some instances the USL branch expansion program was undertaken without due regard to the Board’s fiduciary duty of care due to the absence of a proper risk management framework being in place. It was also established that in some instances, USL pre-financed landlords in addition to making payment of respective commitment fees, but nevertheless the branches were never opened or funds recovered.”

Under Chapter 6 of the CMA Code titled Accountability, Risk Management and Internal Control, boards of directors are required to put in place adequate structures to enable the generation of true and fair financial statements. The Code explains that the rigours of risk management by the board should seek to provide interventions that optimize the balance between risk and reward in the company. In layman’s language: Figure out what could possibly go wrong in the company whose board you sit on and ensure you put in place processes that recognize that risk and, where possible, mitigations for such an eventuality. Furthermore all times ensure the financial statements reflect- rather than conceal – those risks. In the Uchumi case, paying developers of buildings where you intended to open new branches in advance and not putting into place protection measures in case your advance funds were mis-directed to personal Christmas slush funds, was a big mistake. Those pre-payments that were not being recovered should have been provided for or written off entirely.

In light of all the recent corporate scandals, and our seeming inefficiency in prosecuting white-collar thugs dressed in oversized Bangkok knock off suits, the CMA enforcement action is a breath of fresh air. While the directors have all gotten off fairly lightly with a mild disgorgement, it is the social pariah status that will be the most effective deterrent for board directors in this market. I’m not sure that there is a self respecting board in this town, whether in the public or private sector that wants a “director formerly known as the Uchumi guy” serving on its board anytime soon.

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

 

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Image Is Everything

The campaign slogan run by Sprite a few years ago always holds true to me in life: “Image is nothing, thirst is everything, obey your thirst!” In political and business leadership, however, the slogan should be paraphrased thus: “Image is everything, thirst for power even more so: obey your thirst.” Two things will always hold true, in political and business leadership image is everything and power is absolutely everything. I was inspired to this line of thought as I read the spellbinding book titled “A Thousand Hills” by Stephen Kinzer, who writes about Rwanda’s rebirth and the man who dreamed it. The book is a well balanced historical analysis of President Paul Kagame’s life before, during and after the genocide that shot his leadership prowess into the limelight based on the writer’s research and hundreds of hours of interviews with President Kagame and other notable actors in the drama that became notoriously known as 100 days of genocide from April to June 1994. A key player was the Canadian military commander Romèo Dallaire who, in 1993 was appointed as the Commander of the United Nations peacekeeping force in Rwanda that came to be known as UNAMIR. Dallaire’s boss was none other than Kofi Annan, who was the head of the department of peacekeeping operations within the United Nations. Kinzer writes of Dallaire: “Friends had warned him…. that Annan and his colleagues were ‘incompetent boobs who kept bankers’ hours and disappeared when situations in the field came to a head’ “. Within the course of a year, Dallaire came to understand why Kofi Annan’s image was so tainted. At the height of the genocide, ten Belgian peacekeepers were killed and Dallaire immediately called Kofi Annan with a view to request for a bigger and better armed contingent which had a tougher mandate to intervene and provide security to the victims of the bloodthirsty killers. Annan’s response was simply no. Dallaire was asked not to take sides and told further that it was up to the Rwandans to sort things out for themselves.
Image is really a two-way mirror. One the one side of the mirror is the Kenyan. If you ask the average Kenyan who Kofi Annan is, she will tell you that he is the man who came to rescue Kenya from the brink of civil war after the December 2007 elections. The stylish, salt-and-pepper haired Ghanaian who would brook no nonsense until the two Principals came to an agreement. On the other side of the mirror is the Rwandan. Kofi Annan is the man who failed to let the UN peacekeeping force in Rwanda convert its mandate from a paper pushing bureaucracy to saving lives of victims of genocide. It is arguable that the two sides of this Ghanaian coin are a reflection of lessons learnt, a commitment that never again would he watch while a country went to flames. Brokering – or being seen to broker – peace talks in a country that has significant regional importance for the United States and the United Kingdom provided a great opportunity to redeem a fairly tarnished image.
Closer home, the recent appointment of the pioneering, no-nonsense former CEO of Safaricom, Michael Joseph as the chairman of Kenya Airways was met with some fairly robust debate on social media. Social media is the platform where the uninformed as well as the informed continuously churn out both facts and opinion in equal measure and it takes a discerning observer a while to white out the noise, the “retweets” and the multiple “shares” in order to curate the truth. To the external observer, Michael Joseph has always cut the image of being tough, being focused and having ‘zero chills’ with regards to public perception of what he says. His track record at Safaricom, taking it from a start-up to being one of the top ten tax generators in an astonishing ten years, placed him in the Kenyan corporate hall of fame as a turnaround CEO. Thus it was with much fervor that many social media commentators erroneously referred to him as the “executive chairman”, and went ahead to explain why he was there to run the troubled organization on behalf of the shareholders.
The term “executive chairman” simply means a chairman who takes an active role in the day-to-day management of the organization, as opposed to a non-executive chairman whose role is confined to leading the board and its activities. The potential for significant clashes between an executive chairman and a CEO is fairly high, as two centers of power are created within an organization thus creating room for exploitation by stakeholders. It also prevents the chairman from providing the critical management oversight role that is required via his leadership of the board. Happily, the global slant of corporate governance to which Kenya subscribes to effectively separates the role of chairman and CEO. This has been further codified in the Capital Markets Authority Code of Corporate Governance for Issuers of Securities 2015 that specifically requires the separation of the two roles.
Joseph’s lasting image is one of a man in charge, running a ship single handedly and both the formal and social media are driving the narrative that he will now lead the organization to the land of milk and honey. However, his role is limited by law, and by Kenya Airways’ own constitutive documents, to leading the board which body provides the strategic direction that the organization should follow. There is a substantive CEO in place who is still responsible for executing that strategic direction provided by the board and on whose desk the buck still stops. Joseph’s legacy will be sealed as a turnaround champion if he leads the board in determining the correct strategy to help the airline shift its course and ensures that the board keeps the Kenya Airways management on a tight and focused leash in its strategic execution mandate.

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How Not To Grow Revenues-A Lesson From Wells Fargo

[vc_row][vc_column width=”2/3″][vc_column_text]In case you missed it, the United States provided yet another wonderful case study in bad corporate governance in the Wells Fargo case this past September.

On September 8th 2016, Wells Fargo Bank was fined $185 million (Kes 18.5 billion) by regulators after it was found that more than 2 million bank accounts and credit cards had been opened or applied for without customers’ knowledge or permission between May 2011 and July 2015. Employees had been opening and funding accounts in order to satisfy sales goals and earn financial rewards under the bank’s incentive-compensation program.” Dice it or slice it, this was a fraud of monumental proportions that had to have been known from the top. Or was it known? Well, John Stumpf was not trying to take one for the team. Following the termination of about 5,300 employees (about 1% of the workforce) in relation to the allegations, the champion stallion appeared on television on September 13th 2016 quite unapologetic. “I think the best thing I could do right now is lead this company, and lead this company forward,” in response to calls for his resignation. Stumpf was acting straight out of the African leadership playbook titled “Id Rather Die Than Resign.”

A week later, Stumpf met the inimitable Massachusetts Senator Elizabeth Warren. Ms. Warren had done her homework extremely well and in 17 short minutes excoriated the bank CEO. I’ve extracted the first painful minutes here:
Warren: Thank you, Mr. Chairman. Mr. Stumpf, Wells Fargo’s vision and values statement, which you frequently cite says: “We believe in values lived not phrases memorized. If you want to find out how strong a company’s ethics are, don’t listen to what its people say, watch what they do.” So, let’s do that. Since this massive years-long scam came to light, you have said repeatedly: “I am accountable.” But what have you actually done to hold yourself accountable? Have you resigned as CEO or chairman of Wells Fargo?
Stumpf: The board, I serve —
Warren: Have you resigned?
Stumpf: No, I have not.
Warren: Alright. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: Well, first of all, this was by 1 percent of our people.
Warren: That’s not my question. This is about responsibility. Have you returned one nickel of the millions of dollars that you were paid while this scam was going on?
Stumpf: The board will take care of that.
Warren: Have you returned one nickel of the money you earned while this scam was going on?
Stumpf: And the board will do —
Warren: I will take that as a no, then.

Two things to note here: First of all is how Stumpf was trying to bring in his board of directors as the reason why he was not resigning. We will never know if his board quite frankly wanted him gone by this time but couldn’t get garner the guts to ask him to leave, after all he was both Chairman and CEO. Secondly, he also laid the decision to pay back his past bonuses squarely on the board’s hands. Under Warren’s probing eye, he was not trying to take the flak for not paying back unfairly earned bonuses. On this one, he was going to go down with his board. Having seen how Wall Street executives had walked away with a slap on the wrists following the global financial crisis of 2008, Warren went for the jugular:
Warren: OK, so you haven’t resigned, you haven’t returned a single nickel of your personal earnings, you haven’t fired a single senior executive. Instead evidently your definition of “accountable” is to push the blame to your low-level employees who don’t have the money for a fancy PR firm to defend themselves. It’s gutless leadership.

Stumpf, who had probably had the best legal brains prepare him for the Senate hearing, had even been trained on the classic “I don’t recall” technique for any questions whose answers might lead to self incrimination. But Warren was in no mood to take prisoners and gave the classic ultimatum.
“You know, here is what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they probably would be looking at criminal charges for theft.
They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multi-million dollar bonuses and you went on television to blame thousands of $12 an hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability. You should resign.
You should give back the money that you took while this scam was going on and you should be criminally investigated by both the Department of Justice and the Securities and Exchange Commission. This just isn’t right. A cashier who steals a handful of twenties is held accountable. But Wall Street executives who almost never hold themselves accountable. Not now, and not in 2008 when they crushed the worldwide economy. The only way that Wall Street will change is if executives face jail time when they preside over massive frauds. We need tough new laws to hold corporate executives personally accountable and we need tough prosecutors who have the courage to go after people at the top. Until then, it will be business as usual. ”
It is noteworthy that it is not only Kenya that is struggling to get corrupt practices actively prosecuted, especially those perpetuated by “untouchables”. And after that lacerating and very public questioning, the bank’s independent directors announced on September 27th that Stumpf would not be receiving $41 million (Kes 4.1 billion) of promised compensation while they launched an independent investigation. Clearly, being thrown under Stumpf’s bus was not what they had signed up for and necessary action was taken.

John Stumpf threw in the towel and finally resigned on October 12th 2016 from the Wells Fargo Board and also stepped down from Chevron Corp and Target Corp on October 19th 2016 where he served as a non-executive director. An honorable action that was a day long and a dollar short.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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Imperial Audit: 42 Billion Reasons Why Directors Should Be Cautious

[vc_row][vc_column width=”2/3″][vc_column_text]A pilot was welcoming passengers to the flight shortly after take off. “Thank you for flying with us this morning. The weather is…..” He broke off his welcome with a sharp scream followed by, ”Oh my God, this is going to really hurt. It’s burning.” There was complete radio silence for a full minute before he returned. “Ladies and gentlemen I sincerely apologize for that incident, as I dropped a very hot cup of coffee on my lap. You should see the front of my trousers!” Out of the back came a worried shout from a passenger, “If you think yours are bad, you should see the back of mine.”

The Imperial Bank forensic report is out and any bank director, actually scratch that, any director of a Kenyan company should be having severe indigestion right about now. Following its findings, the Central Bank (CBK), the Kenya Deposit Insurance Corporation (KDIC) and the bank in receivership have sued nine individuals, one deceased person’s estate and eight companies in a bid to recover Kshs 42.4 billion of the banks assets and deposits. Yes, the figure is simply eye watering by its sheer size. This civil suit represents a watershed moment for corporate governance in Kenya. With the exception of three independent non-executive directors (INEDs), the other seven individuals (including the deceased) were directors representing the eight companies that were shareholders in the bank.

While the individuals are being sued for breach of fiduciary duty – a basic tenet of corporate governance – the companies therein named are being sued as being beneficiaries of what may come to be Kenya’s single largest corporate fraud since the 19th century explorer Henry Morton Stanley stepped off a boat onto Kenyan shores.
Over the period of ten years from 2006 to 2016, the bank was found to have operated two banking systems, with the illegitimate system passing through over billions of shillings in fraudulent disbursements over that period. The non-executive directors, including the chairman, were tightly joined at the hip and had cross shareholding in various other companies some of which were property related. In view of the fact that this was starting to look like a brotherhood of veritable kleptomaniacs, the three INEDs who joined in quick succession- two who joined on 1st of July 2014 and one on 1st February 2015- may not have been on the board long enough to cotton on what was, and had been, going on for the previous nine years. But today they are jointly and severally liable for years of mismanagement. These chaps were probably pleased as punch to have made it to the board at all and may have been snookered by the fast talking CEO, whose verbosity is alleged to have steamrolled various discussions on the board audit committee which he regularly attended. Now the three INEDs have to get lumped with the other directors all of whom have been painted with a mouthful of accusations over and above breach of fiduciary duty including negligence, gross negligence, fraud and theft.

One could very well argue then, that banks owe a duty of care to their directors to provide rigorous training in both corporate governance and risk management. There are now 42.4 billion reasons why bank directors need to know what they are signing up for. Actually, I could kick it up a notch and say that the CBK should require a made-for-purpose bank director training that one must undertake before they sign off on those ‘Fit and Proper Forms’ that are required for any bank director and senior officer before appointment to the board.
Yet the CBK is not entirely blameless in this mess, as all this happened on their watch. The regulator cannot claim that it relied on audited accounts to arrive at their conclusions for renewal of licenses. There were glaring irregularities in the governance such as the Board Executive Committee undertaking the role of the Board Credit Committee (BCC) without the proper structures in place including having an INED chair the BCC as per Prudential Guidelines. There were allegedly no notices for or minutes of meetings for a BCC from as far back as 2006. Someone was asleep at the wheel over at the banking supervision unit. The lack of INEDs until February 2014 should also have raised a slap on the wrist from the regulator. But it doesn’t appear to have. The only redemption here is that the regulator eventually stepped in, and quite likely because there was a new sheriff in that town.

Whether that amount of money is feasibly recoverable is something for the courts to determine. And directors should not try and draw comfort that they can ask the companies whose board they sit on to put in indemnification provisions in the articles of association or in their appointment letters. Section 194 of the Companies Act 2015 specifically voids any provisions that a company may make to exempt directors from any liability that attaches from negligence, default, breach of duty or breach of trust. However, companies are permitted to purchase Director and Officer (D&O) Liability Insurance to provide that specific indemnity from negligence etc. But there’s a catch. The same Companies Act does not allow D&O cover to provide indemnity (i) against fines from criminal proceedings, (ii) fines from regulators for non-compliance, (iii) defense of criminal proceedings and, finally, (iv) defense of civil proceedings brought by the company itself in which judgment is given against the director.

Therefore even if the Imperial directors had D&O cover, such cover busts two out of the four prohibitions above, viz (ii) and (iv) since the company is the plaintiff in the civil suit.

What’s the moral of this sordid story? Being a director of any company is risky business. Being a director on a board full of business buddies is even murkier business, the kind that requires one to keep a set of adult diapers on hand as they undertake the flight of their lives.
[email protected]
Twitter: @carolmusyoka[/vc_column_text][/vc_column][vc_column width=”1/3″][/vc_column][/vc_row]

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British Banking Reforms Make for Tough Directors

[vc_row][vc_column width=”2/3″][vc_column_text]A friend of mine who heads the compliance department of a multinational bank recently drew my attention to the stupefying impact of the United Kingdom’s Financial Services (Banking Reform) Act 2013. Following the impact of the global financial crisis in 2007-2008, in June 2010 the United Kingdom government established the Independent Commission on Banking to inquire into the structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. After slogging through numerous details and nail biting horror stories from members of the public on the favorite whipping boy of human beings: banks, the Commission made its recommendations in September 2011 which resulted in the Financial Services (Banking Reform) Act being published, debated in the UK Parliament and assented to by December 2012.

The fairly righteous indignation of the British public and their parliamentary representatives against “Big Banks” provided the much needed wind assistance for the speedy conclusion of the inquiry and the conversion of their recommendations into law within 15 months. A key outcome of the Act was the creation of a new regulatory framework for financial services which including the abolishment of the Financial Services Authority and creation of the Financial Conduct Authority (FCA).

Please note the nomenclature used in the new entity: “Conduct”. The global financial crisis and the Libor crisis in the United Kingdom a few years later were primarily the result of misconduct on the part of errant bankers. Conduct has become the catchall phrase for addressing the shortcomings and trying to fundamentally shift behavior within the banking fraternity. According to Wikipedia, the FCA mandate includes the power to regulate conduct related to the marketing of financial products and it is able to specify the minimum standards and to place requirements on products. The FCA has the power to investigate organizations and individuals as well as the power to instruct firms to immediately retract or modify promotions that it finds to be misleading and to publish such decisions.

But this is the point that has made many senior bankers as well as banking executive and non-executive directors sit up and take notice. One key objective of the FCA is protect consumers and while the caveat emptor (buyer beware) principle that consumers are responsible for their decisions is maintained, if the consumer’s decision is made as the result of advice then the advisor should be responsible. So in March 2016, a new accountability regime was established called the “Senior Managers Regime” for both the banking and insurance industries. According to the press release on the FCA website, the new regimes will hold individuals working at all levels within relevant firms to appropriate standards of conduct and ensure that senior managers are held to account for misconduct that falls within their area of responsibility.” The thought process behind this regime change is that while there have been numerous occasions of banks being found guilty of flouting conduct rules, there have been very few cases of individuals being held to account.

According to a Deloitte UK publication explaining the Senior Manager Regime, “As there has previously been no requirement to determine who is responsible for what in a bank, it has been possible for individuals to claim that it was someone else’s responsibility, or ‘individuals seeking to protect themselves on a ‘Murder on the Orient Express” defense (It wasn’t me it could have been anyone)’ as noted by Martin Wheatly the former CEO of the FCA.”

Now if I were a senior manager at a UK bank, this is right about the time I would be having a candid chat with my line manager about decisions within my pay grade, with the option of a downgrade in title, but not salary being a viable option. Because the thrust of the new senior manager regime is one: ‘You can delegate tasks but you can’t delegate responsibility.’ The FCA then puts its mouth where its money is and proceeds to produce a lengthy document subjecting its own organogram from the board of directors through to management to demonstrate who has senior management responsibilities as well as prescribed responsibilities and overall responsibilities. The aim of this diagrammatic self exposure is to establish to the public how it expects financial institutions to identify who a senior manager is and where the overall responsibility of their decision flows up the organization’s chart all the way to the chairperson of the board.

It’s a very complicated way to arrive at the conclusion that the buck stops at the chairperson of the financial institution’s board, as one key responsibility that he has been given is quite simply put: “The responsibility for the allocation of all prescribed responsibilities.” In other words: The Big Dog, The Big Cahuna, or He-Who-Shall-Never-Sleep-Well-At-Night.

But all is not lost for chairpersons of financial institutions. The new regime now clearly identifies each senior manager and the scope of his or her responsibilities. In the event of a breach, it’s easy to have that most unfortunate conversation: “One of us has to take one for the team, and it’s certainly not me.” Or in relationship speak: “It’s not me, it’s you who is the problem.” As the Deloitte paper aptly puts it, the increased focus on individual accountability removes the regulators away from the time consuming task of having to determine who is accountable for what, to a position of determining whether the individual(s) responsible took reasonable steps to control their areas effectively and to comply with all relevant regulations.

Given that a large part of our jurisprudence and regulatory frameworks are borrowed from the United Kingdom, it would be interesting to see if this will eventually flow into East Africa in which case bankers should girdle their loins in anticipation.

However, if this regime was in force in the United States, the current refusal of the Wells Fargo CEO John Stumpf to resign for the misconduct of his team in opening fake accounts for purposes of driving up revenues would be difficult to maintain.

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

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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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Profiting From Dangerous Driving

[vc_row][vc_column width=”2/3″][vc_column_text]Many years ago as a masters student in the United States, I needed to renew my student visa and in those days, you needed to apply for the visa outside of the country’s borders. I therefore had to drive 946 kilometres, from Washington DC where I was living to Montreal, Canada where I had booked my visa appointment. Driving in a northeasterly direction through New York State is about as stimulating as watching yellow paint dry on a concrete wall. The highways are well patrolled by State Troopers who are always looking out for speed offenders breaching the 65 miles per hour (105 km/h) speed limit, and you could be busted at anytime as they had a knack of hiding on embankments and behind grassy knolls on the highway. So I drove the rental car sedately until the Canadian border, where the speed limit changed to the metric system, and was set at 100 km/h. By this time I was ready to slit my wrists in boredom, noting with consternation the number of cars that zoomed past me at extremely high speeds. (To assist your supercilious judgment over my choices, I was young and foolish at that time so speed was the most tempting way to kill the boredom). Having nothing better to do than observe what I thought were brave, foolhardy souls, I realized that the drivers would suddenly drop their speeds at certain sections, and sure enough I’d see a police cruiser parked surreptitiously over a brow or under a bridge, prowling the highway for its traffic offending prey.

These daredevils had speed detector kits (illegal in the US but not banned in Canada at the time) and would therefore drop to within the speed limit in time to daintily saunter past the unsuspecting cops. Never one to let opportunity ceaselessly knock on my forehead, I latched onto the next daredevil, hugging his bumper for dear life and together we danced the speed detector waltz all the way to Montreal. I must have shaved off an hour on that trip, arriving breathless and exhilarated at having dodged not one but several police traps. On my way back, I hadn’t even left the Montreal city limits when I foolishly choose to follow what I thought was another speed detecting daredevil. It turned out that he didn’t have the detector. But this is the clincher: he got away while I got the much dreaded “wiiiiuuuuw” sound followed by the even more heart thumping red and white flashing lights in my rear view mirror. The Canadian cop was a gentleman. He got me to park my car on the side of the road, hop into the back of his Bat-mobile and drove me to an ATM machine at a nearby strip mall. I had to pay $250 Canadian dollars as a speeding fine. That was the entire salary I had earned in the month of June and July working as a research assistant for a professor in law school and, mercifully, I had just been paid the day before. I limped back to the Canadian border at 90 km/h and never looked back again. I’m still smarting from that traffic fine which completely changed my driving habits thereafter. This story came back to mind when I, and many Kenyans, woke up to the news of yet another mind boggling family decimation at a road accident in Salgaa some days ago.

The definition of insanity is doing the same thing over and over again and expecting a different result. Except we don’t seem to be doing anything, let alone over and over again at notorious accident black spots. We know our traffic police force have a penchant for enforcement, the kind of enforcement that misdirects on-the-spot penalties into non-government coffers. This may be the time to introduce quotas in our traffic department. Each traffic officer is given a target to raise a certain amount of money in the form of penalties from dangerous driving (all one has to do is stand beside any single Kenyan roadside for 3 minutes and he’ll be spoilt for choice, in fact he’ll probably bust his daily budget within an hour), driving without seatbelts, overlapping, overtaking on a continuous yellow line, driving without indicating and the mother of all mothers: driving above the speed limit. The income from the fines can and should be used to train the police to become 21st century law enforcement officials as well as provide the police with modern law enforcement equipment including patrol cars and on board computers linked to individual identification and motor vehicle national databases.

I did a little research and found the use of traffic ticket quotas in Australia and the Netherlands. However, in the United States where ticket quotas have been widely used in the past, a number of state legislatures have passed laws to remove the quotas as they are viewed to be exploitative of motorists. In Florida for example, the state legislature passed a law in July 2015 making traffic ticket quotas illegal. The law requires the police to submit reports to the state legislature if their traffic ticket revenues cover more than 33% of the costs of operating their agencies. The agencies may also be audited and face investigation by the state attorney general. But these are first world problems, in jurisdictions where law enforcement is credible and extremely visible.

It cannot be that we look at our own lives as mere transactions, transitory on this earth until extinguished desultorily. We have become completely inured to the rusty, twisted metal scraps that occupy pride of place on many of our highways, an attempted reminder by road safety authorities of the horrific outcomes in death and maiming. We see through these grim reminders the way we see past the drudgery that cakes the feet of our accident tired national psyche. Perhaps looking at prevention of loss of lives as a lucrative revenue source is the ethically challenging mindset shift that we need.

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Sights and Sounds of Kigali’s Finest

[vc_row][vc_column width=”2/3″][vc_column_text]Last Tuesday I flew to Kigali on the early evening flight and landed into a warm, balmy city. As we deplaned and walked to the terminal, I saw a long line of passengers walking from across the tarmac having just disembarked from a KLM flight. I hightailed it down the escalators in the terminal building as I knew the lines at immigration would be insane. They ended up being insane. But I didn’t mind as it gave me time to observe the immigration hall inside the Kigali International Airport. The modern hall is purpose built, with high ceilings and an almost clinical white décor. Illumination from the bright lights bounced off the sterile white walls and onto the clean-shaven, smart and well-spoken immigration officers. They sat on high stools and were easily accessible due to the absence of the ubiquitous thick glass barrier found in many immigration counters.


Image from www.rwandagorillassafari.com

To the far right of the immigration hall were two channels of passage with a large welcoming sign above that said “E-Gates Nationals Only”. There were clear instructions pasted on the side on how to use the 21st century contraption: Walk to the reader, scan the bio data page of your passport, wait for the beep to signify transaction complete and voila, heaven’s gates would open and you, Citizen Rwanda will gladly step back home. I stood and stared for a long time as the only other airport I had seen this was London’s Heathrow. The only pity was that the bulk of the passengers from the two flights were non-Rwandese and so I only observed two citizens triumphantly sail through.

I was picked up by an extremely chatty driver named Tresor, who spoke fluent Swahili as he was born in Bujumbura where he said Swahili is more widely spoken due to proximity to, and large trade with, the DRC. Since I couldn’t get a word in edgewise past his excitable monologue I sat back to listen but I noticed a glowing orb in the far distance as we drove past the gates of the airport. It was a beautiful sight against the clear night sky and something that I had certainly never seen in my past Kigali visits. I parked that question for later. Tresor had much to say about how the city was now full of Chinese who had come to build infrastructure in Rwanda. I puckered my brow in reflection as I had observed massive buildings being put up in Sandton, Johannesburg by Chinese as well as critical arterial roads in Kampala not to mention our very own Kenyan railway and highways. Historians will more likely document the not so subtle Chinese infiltration of Africa, when the effects of this economic colonization shall be obvious. Within 15 minutes my curiosity about the glowing orb was assuaged as we approached the Kigali Convention Centre (KCC).

The Kigali Convention Centre
Image from http://www.newtimes.co.rw

In my past visits to this beautiful, serene city, I had driven past the construction of the $300 million KCC without paying much attention to the distinct spherical framework of the emerging building. The Rwandese government has constructed an iconic building that will become to Kigali what the Sydney Opera House, London’s Tower Bridge and Nairobi’s KICC have done in terms of being globally recognized city trade marks. Its curved silhouette, whose inspiration is the traditional Rwandese hut, is sheathed with luminous lighting that projects the ethereal glow I saw all the way from the airport. With a capacity for up to 5,000 delegates, the KCC has been built with the aim of making Kigali the premier conference destination site in the region. Together with the refurbished airport and a growing number of new hotels, the Rwandan government aims to use meetings and conferences as a key growth pillar for the economy. Next to the conference centre is a brand spanking new 292- room Radisson Blu Convention Centre Hotel which was opened just in time for the World Economic Forum in Africa (WEF) meeting in May 2016. I don’t think it was accidental that Kigali was chosen as the location for this annual meeting as the conference theme, Connecting Africa’s Resources Through Digital Transformation, was undertaken against a backdrop of free high speed wifi in most of the hotels and 4G free wifi provided in the public transport system.
Actually a Rwandese acquaintance reminisced with us the following day about the rapid growth of 5 star hotels in Rwanda. He spoke with bemusement as he recollected how the Kigali Marriott Hotel had been under construction for a long time and had literally been completed and furnished a month to the WEF conference. The government organizers were keen to ensure that WEF delegates had access to 5 star accommodations and couldn’t understand why the Marriott management was not ready to avail the premises for this momentous event. “The hotel is not up to global Marriott standards in its current form,” was the alleged response from the owners, “We need another three months before we can open the hotel.”

The government promptly bussed in experienced hotel staff from Kenya and Uganda, slapped a new banner at the front of the hotel calling it “Century Hotel” and sewed the same name on top of the Marriot name on the staff uniforms. By the time WEF delegates landed in May, the hotel was open for (temporary) business faster than you could say kusema na kutenda. Of course this is anecdotal but is illustrative of the can-do attitude that’s widely prevalent within Rwandese government circles.

A benchmarking visit to Rwanda is critical to any African that wants to see what urban planning, good road infrastructure (I didn’t feel or see a single pothole as I crisscrossed the city), extremely clean streets and excellent security looks like. On one of the nights we went out for dinner, we found women walking completely alone at half past nine, brazenly carrying handbags and visibly comfortable about personal well being. To paraphrase the Kenyan author Binyavanga Wainaina: One day we shall write about this place.

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A Day Long and a Dollar short for Imperial Shareholders

[vc_row][vc_column width=”2/3″][vc_column_text]To understand the recent actions by Central Bank (CBK) in appointing third parties to manage Chase and Imperial Banks, a little history is required. In 1986 the Moi Government decided to get into the 20th financial century and created the Deposit Protection Fund Board (DPFB), which was only operationalized four years later in 1989. The purpose of the DPFB was twofold: To create a fund to offer protection to depositors in Kenyan banks and to take on the role of liquidator for failed banks. Between 1989 and 2012 DPFB had managed 24 banks in liquidation, the earliest being Inter Africa Credit Finance which was put under liquidation on 31st January 1993 and the latest being Daima Bank on 13th June 2005. There is no documented successful revival of any bank in those 26 years of the DPFB’s existence since the prevailing regulatory framework provided for statutory management leading to liquidation. The results speak for themselves: 24 banks in question had Kes 22 billion in deposits of which only Kes 1.5 billion were protected deposits. (Remember that the law provides insurance of up to Kes 100,000 per depositor). The DPFB in that period managed to pay out Kes 1.1bn or 74% of the protected deposits by the end of the financial year June 2012. It is noteworthy that the DPFB has an excellent record of publishing its accounts via its website since 2003, which accounts are audited by KPMG on behalf of the auditor general. The organization has been profit making from inception and by the end of FY June 2012 recorded a surplus of Kes 5.1 billion. Cash was certainly not what prevented DPFB from making 100% payment to protected depositors. One conclusion that can easily be drawn therefore is that the 26% protected depositors that weren’t paid simply didn’t make a claim for their money. Now let’s take a look at the loan recovery. In the same period the 24 banks had Kes 41.1 bn in loans outstanding, of which DPFB managed to recover Kes 6.4bn or 15.5% of the loan stock. Either DPFB was very inefficient or they quite simply couldn’t make the offending borrowers repay their (insider) loans and couldn’t find quality securities that would realize some value to extinguish those debts. My money is on the latter reason. As a result of clawing back a little in the form of loan repayments, DPFB managed to pay some depositors over and above the statutory minimum of Kes 100,000/-. Referring to this as “dividends” in their annual report, up until FY 2012 DPFB had paid only 28% or a total of Kes 5.6 bn cumulatively to depositors out of Kes 19.9 bn in unprotected deposits. In light of this less than stellar history of recovering the distressed assets and liabilities of the banking sector, the Kenya Deposit Insurance Act 2012 was enacted, which replaced the DPFB with the Kenya Deposit Insurance Corporation (KDIC).

KDIC-with-power-foam was created to make whites whiter and colors brighter. This piece of legislation gave the new institution far more operational discretion and a solution driven approach to managing failed banks than its predecessor. KDIC was now motivated to breathe life into failed banks rather than play the lugubrious mortician role of its predecessor. Through Section 53 of the Act, KDIC is given a tight timeframe – 12 months to be precise with a window to extend for a further 6 months- to either cure the bank of the matters that caused it to go under receivership or put the bank in liquidation. Twenty six years of experience had also led the former DPFB team to realize that perhaps the solution to keeping a bank open is to outsource receivership to a third party (with the necessary operational capacity) who would be nimbler in putting the structures in place to begin assessing loan viability and recovery thereof in order to pay suffering depositors and creditors. We have a different perspective now on how to manage failed banks, a perspective that allows for industry experts to step in and help KDIC execute its mandate. A perspective that allows for employees to continue working, borrowers to continue paying and depositors to receive funds over and above the historical statutory minimum.

The aim to maintain a going concern would be an unprecedented win for CBK as it would stabilize jittery depositors, calm foreign investors who were now having doubts about the wisdom of investing in Kenya and allow legitimate borrowers to continue utilizing much needed working capital facilities that were the lifeblood of their businesses. The first trial of the KDIC’s going concern experiment was with the appointment of KCB in April 2016 under S. 44 (2)(b) (iii) of the KDI Act that essentially allows KDIC to appoint a third party to manage the assets, liabilities and affairs of the institution. That KCB has a fully-fledged debt recoveries department that can land on errant borrowers like a ton of bricks is without question. This is business as usual for them. It is only through the active management of the loan book that depositors and creditors will get paid, and, hopefully a going concern is maintained. More importantly, the credit risk team at KCB should also be able to actively manage the performing loan book with a view to ensuring that businesses are not starved of the loan facilities that are needed to keep their businesses afloat. Providing mirror loan facilities on KCB’s own books provides an obvious solution to legitimate and well performing businesses. Operational capacity and deep industry experience is what third parties appointed by the KDIC under S. 44 (2) (b) of the Act bring to the table. But it’s a day long and a dollar short for the shareholders of Imperial Bank when energetically stating righteous indignation at CBK’s actions to appoint third parties to help recover the bank’s assets. Those energies should have been better placed keeping a tighter lid on the co-shareholder who led them down the rabbit hole of fraud in the first place.

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Chasing The Truth In Parliament

[vc_row][vc_column width=”2/3″][vc_column_text]Last week, an unlikely source in the form of a Parliamentary Committee helped to unseal the tightly held lips of the Chase Bank’s board of directors. The directors had been summoned to assist the Committee to understand the challenges that faced the Bank, resulting in the same being placed under receivership by the Central Bank of Kenya. This was an opportunity for the board to give its side of a controversial story, a tale that has as many versions as there are heads to the Greek mythical hydra. The story caught my attention for one reason only: The directors called the auditors professionally ignorant. Actually let me quote the exact statement here: “The Musharakah Agreements for each of the SPVs clearly show Chase Bank’s 99% interest in the Musharakah assets. Deloitte’s insistence on treating this as a normal loan or advance can only be labelled as professional ignorance at best.” Part of the dispute between the auditors, Deloitte in this case, and the board of directors has been on the treatment of a series of real estate transactions either as internal loans to a key shareholder (according to the auditor) or as Musharakah assets (Islamic financing terms according to the directors). So I pored over the submissions made by the directors in their vigorous defence of these assets.
Banking is premised on the fact that there are depositors who want a safe place to put their money, and there are borrowers who require to borrow funds for consumption. The bank is simply an intermediary. In the case of Islamic banking, the institution applies Sharia compliant procedures in the booking of those deposits and loans. The key point here is: there must be a customer. Period. Finito. Whether it is mainstream or Islamic banking there must be an individual or an entity who is the customer. But the directors state thus in their parliamentary submissions:
“Subsequently, Deloitte rejected the Musharakah Agreements and Deloitte insisted that the Musharakah properties be charged to the bank, thus effectively classifying the SPVs as Loans and Advances rather than Islamic investments as documented. These loans would then become technical insider loans, as the shares in the SPVs were held by the two directors, albeit held in trust for the Bank. Chase Bank’s Management emphasised to Deloitte that treatment of the Musharakah assets as Loans and Advances would be in contravention of not only the principles of Islamic banking (and therefore a breach of trust with Islamic depositors), but also of Section 12(c) of the Banking Act and
would incorrectly treat these as an insider loan. It was evident that Deloitte were simply not interested in appreciating the nature and substance of the Musharakah Assets or the principles of Islamic banking.”

I scratched my head and read the report twice over. At no point did the directors say who the ultimate customer was. I mean, a bank doesn’t wake up and decide to give a loan out to a customer, whether Islamic or otherwise. Why was there no attempt to say that this was an unfair treatment of a yet-to-be-named customer who had borrowed from the bank in good (Islamic) faith? That the assets were bought in the name of the SPV is not in doubt. That the SPV has two Chase directors as the shareholders is not in doubt. But where the shareholders were holding the shares “in trust” for the bank is where it starts to get “grab-a-bag-of-popcorn” interesting. The directors fail to mention if a “deed of trust” was provided to the auditors as evidence of that understanding between Chase Bank on the one hand and the SPV shareholders on the other. I mean, one doesn’t assume trust falls off the back of the Kisumu express train, it must be documented somewhere, right? The directors beat their Islamic financing drum further by dragging in the regulator into their drama: “On 26th July 2012, Chase bank wrote to the Director of Bank Supervision at CBK requesting CBK to revise the Central Bank Prudential Guideline on Publication of Financial Statements and Other Disclosures to accommodate Islamic products and
specifically:
(i) the Islamic Banking Income received to be reflected separately in the Profit and Loss
Account;
(ii) The Islamic Banking Expenses also to be reflected separately in the Profit and Loss
Account;
(iii) The Islamic Banking investments or Financing Activities as a separate Asset line in the
Balance Sheet;
(iv) The Islamic Deposits or Liabilities as a separate Liability item in the balance Sheet; and
(v) A separate Off Balance Sheet line item for Islamic banking.
The CBK has not objected, in the absence of any changes to the Prudential Guidelines, to the classification and treatment in any of its reports to the Bank.”

I have to admit, that this submission by the directors stumped me. If you wrote to the regulator and asked to be reporting Islamic Banking products separately, and the regulator did not object, then why do your 2014 and 2015 financial accounts not reflect the same? I zoomed across to the only fully-fledged Islamic Banks in Kenya, Gulf African Bank and First Community Bank (FCB) websites to see how their Islamic assets are recorded. Their professionally competent auditors in the name of KPMG and PriceWaterhouseCoopers (PWC) respectively reported loans as “financing activities (net)” exactly as Chase had requested the CBK to do in (iii) above. (It’s noteworthy that PWC audited the FCB accounts in 2014 but the 2015 published accounts are silent on who their auditors were) If Chase directors had knowledge as far back as July 2012 on how “Musharakah Assets” should be recorded on the balance sheet why wait until June 2016, or four years later, to call their auditors professionally ignorant? And why are the Islamic depositor funds not separately recorded yet the directors have vigorously highlighted the potential breach of trust for the Islamic depositors if Musharakah Assets are treated as loans and advances?

The Chase Bank saga is a case study of corporate governance failure, weak internal controls, questions on the auditors’ scope and depth of review and a passionate to almost rabid love for the brand by its most loyal customers. But on the back of all of that are innocent depositors who must always remain in the minds of all bank directors whose oversight role gets heavier with each passing day.

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

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Credit Reference Bureaus Destroy rather than support credit

[vc_row][vc_column width=”2/3″][vc_column_text]Two weeks ago, I published an opinion on this page highlighting my experience with an erroneous report that was submitted by my bank to the credit reference bureaus (CRBs). The article generated some interesting feedback from some kindred spirits. Augustine M shared as follows: “I have also experienced a similar issue like yours. A standing order that I had closed 5 years ago, but apparently the bank continued to surcharge and penalize for 4 dark years, only came to my attention when I needed that CRB Credit Report. What made me mad was why my bank, which I understand has rights of set-off to enable them recover from your other accounts with them and clear you, goes ahead to issue a damning report. Yet I had all along another well performing loan with the same bank.”
Well dear Augustine, a major assumption that you are making is that your bank has a universal view of your accounts. Whereas you have a universal view of the bank in terms of all the products and services that you are consuming from them, your bank may have as many separate records of you, as there are services you are consuming. These records are in different databases that don’t talk to each other because they are in different departments. Asking your bank to set off from one account to another, well…that’s just asking for too much efficiency. I mean do you know how many internal approvals have to be sought to get that process approved? You’ve got to be kidding man! Now your bank might be a manyanga bank, meaning it has a supercalifragilisticexpialidocious 21st century operating system and therefore your national identity card number can generate a universal view of your accounts. But then it requires someone to initiate that query. And there’s hundreds of thousands of other retail clients like you. Moreover that would require a rather high level of efficiency. So hang tough bro, they’re just not that into you. One more thing: can you imagine the number of negative reports that the CRBs have of ordinary wananchi who have minor charges on accounts that have failed to be closed? And are now dragging a millstone around their creditworthy necks in the name of credit reporting? Another writer Andrew F had this to say:

“Hello Carol, as soon the CRBs were authorized commercial banks submitted 800,000 negative credit reports! Needless to say, the commercial banks neglected to comply with the new law by notifying the 800,000 account holders who were having their credit histories trashed! Too expensive? It really makes no difference; our commercial banks are out of control and our friends and associates **** (edited out as this is a family newspaper) us royally in plain sight. You knew who to contact which only leaves 799,999 others being trashed without legally required notice.”
Dear Andrew: Are you aware of how many Kenyans must have been temporarily employed during the process of issuing 800,000 negative credit reports? During that period, the unemployment levels for the country took a significant dip and the banks were awarded with the highest Pay As You Earn award from our veritable tax collectors. In fact the bigger issue for me is that by ignoring Section 50 (1) (b) of the Credit Reference Bureau (CRB) Regulations 2013, which requires banks to “notify each customer, within thirty days of the first listing, that his name has been submitted to all licensed Bureaus,” the banking industry deliberately scuttled efforts by Postal Corporation of Kenya to grow its profits through sale of regular postage stamps on the 800,000+ reports that should have been mailed out.
Finally, JK weighed in with these words: “Just thought I would point out great article today in Business Daily, the system is absolutely flawed. In South Africa they forced all bureaus to delete all their information and have all banks resubmit because almost the entire country was listed for one reason or another. I was listed because I owed a bank Kshs 200 for not closing my account with them. I’m surprised a class action has taken this long in Kenya.” Dear JK, thanks very much for reaching out to this pained sister. I have tried to research your point about what happened in South Africa and actually found that in 2005 the South Africans published a National Credit Act which stipulates the type of information that credit bureaus can keep on consumers, how the information is obtained, used, and for how long that information may be kept on their records. More importantly, the Act aims to ensure that credit bureaus keep accurate records on consumers. In a bid to cure the mischief of erroneous credit reporting, the Act in Section 72 gives consumers the right to access and challenge information held by a credit bureau. A key extract of that section provides that a consumer can challenge and request proof of the accuracy of information held by a credit bureau. Should a credit bureau fail to provide the consumer with proof of accuracy of information that the consumer disputes, it is compelled to remove the disputed information from its records. The same section also gives the consumer the right to be advised by a credit provider before certain adverse information about that consumer is passed onto a credit bureau and to receive a copy of that information on request. As we often say in Kenya, it’s not a dearth of laws that we suffer from; rather it is the enforcement of existing law that is the problem. The Credit Reference Bureau regulations in Kenya do protect the consumers, but the protection mechanisms are not being enforced by the banks, either through sheer laziness and ineptitude or utter contempt for the impact of their actions. I like that the South African legislation puts the burden of proof for veracity of information on the credit bureau, which means that a layer has been added for ensuring that consumers are protected from lazy bank processes.

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

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Sights and Sounds of Cape Town

[vc_row][vc_column width=”2/3″][vc_column_text]Nestled between the hulking, sepia toned Table Mountain and the deep, blue, frigid waters of the Atlantic Ocean lies the city of Cape Town, South Africa. It is the administrative capital of the Western Cape Province, and the seat of South Africa’s Parliament. Capetonians, as the residents proudly refer to themselves, have a rich and centuries old co-existing heritage of race and religion with Christians, Jews and Muslims represented across the black, white and colored populations of the city. “The reason everything works in the city is because the Democratic Alliance Party runs the Western Cape government,” were the smug words of my female taxi driver Kellie, who at 8 months pregnant, drove fast and furious to the airport through the palm tree lined boulevards that crisscrossed the beautiful city.

I had just completed a whistle-stop maiden trip to one of the most beautiful coastal cities in Africa, second only in my limited world view, to Tunis. I genuinely cannot remember a single city that I have visited on this continent with teeming hordes of tourists arriving in busloads into the hotels and archetypal tourist spots like the Table Mountain Cable Car ride or the V&A Waterfront. Large groups from India, China, Japan stuck out prominently armed with cameras and light winter coats relentlessly taking pictures and chattering up a storm on the open top double decker buses that ferried tourists in a scheduled circuit around the city that allowed one to hop on and hop off the bus at the tourist spot of their choice.

V&A Waterfront, Cape Town
Photo from: http://www.holidaybug.co.za/

There is a heavy but subtle police presence to secure tourists and very little open crime in the streets. Opulence is well represented with Lamborghini and McLaren showrooms for the local partakers of sublime automotive fantasies while tasteful mansions dot the exclusive sea facing neighborhoods higher up towards the mountain.

But there are stark reminders of South Africa’s developing nation status as you pass the mabati shacks of Cape Town’s fastest growing township, Khayelitsha, that stands unabashedly next to the city’s main highway artery, the N2. The unapologetic vestiges of poverty conjure up mixed emotions as a notable number of the shacks bear the unmistakable middle class markers of a DSTV satellite dish and an old but clearly functional car parked in the front. “Some of these guys come own property where they come from in the Eastern Cape,” Kelly the cab driver told me. “They’re not all poor, they just like the township life.”


Photo from: http://www.sharkquests.com

I took the ubiquitous Table Mountain tour. The road leading up to the Table Mountain Aerial Cableway is a long, winding and twisted drive up the very steep base of the mountain. The month of May is the point where winter starts nibbling at the feet of the Western Cape and for about a kilometer before the cableway station, cars were parked along on the side of the road. Our driver informed us that those were cars of local residents who came to hike up and down the mountain over the weekend. Apparently during warmer weather the parked cars would be lined up for more than 3 kilometers! The aerial cableway was built in 1929 and has ferried over 24 million passengers since. A ride up to the mountain is not for the faint hearted as those little glass and steel bubbles move at 10 meters per second and you are suspended on a steep vertical incline as you climb 704 metres. Once you are spat out of the cable car at the summit which is 1067 metres above sea level, you emerge to find fairly fast free wi-fi for visitors as well as wheel chair friendly paths and accessibility to a self service restaurant and clean toilet facilities.

No female worth her favorite high heels can avoid a visit to a mall, so in keeping true to my gender’s requirement for occasional retail therapy, I made a rather cursory jaunt to Canal Walk which is apparently the third largest mall in Africa, with over 1.5 million square feet of retail space and 400 shops to pique a shopaholic’s interest. The mall owners have created a space where mid range stores like Adidas and Top Shop are co-located with low value offerings such as Shoe City and Ackermans.

Canal Walk Mall, Cape Town
Photo from: http://www.travel2capetown.com

And if you are so inclined, the absolutely cheap knock offs are sold in a discreet corridor aptly named Market Street where the shops look like something out of an Indian bazaar but, due to their hidden location, they do not detract from the high end look within the rest of the mall. Essentially the mall has shops that cater to all pockets and was full of shoppers, although this is a fairly common occurrence in many South African malls. This phenomenon is largely driven by the easy access to credit through bank credit cards or shop store credit cards. South Africans have some of the highest individual indebtedness on the continents with about 75% of monthly income spent on debt service according to different internet sources. In a February 2013 article on the Business Day Live online newspaper, a survey by the global payments technology company Visa reported that most middle class South Africans spent an average amount of ZAR 7,283 (Kshs 46,611 in today’s terms) to pay off debt each month. The survey was completed by 2000 people aged 18 to 65 of all races and across middle and higher income categories with half of the participants indicating that they would never be financially free. Meanwhile 68% of the other half said they would only achieve this after the age of 50. Two clear lessons emerged for me from this trip: First, if a county government wants to truly benchmark how to run a well-oiled tourism machine in Africa, Cape Town is a good start. Secondly, if you want your Kenyan mall to have multitudes of shoppers and not just sightseers, the role of consumer credit is tightly linked to the purchasing power of mall visitors.

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

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What everyone needs to know about borrowing in Kenya

[vc_row][vc_column width=”2/3″][vc_column_text]A few weeks ago I received a random text message from a credit reference bureau: “URGENT: This is to notify you of some NEW information on your CREDIT BUREAU records. Send URGENT to 21272 to check now.” (Sic).

It certainly got my attention, and I did exactly as I was exhorted to. I received the credit report on email and discovered that erroneous information had been sent by my bank to the bureau. Did I say erroneous? It was downright wrong. The report related to a six year old dispute on a credit card that in my view had been resolved and forgotten about two years ago. But somehow the dispute resolution slipped through the cracks and 2 years later my name was sent to the credit reference bureau as a defaulter. I bristled in anger. A negative report meant that my personal credit rating would be affected and this would impact on any future borrowing that I may consider undertaking. It also meant that any position for which I would be considered for that requires a positive credit report would be compromised. (A negative credit rating is a mortal sin right below being an adjudged bankrupt in the ten commandments of self-respecting citizens.)

The vein on my right temple throbbed furiously as my legal training kicked in: Never go to a gun battle armed with a toothpick. I googled and found the Credit Reference Bureau (CRB) Regulations 2013, issued by the Cabinet Secretary for the National Treasury and gazzetted on 17th January 2014. A slightly lengthy document that isn’t your staple bedside reading, but one that is certainly pertinent for anyone who uses banking services in Kenya. The regulations were created to provide a legal framework for the provision of critical information on the financial behavior of individuals and businesses in the country. The regulations extensively provide guidelines on how credit information should be shared. Why should this interest you? As a consumer of banking services, your bank holds in its puissant hands the power to destroy your reputation with one flick of a button: SEND. A bounced cheque, a defaulted loan or credit card, an account on an overdrawn status., the examples are numerous. But the bank is well within its rights to let its industry brethren know that you are not worthy of the fake leather shoes that you are strutting about in pretending to subscribe to the ten commandments hereinabove mentioned. As a consumer, you are also well within your rights to know who is sending information about you, and the nature of that information. And since the regulations were most likely drafted by ordinary mortals who have experienced the aftermath of a financial peccadillo or two, they took care of that exact fact under Section 50 (1) which reads “ An institution shall (a) notify the customer within one month before a loan becomes non-performing that the institution shall submit to a Bureau the information on the loan immediately it becomes non performing.” I bet you’re sitting at the edge of your seat waiting for me to tell you that I received that awe-inspiring letter from my bank. Well, hang on to your hats a little bit. Section 50 (1) (b) highlights my bank’s obligations to me even further by saying that it should “notify each customer, within thirty days of the first listing, that his name has been submitted to all licensed Bureaus.” Can you hear that? Exactly! What you hear are chirping crickets, because I received absolutely nothing. If it wasn’t for that CRB’s urgent message – of which I have no doubt was motivated to ensure I sent a highly priced text message to request for a “free” report – I would never have known that I was in trouble.

But this story does indeed have a happy ending. Since I knew who exactly needed to receive a sweetly worded missive reflecting my umbrage at the misinformation that was now circulating at CRBs, I got to typing my slight displeasure (please apply sarcasm font as you read this part). A few calls and emails later, my bank quickly rectified the situation and sent a delete record request to the CRBs followed by a profuse apology for which I am grateful for the kind attention that they gave. But they did it because I knew exactly who to send flowery emails to. Not everyone else does.

Two years ago a company that had borrowed funds from a bank, against which a close friend who we shall call Jane had signed personal guarantees as a co-director, underwent some financial distress. The loan was eventually repaid in full. A full year after that loan was repaid, said bank sent a report to the CRBs that succinctly stated that while there was no loan outstanding, Jane had a history of default. Not the company, mind you, Jane specifically. There was zero communication from that bank that they were sending a negative report, and I can’t say I blame them. How do you draft that letter? “Dear Jane, remember that loan for Company X that you signed a personal guarantee for? It was repaid in full last year. But our grubby fingers are itching to hit the SEND button so we feel now is a good time to let all the CRBs in Kenya know that a company you are associated with underwent stress, but the loan was repaid in full. Please don’t catch feelings, it’s never that serious. Yours truly, Totus Ignoramus.”

The next time you see a message titled URGENT from a CRB, it’s not from the thoroughly bored chaps over at Kamiti Maximum Call Centre. It needs your urgent attention. Your bank is talking about you behind your back. Assuming they are doing what the above two banks are doing, it’s likely that they are not informing you. Girdle your loins and ask for your report. Then brace yourself for what you might find.

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

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Banking Crisis in Africa

[vc_row][vc_column width=”2/3″][vc_column_text]A few weeks ago, I quoted extensively from a speech given by the former Nigerian Central Bank Governor, Lamido Sanusi, in February 2010 where he was explaining, with painful honesty what had gone wrong in the Nigerian banking industry following the global financial crisis which impacted the Nigerian economy hard. He could have been describing the Kenyan industry in many ways. Do we have a problem in Africa? Do we have a problem distinguishing customer deposits, from revenue? And further, distinguishing revenue from profits? The fact is that banks have only one product: cold, hard cash. That’s all that they deal with, and therefore a great responsibility is placed upon them as that cash, with the exception of the capital that shareholders put in, is largely from our pockets. Our sweat, blood and tears in the form of salaries, business revenues and savings is what we place in the hands of total strangers, believing with every fibre of our native beings that they will make it available to us as and when we need it. We trust that the management of these banks will make the distinction between what belongs to us and what belongs to them. A distinction that is clearly difficult to make once a rogue management crosses to the dark side. Sanusi explains the Nigerian experience thus:
“The original title of this paper was “Transformative Disruption: Relocating theNigerian Banking Crisis from the Economic to the Social.” The choice of title
was informed by a strong desire to articulate a correct narrative, in an
environment in which we are confronted by a multi-vocal opportunism
determined to subvert history through the fabrication of false narratives.
Among these, is the assertion that the actions taken by the Central bank are
part of a grandiose “northern” agenda against southern Nigeria. Or that
perhaps it is an “Islamic” agenda being pushed by a Muslim fundamentalist.
There are also other subtler and more sophisticated-albeit just as
opportunistic-narratives. For example the new claim by public officers and
politicians that there is really no corruption in the public service, that
politicians are not corrupt, and that the real corruption is only in banks.
What we have done in the Central bank, is to fire the opening salvo in what could potentially be a revolutionary battle against the nexus of money and influence that has held this country to ransom for decades. This would not be the first time banks
collapse nor are brought to the brink in our national history. And it will certainly
not be the last. But this time there is a difference.
In previous crises we said some banks had failed a passive and complicit
phrase that masked a gross irresponsibility and crass insensitivity. “The bankhas failed”.

……And that is exactly what happens when we refer to “failed banks” as if the
bank itself, some impersonal structure made up of branches and computers,
somehow collapsed on its own. By using-or abusing- the term “failed bank” we
are able to mask what is almost always a monumental fraud. But it is a
deliberate act of prestidigitation. Thousands of poor people, who have kept their life savings in the bank, lose it. Children’s school fees, savings for retirement, medical bills, gone into thin air. And who is to blame? No one really. Or maybe the poor people who were foolish enough to keep their money in a bank that “failed”.
How many people have died of heart attacks due to this tragedy? How many
honest businessmen have been rendered bankrupt? How many people have
committed suicide? How many have died because they were unable to pay
medical bills as their monies were trapped in these institutions? How many
children have dropped out of school? We do not know. Because we live in a
society in which they do not matter. They are anonymous. They are poor.
What we do know is that we have today, among those parading themselves
as role models in society, people who profited from failed banks. Owners and
managers who go on to become governors and senators. Bad debtors who
are multi- billionaires, having taken the money belonging to those poor dead
souls and not paid back.
So here is the reality. The owners and managers of banks, the rich borrowers
and their clients in the political establishment are one and the same class of
people protecting their interest, and trampling underneath their feet the
interest of the poor with impunity.
So this time we turned the tables and said “enough is enough”. The banks did
not fail. They were destroyed and brought to their knees by acts committed by
identifiable people. Do not say that government money has been
stolen. Name the thief. And so, in keeping with that tradition, we did not say
that banks had failed. We named human beings-the management that stole
money in the name of borrowing, the gamblers that took depositors funds to
speculate on the stock market and manipulate share prices, the billionaires
and captains of industry whose wealth actually was money belonging to the
poor which they “borrowed” and refused to pay back.
Fortunately, the President, Umaru Musa Yar’Adua, understood from the first
day that this was an ideological choice we had to make. We could side with
the rich and powerful, and say the banks had failed. Or we could side with the
poor and save the banks but go after the criminals. And we chose the latter.”

That KCB has swung in to provide much needed stability in the wake of the Chase Bank fiasco is nothing short of a miracle pill engineered by Kenya’s Central Bank Governor. But this is not the time to exhale from a dodged bullet. There’s blood in the water and significant public goodwill to see the elite “financial accounting wizards” get what they deserve. A nice room with enough light that will allow them far more time to sit and reflect on the distinction between deposits, revenues and profits.

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