Re-commendations....

1. Thank you God for the rains and a fast recovering economy in 2010
2. Africa Alliance: For outstanding brokerage service. You see, being a broker is simply about taking an stock/bond buy or sell order and executing at specified price. And offcourse making sure clients get a feeling that you can take care of their funds. AA does this very well.
3. Mwai "Roads" Kibaki: Credit where its due. With the exception of the Nai and its environs; the Kakamega to Kisumu and Nyahururu to Nyeri roads; you can now fly to your destination on very good bits of road building. The 8-lane Thika Road, will not resolve the massive jams caused by the fast growing real estate and car consumption from Central, though. Kibaki is no leader but on roads and infrastructure generally, he has done well so far.
4. Maina's barber and saloon on Rose Avenue off Ngong Road. Superb haircutting experience...
5. Starbus coach hire:- drivers with integrity
6. Swimming across Likoni rather than the 3 hours you'll be sweltering in your car while waiting for the ferry to become available
7. That all mathree drivers be made aware that they are not driving eels but metal contraptions that can't weave in and out of traffic; block rival mathrees while picking up passengers and overtaking other cars silmultenously.
8. HFCK's Makao product. Might be the long-sought solution by the diaspora who fear "additional" costs or even misappropriation of their real estate.
9. Kenyan drivers take crash courses (no pun intended) on overtaking. Tailing the car infront and shomokaring now and then will get you involved in a head on crash.
10. Uhuru Kenyatta: for dedicated consumption services offered to EABL. Saw him twice and his eyes could light up a dark street in Ahero.
11. Daily Nation's "The Truth" blue boards for making sure drivers which little town they are passing through almost everywhere in Kenya
12. Mama Kim's cafe in Molo. Clearly, the Nakuru land mess is not the only legacy left behind by Kihika Kimani. Awesome chapatis and tea.
13. The "piki piki" phenomena now overtaking the cyclist boda boda phenomena for creating some employment for the youth and offering an alternative to those dodgy mathrees. Unfortunately, GoK has noticed the phenomena and is clamping down on their growth (in Ngong, there were 30 piki pikis two years ago, now there are 300).
14. Upholding the Harambee spirit: Fund raising by traffic cop and ordinary cops everywhere. The bane of mathree drivers whether they are guilty of misdemenours or not. Private drivers also get caught in the net if they are driving early or late at night.
15. Red soil
16. South coast over North coast of Mombasa. just classier
17. Total for charging Ksh4 more than anyone else for unleaded. Made me discover all sorts of other interesting petrol providers
18. Avoid Zain:- The only peeps who actively use it are politicians and businesses.

Happy Jamhuri, Xmas & New Year

'09 has just flown by. Or maybe too much fun has been had. Or maybe age is catching up.

Anyhouse,

enjoy your mbuzi, turkey (zzzzzz), or green chick peas (double zzzzzzz).

Is money-making and Godliness compatable?

In many versions of Gospel-preaching there tends to be emphasis on the self-sacrificing nature of Christianity. According to these preachers, its easier for a camel to go through the eye of a needle than richman to go to heaven. The meek (implicitly, the poor), shall inherit the earth. There seems to be a contradiction with go ye and multiply and the various tales that Jesus demonstrated about being fruitful. 2ndly, heaven is unlikely to come tomorrow or rather, its just as likely that come tomorrow, you'll have to pay bills. Its thus to focus on making sure that you are being fruitful enough so that (a) you can build God's kingdom (b) you can generous unto those who are unable to be fruitful.

I believe what God wants is for us to not put money-making before a relationship with Him.

The "too big, please don't fail" banks in Kenya

In this post, I talked about how banks can grow to a size that presents systemic risk to their domestic economies. That is, there are so large, that their likely failure would mean guaranteed govt assistance which would off-course mean every taxpayer peaks up the bill. Further, it was/is my opinion that such banks being deemed to be too large to fail and too expensive to rescue, should have applied to them, more stringent regulatory measures. The examples were higher capital and liquidity requirements to match their size or growth.

So do we have such banks in Kenya? The answer is yes:

1. KCB: At close of play in September 2009, KCB had a balance sheet of Ksh189bn, which si roughly speaking 27% of Kenya's total budget. It also has around 200 branches, 150 of those in Kenya. Thus its a large employer as well. Its collapse won't be pretty. Remedy: At 13%, its tier 1 capital ratio looks strong for versus some Western banks, but its target should be 20% or more given its host economy.
2. Equity: Holds just under 50% of Kenya's banking account population irrespective of the size of their accounts. And has 155 branches (130 of them in Kenya). Its collapse would lead to a severe dislocation SMEs and agriculture for which it serves a significant portion. I see its risk coming from liquidity rather than capital concerns. Remedy: Should be required to hold at least 12% of its assets in form of t-bills and or AAA-rated gilts.
3. BBK: At Ksh170bn (June 2009), its also a behemoth in the local economy. Included here because of its corporate client content which would again cripple our economy were it or the parent to collapse. Remedy: As with KCB, probably more suspect to lower capital thresholds and should thus be required to hold at least 15% tier 1 capital ratio at all times.
4. Co-op: The banker of co-operative societies and Saccos country-wide. And like Equity, therefore, carries systemic risk for the economy. Has a history of appalling size of bad loans coupled with political inteference. Remedy: Higher liquidity and capital requirements. The broker licence was probably a mistake.

Investment banks should be banned from proprietary trading

Angukia investment bank has 3 employees.

1. A1 who is the broker. She executes buy and sell orders on behalf of Angukia's clients (corporate, high net worthy and raia).
2. B1 is Angukia's proprietary trader. He buys and sells various instruments using Angukia's capital.
3. Finally C1 is the investment banker. He advises Angukia's corporate clients on mergers, divestitures, acquisitions, financing and capital raising events (such as rights issues).

In the West you'd be told that there is a Chinese wall between the various activities that Angukia undertakes such that C1 and A1 never converse about the deals passing through their desks. You'd be told that if A1 received an order for 5% stake in a particular listed share, she'd never tell B1 who was thinking about selling the 1% stake that he had built up for Angukia.

This is ofcourse not possible.

In the developing stockmarkets like the NSE, where integrity may not be as established, it is essential that IBs not be part of the trading in the market.

Warren Buffet: invest in what u know & other priceless gems

A must watch docu-info for experienced and aspiring investors alike. And remember, buy low, sell high

Living abroad and investing

Just some observations:

Middlemen- cut them out or to absolute minimum. That includes relatives, "friends", brokers et al.

The more liquid an asset, the better.

Remember exchange rates matter.

Legal recourse in Kenya can be long and expensive.

Returns in motherland can be awesome.

Timing is important, therefore avoid herd mentality.

Invest in things you can monitor easily. This might mean investing locally.

DYOR

Does universal banking have a future in Kenya?

Universal banking is the term used to define banks that are one a stop shop for any combination of depositors, lenders and or investors and insurance seekers. Globally, Citi, UBS Bank of Tokyo Mitsubishi and the newly formatted BofA are typical egs of universal banks. In Kenya, we have 2009 Equity and CFC Stanbic.

The key driver for this type of banking has always been the economies of scale in costs and knowledge and products. That is the upside...

The downside which has rarely been priced in the past is that the management matrix and knowhow required to centrally manage such businesses has been huge and as yet, there are few successes. The outcome of this is that management is delegated by default to those knowledgeable in the various facets e.g. an investment banker is given the remit of running the show on the ib part of the business and ditto for the insurance part of the business. This has then lend to a situation where its difficult for the ultimate bank ceo to get a handle on a daily basis what his/her value at risk from the universal bank. Cue the sort of big issues we've seen with these types of banks in the current crisis.

Given the embryonic state of banking regulation in Kenya (is no where near adapting Basel 2 type of capital/ liquidity requirements), it currently is prudent to encourage universal banking without either very targeted regulation of the various parts of such a bank.

Insurance as an investment/saving product

To invest, you mostly have to have saved unless you are the type who does investing for a living in which case you can use leverage. Savings will come from your disposable income. To create the room for enough disposable income, you either increase your income; reduce your spending or do both. One-off big ticket expense items can derail your saving/investment strategy. Even if you earns zillions, having to buy a central heating system or replace a broken electrical home appliance will skew your savings targets.

Which is where insurance comes in. By insuring some of these big-ticket items, you'll typically be able to claim either on the repair work or the replacement. And although, you may not need to claim every other month, saving yourself that once a year cost is sufficient reason for taking out the insurance product.

Giving NSE some bouyancy

The reasons for the current fall and stale state of the NSE are various and now well known:

• Brokers' embezzlements
• Economy messed up by (a) PEV (b) drought (c) bloated GoK (d) public crowding out private sector
• 2012 and bleak outlook
• Bonds taking up the liquidity
• et al

Some of the above won't change unless we see radical moves like UK or Ruto in handcuffs on their way to Hague. I think bonds have some way to go given its the latest kid on the block and corporates are now queuing up to go through this avenue.

However, the NSE can attract attention back to itself in the following ways:.

1. Share consolidation: while (i) sharebuy back legal stuff is being sorted out and in any case will probably be too expensive in the medium for any firm to contemplate doing (ii)the cheaper share consolidation is easy to do and will give shareholders, brokers and the firms themselves a consolidated cheaper way of managing the quantity of shares. Safaricom being the share that indirectly started the current bear should kick-off the stage by doing a 10 for 1 share consolidation. This would mean 40 shares if you currently hold 400 and so forth. Equity could then do a 2 for 1.
2. Shorting: a hobby horse of mine where the NSE is concerned. It will probably be the single most educative instrument that can be introduced to the NSE. Because it allows an investor to make returns and take a view whether a share is rising or falling, NSE investors will no longer think of shares as endlessly rising investing instruments. Clearly, brokers will also have two more avenues for revenue generation. How about concerns re margins?Initially, the movement when shorting could be limited to a 20% loss at which point the investor would have to come up with the cash to cover his losses.
3. Bring up NSSF: UK obviously banned NSSF from new share purchase to facilitate liquidity in the bond market. In the medium and longer term however, its a silly policy to ban one of the deepest pockets in the land from a capital market. An oxymoron if you like.

Saying all that, an NSE at 2,500 is a very welcome re-entry for me.

What type of CBK governor does Kenya need?

With a few exceptions, the two main functions of a Central Baank in an economy are

1. Control money supply
2. Prudential supervision of the banking/financial system

In performing these functions however, you tend to get three types of people (men in the main) who head up the Central Banks:

1. Patron governors: These are in effect there to support the economic policies of the government of the day. So they'll adopt monetary policy and in some cases, supervisory policy to the govt's economic policies. As an example, in the US we had Greenspan who in support of credit-based economic growth adopted loose banking regulation (even going along witht the idea of awarding self-regulation to some of the larger ibs). In Kenya, we had men like Kortut who was very supportive of the export intiatives that Pattni had come up with or even Mullei who was able to relax the reserve ratio in 2003 so that banks could lend more. In Nigeria, Chukwuma Soludo presided over the introduction of margin lending which indirectly has brought the Nigerian banking system to needing bail-out.
2. Clean-up governors: Patron governors with a few exceptions, always create a mess. Guaranteed. Because their policies are not rooted in the basic functions of a central bank, these types of governors wonder into unfamiliar territory which (a) they don't understand (b) can't not then control. Greenspan was talking about cleaning up the mess created by "irrational exburance", but he really didn't know or understand what he was talking about since the scale of the bailout has been huge. Clean up governors therefore have a thankless task of undoing the work of patron governors. Cheserem did this in Kenya in the mid 90s.
3. Independent governors: In effect perform the function of a central bank and are thus usually quite unpopular only surviving due to a change of government. Mervyn King has done this to a certain extent. In Kenya, we are yet to see one but urgently need one.

Agriculture food exchange

As this FT article shows, agriculture exchange would resolve two problems that have hampered farmers from growing their farming as a business:

1. Pricing: many farmers especially those dealing in perishable horticulture produce typically rely on rumours on what prices are. An exchange close to home will be able to relay the information much more cheaply

2. Transport: never mind the roads, due to (a) lack of enough cars (b) fuel costs; farmers typically have to shoulder the costs wrought by these two factors thus minimising their returns.

Stockmarkets retrace on the way

After 6 months of almost uninterrupted rise driven by a huge sigh of relief at surviving the largest financial crisis since the South Sea bubble, we may have a retrace shortly. A rise of 60% seems overdone given rising unemployment; budget deficits which suggest that while the economies are recovering, the recovery is not going to be anywhere as fast or as strong as the markets have factored. I therefore expect markets to fall by around 10% in the coming fortnight but thereafter start a slower upward movement as financials start reporting in early November.

Thinking of having kids?

One of aspect of financial life that no one can really plan sufficiently for, is how your finances change once you get married and then have children. Having kids and seeing them grow is both a blessing and very satisfying. Infact, a perfect tonic to a busy life. However, its good to be realistic and know its a lifetime commitment which should be borne in mind when planning your economic/financial life.

Handily enough, the UK FSA has come up with a calculator that gives you a rough idea of how much it'll cost you to bring up your kids.

Play away.

The KenGen Ksh15bn bond beneficiaries

Going by the debate so far, the 12% bonds seems to have tickled the interest of retail investors who usually stay away from bonds given the return is far lower than current or expected interest. Ther reasons for this change are many but a major one would be changing perceptions about the NSE. How will the different players benefit from this bond?

• Retail investors:- despite a drop in inflation, its unlikely that it'll go below double figures before 2012. That means that in real terms, a retail investor will be making a loss from investing a Ksh100k of his in the bond. Although its unusual in Kenya, you may not be able to get the full principal in the first 2 years. It'll be 2017 before you double your money.
• High net worthy: If you have Ksh5m and the risk-aversion of a typical elderly investor, then the 12% is sound return. However, NSe shares pay over 10% in dividend alone.
• Money market fund managers: will love this bond because it make them very competitive against savings accounts.
• KenGen shareholders: interest payment of just over a Ksh1bn will hit the P&L every year. In the first few years, there will be no concomitant revenue from the project to offset this. Something to ponder?
• Electricity consumers: should hopefully see fewer rationing episodes.

The bond offer closes tomorrow.

Living abroad: When in Rome...?

Having lived in London for 10 or so years, I have seen wazalendo get ripped off here and in the motherland. And I think this mainly happens because of the society we come from. And secondly and more importantly, because we forget the cardinal lesson that those conquered by the Romans learned in third century.

The first one affects us in that, we are used to living in a society/country where most systems (especially government-related) don't function as they should. Because these institutions don't work well, we are used to shortcuts to get things done. We are used to services that are not delivered professionally. So for example, most land offices won't ask you for any id to see documents or you say you will bring the id tomorrow. Thus when we encounter systems that work, we surely find dificult to process whatever it is we need to get processed. Just look at these tragic examples of Kenyans trying for US papers. If its possible, its wise to engage the advice of peeps who've gone thru the same process successfully.

For those of us who God has given opporunity to land abroad, our problems seem to be varied though not insurmountable. A few examples:

• we like our drink and driving. In most of the western countries, this is a huge no no and is a deportable offence. I've lost count
• The law is the law. Lots of black and white situations (i.e. no room for your interpretation) across the bureaucracy.
• Lack of papers means many of us do a lot of underground/menial jobs with no bank accounts and the like.
• Strong motherland bias in investing.
• Loneliness- no weekend relas or easygoing friends...Race is an issue
• Living costs are 4 times higher than Nai in some cities abroad
• Family life is not easy. No mboch or you get expensive childcare. Discipline your kids at your own risk.
• Relas in the motherland expect instant returns adding to the stress.
• Failure to appreciate social situations especially awkward pc ones.
• A significant proportion of our students never complete because of economic situations-note that in some countries students are only allowed to work for given number of hours e.g. 16 per week in the UK.
• Cramped or unhealthy accommodation.
• and the worst, getting ripped off by relas when you entrust them to look after your ventures in the motherland.
• And expecting the law to be on your side in the motherland...

But, its possible to successfully conclude your education and even get jobs provided, one makes it there first call to know the dos and don'ts legally and system-wise.

1. If you are a prospective student, think not about what your mate is doing but what is your calling. That way, you will be able to endure.
2. If you are a student, aim high because lecturers and tutors can be your best reference for jobs in your study nation. Some countries are now giving students 1 yr job visas. Its an awesome situation to make yourself indispensable to your employer.
3. If there is a job opening, stay out of office politics, pray your boss gives you the portfolio your qualification deserves and work hard like a Kenyan. You'll shine.
4. If you are here for a visit/a few £s, learn what can jobs pay with minimum farce and supervision.
5. The west is an individualistic society. Take the opportunity to build and discover you.
6. If you can get married and appreciate the cost and difficulties of bringing up your kids here, do so especially if you are a guy. Otherwise, the pubs are waiting to drink your sweat.

Finally, this is one of most inspirational songs for nrks. Loosely translated, you are wherever you are for a reason. And whatever hardship you endured getting there, you'll go back fruitful.

KACC: Prevent, Convict & Recover Assets vs Corruption

While many have focused on the kibz illegality (in spirit and law) in re-appointing Ringera, we've overlooked the criteria by which we should evaluate his tenure and KACC's in general. On this criteria, KACC either be closed or revamped as something completely different. Summarising KACC's functions leaves with3 core ones against which you can evaluate its success

1. Prevention: by educating; campaigns; facilitating whistleblowing; following up and taking forward credible complaints of corruption. And probably the easiest, using the public wealth declaration forms to pursue GoK employees. Corruption is far worse now than it was in 2003 when KACC came into being. I know and I'm sure others know many who went to parliament in 2002 as paupers and are fabulously rich today. Murungaru is an example. He was facing an auction in October 2002, but today he is... So where is KACC?
2. Convicting of the corrupt: This is more the role of the Ag and DPP, but do note that KACC has to present fool-proof evidence of corruption. Crucially, note that KACC can institute civil proceedings where it has evidence that taxpayers money has gone missing via corrupt actions. On either fronts, it has not done so. Even it has presented evidence, I believe only Margaret Gachara has ever been convicted of corruption and even in her case, KACC never went ahead to recover assets.
3. Recover of Assets: Biggest failure in my books. From Goldenberg, Ndung'u commission, Anglo-Leasing there has been evidence that taxpayers money was diverted to private pockets. I believe Ksh78bn was mentioned for Goldenberg alone. Ksh4bn that it has recovered is probably what KACC has spent since 2003.

On the above criteria, its fairly obvious that KACC has failed and we need to move on...

NSE: where is hope?

After the subprime crisis, market comentators and economists have now realised how important a role Keynes' animal spirits play in market movements.

From a fundamentals point of view, the NSE should now be seeing a recovery given power rationing is being reduced as well as the forecast El Nino portending better food output.

The reason its not rising is lack of hope among potential and existing investors thanks to the messed up leadership and the future.

It was a u/v curve

Today 1 year ago was a fairly traumatic day not least for Lehman Brothers folk who turned up to work only to be told no pay no job et al. While there is generally little sympathy for big bank-bursting bonus earning folk getting made redundant, the effects were felt world-wide and are of course still reverberating today with many unit trusts and hedge funds who had or offered clients exposure to Lehman Brothers' structured products suffering.

The main thing though is that tremendous amounts of money and measures such govt stakes in banks and quantitive easing have resuscitated the banking system thus allowing markets to start playing their signalling role. We are far from out of the woods, but all signs are that economies will be able to self-sustain beyond govts exiting from financing banks and economies.

Irony? Well, the preceding bubble was in the main caused by a benign interest rate environment allowing banks to borrow locally at low rates and invest in toxic assets for high returns. And the instrument of choice for allowing economies to recover? Zero interest rates...

Aligning bank's size to the economy

After you've

• set required capital ratios
• asked banks to holds capital against every balance sheet
• hold the right type of capital- unencumbered permanent share capital
• request a "will"
• request banks' single counterparty exposure be limited to a multiple of capital

You still won't have tackled the largest elephant in the room so to speak. That is banks that are so large that you don't want them to fail because the cost of rescuing is too prohibitive. Socially, financially, economically locally and maybe even globally, these banks become a threat with economies of scale outweighed by externalities.

The answer is a removal of a one-size fits-all and move to a more dynamic capital adequacy system. Regulators and governments set minimum capital requirement with reference to the growth in the banking industry's lending as a proxy for the economy.

But then for banks that are growing, you require that they adjust their capital ratios in line with year on year the growth of their balance sheets. Similarly, those that particularly large should have higher capital ratios.

The methodology is intuitive and can be applied even to simple regulatory systems like Kenya's. i.e. while each bank must have a Ksh1bn plus, those that are growing fast or the top 10 should hold higher capital Ksh2bn and the top five Ksh3bn or higher capital ratios.