NSE on track for a 4,800 finish

As previously mentioned, I believe that barring another drought, the NSE will reach 6,000 in 2011 before a slight dip in 2012 to allow for the general election. To do so, it'll have to hit and stay above 4,800 during 2010.

Up to now the NSE has been driven by a combination of emotions primarily derived from the political theatre; economic fundamentals which are driven by rain or no rain and foreign interest which tends to be driven by how Western economies are performing.

• With the katiba referendum successfully out of the way, the only other chink in the political armour might be the ICC investigations, but I see those getting bogged down mainly because this GoK doesn't have the cojones to deal with impunity. Thus no nervous investors.
• Economic fundamentals: The structure of our economy is such that domestic demand plays the key role in the economy's outturn. Domestic demand is driven by disposable income and credit build-up. Disposable income is derived from income less taxation (which is fairly constant) less BAU spend. This BAU spend can be very volatile especially if prices of daily supplies go up. They did in 2008 and the NSE tanked. Once it started raining, Kenyans could spend more on investing and savings. More importantly manufacturers could see returns on their investments, thus economy starting growing again. Should rains continue in later 2010 and early 2011, NSE will search 5300 by March 2011.
• Western economies: Are set for a low growth until 2012 at least. This maybe to NSE's advantage as many fund managers such for alpha will have to go beyond over-priced commodities and buying bonds from heavily indebted sovereigns.
• IPOs: This is not really a driver but tends to be a firm signal that the NSE is buoyant and on the up. So far, KenGen's OSF, NSE IPO, the IPo by the baker, NBK's OSF have all been talked about but not delivered. By my reckoning, the NSE needs 75 counters to really catch the imagination of joeblogg type of Western funds. Nobody wants to pay a P/E of 15+ and having a few more counters will drive P/Es to attractive levels.

Charterhouse bank - the money-launderer's dream bank

Charterhouse bank cost a CBK governor (Andrew Mullei) his job. It also led his obvious successor, Jacinta Mwatela missing out on the job. Several people involved in investigating the bank either had to flee for their lives or their careers were ruined. Its crimes:

• Money laundering: In any story you read about money laundering in Kenya, one of the best examples you get is that of Crucial properties which held a foreign currency account with Charterhouse bank. The company owned by among others Humphrey Kariuki (Wines of the World; Dalbit Petroleum and I think former proprietor of Green Corner in Nai) was investigated by CBK after it received $25m from either Leichstein or Jersey (depends who you ask). CBK reckoned this was drug money. Charterhouse refused to provide details and the whole thing went to court. The judge allowed Charterhouse to go scot free. In the meantime, the CBK team doing investigations discovered that Charterhouse had like 200 customers with 20,000 accounts. Many lacked basic know-your-customer information, but were clearly opened for the the purpose of layering where you disguise the source of your money by making multiple transactions into different accounts. That money-laundering only became illegal in Kenya this year is neither here nor there. When CBK delved it discovered the following other crimes none which have ever been successfully prosecuted because CB and related players pay well.
• Tax evasion: Charterhouse helped Nakumatt (had a 10% stake in CB), to effectively under-declare it sales which meant that its tax payments to GoK were something like Ksh50m compared to Ksh500m for the smaller Uchumi! Effectively, Nakumatt and associates had not paid taxes amounting to Ksh18bn going by the CBK findings. How? Suppliers were paid into their CB accounts where they would either ship the money abroad or shift into several other accounts within CB. When KRA came, it started chasing the account holders. Those cases are still pending.
• Large exposure breaches: Means nothing to most of us, but most banks that have either been conduits of crime or played with the idea of collapsing always do so because they breach larg exposure requirements. In layman terms, no one customer should more than 25% of a bank's loans or deposits. Reason being, if the customer collapses and goes to heaven tomorrow, the bank will more or less follow (though presumably not to heaven). Nakumatt and associates probably did something like 50% of all CB's business. CB also broke banking rules on lending to employees;

Why did Charterhouse survive to awake now as its threatening to do? The owners of CB are well connected characters.

Fuller details here.

County Kenya - making your county viable

I see counties working only if they tick 4 boxes:

Financial control:

The world over local governance fails because for a whole host of reasons they spend more than they get from central govt or can collect locally. As of now, I'm aware of any financially solvent municipal or city council in Kenya. Its not Kenyan either. In the US, very few states are able to balance their books. In Kenya, the chief issue is not corruption but lack of financial control. Corruption is a by-product of this. Add politics and the cocktail is potent. Apart from the kind of auditing that is being done on CDFs, the second part has to come from the locals themselves. Seek accountability from your county by electing men/women of integrity and professionalism. Ksh2bn can look like a lot of cash but if your county has 1m population that is only Ksh2k each. Its not cash to be pilfered but to put into projects that will generate returns. Proper accounting, budgeting, project management and procurement processes will seal loopholes. Although, new Katiba doesn't have it, I expect some revenue raising powers for counties eventually. In any case, revenue and job creation measures will become a key differentiator between viable and non-viable counties. Hence,

Industrial base:

Nairobi has grown chiefly because its a magnet for most of the Kenyan brains. And many others. Counties without any employment prospects will become a mere curiosity. A grounded industrial policy should be one of the things each governor should be judged on. Measures to attract some of the industries currently congested in Nai's industrial should be looked at. Counties should consider setting aside 25% of their revenue to attract prospective employers be it via soft loans or even infrastructure development. While industrial development should be pegged on comparative advantages e.g. its no point Turkana setting a tea factory; certain counties may need to create the comparative advantages. As an example, Laikipia can look to set a meat processing concern or even look to aggressively market its tourism potential which is huge (Mt Kenya, Bantu lodge, Solio lunch, Samburu traditional homes etc). Others like Eldoret must look to turn the nearby Moi University into a R&D assembly point where students can come to study and build their lives as they become part of the next Silicon valley and so forth. No industrial base will really take off without...

Infrastructure:

Many counties have basic infrastructure. A touch of tarmac here; a few homes with electricity; very basic health centres. If a county is planning to become the next base for manufacturing of agricultural produce and other value-adding activities, it'll need power either from the national grid or by supporting solar energy collection. It may need a working airstrip or even airport to either transport produce to JKIA for onward transmission or direct to export markets. Roads will have to be good even for non-perishable produce as bad roads increase fuel costs. Its not just hard infrastructure, soft infrastructure in form of promoting R&D to locate to your county will create the brainpower to attract the employers that are needed. Upgrading and increasing the number of secondary schools (provide subsidised internet); technical schools supporting industries; universities will create a virtuous circle. Planning will also make a difference. Nyeri has had the same buildings and streets since I can remember i.e. late 80s, but also seems like many other towns to have sprang up a slum or two.

Minimise impact of politics:

Unless we get any external influences, competitive politics are here to stay. If Kenyans can't understand or won't play by the rules of such competitions, we'll have bloodshed or the kind of tension we had between 2005-8. Eventually, you find the economy goes backward as ours did in 2008-9 period. County govts that fall prey to negative politics will become like in the council of Nai or even Momba where nothing really progresses because the political animals can't see the big picture. How do you minimise negative politics? This comes back to the local county people electing men and women of integrity. It doesn't matter what you want as a county dweller, if you vote for the guy who builds up your party or pays out most, he'll need to recoup that outlay or party line up. Secondly, CDFs seem to have elicited more involvement by constituents in their affairs and this level of involvement will need to be there for county governance to work. Finally, the foundations and the future of your county will be laid by the first county government in 2012. Electing the right leaders; having succinct katiba provisions for counties and central govt involvement (via annual audits) will ensure that strong county institutions are in place to ameliorate politics.

In short, County governance is here to stay. If it can build on the positive aspects of the CDF experience, it'll take Kenya places.

An analysis of the 2009 Census figures

Well. Its official. China's one child per family has never seemed more appealing. We've increased by a third in 10years. As many couples will tell you, have one child is very noticeable on the budget. Having two or three is even mooore noticeable.

Unlike in Chine were you need permission to have two children, in Kenya, GoK should just say you have to pay for schooling your second. And clearly we need family planning education.

Other highlights?

• Nai has the highest proportion (14%) of its young going to University. Central is next with 2.6%. Vast gap and I'm pretty sure some of it is explained by the fact that Nai houses more single people than children.
• 2 of the largest counties (outside of Nai), are in Western. Bungoma and Kakamega with around 1.7m each both have 700k more people than Mombasa. Nyeri has a similar population to Kajiado and Kwale (just under 700k).
• North Eastern hs the highest proportion of bush toilet users (63%). Unsurprisingly, Nai has the highest proportion of its population (47.7%) with main sewer toilets followed by Coast. With 5.8%. Huge gap. Only 8% of Nyanza households have piped water. Only 2.6% of households in NE (which has the highest), use rain harvesting techniques.
• Despite (or because) fo their love of mbuzi choma, Central only have 0.5m goats compared to 4m in Eastern and almost 12m in Rift Valley. Human population outnumbers each of its animals even ingoho which are only 25m. There is an economic opportunity here and I think guys need to think harder about the meat business. If you want asali, go to Eastern province where
• Surprisingly, Central has the highest proportion of households (85%) that own a radio. 62% of Nairobian households own a TV with 40% in Central doing the same. Only in North Eastern do less than 50% of the households own a cellphone. A flattening market? Computer ownership (14% in Nai at the highest and 3.8% in Coast which is 2nd), is paltry although I think cellphones have been a handy substitute.
• 42% of our population is aged less than 14 years.

Well done to GoK for doing this census because it'll help to guide planning.

Mobile telephony - a low margin future?

Zain's Ksh3 per minute call anywhere announcement last Thursday was in effect the first time Zain has made a no-head scratching announcement. That and CCK's subsequent announcement on halving interconnection rates to Ksh2.21 per minute could mark watershed moment in the mobile voicecall sector.

The key driver of the Zain move is obviously to take away subscribers away from Safaricom. The size of Safaricom's subscriber book is now seen as the biggest entry barrier into this sector and both the measures are aimed at reducing the book. As an aside, Safaricom paid Ksh4.5bn in interconnection rates (13% of its operating expense), you can thus imagine how much the other 3 players pay given most of their subscribers will be calling Safaricom customers.

Safaricom's subsequent response was clumsily presented, but the upshot is that its 8m or so subscribers will only pay Ksh2 per minute to call each other for the next month. Safaricom made Ksh63bn of its Ksh84bn revenue from voice calls last year. Thus Safaricom responded to the threat on its subscriber book (you can tell this is the case by the fact that postpaid customers will still be paying normal Ksh8 rate). The length of the offer period implies that Safaricom's thinking is that Zain can not sustain Ksh3 per minute beyond a month. Wishful thinking?

The issue is this. Can the voicecall providers make money if interconnection rates are reduced and hence they have to reduce the charge per minute? In my mind, the components that make up the cost of a call would be the fixed and variable (staff, commission, marketing) costs incurred by the provider; any costs associated with interconnection; other business-associated costs. A lot of the smaller players can probably sustain a price war because their interconnection cost has been halved. For Safaricom however, such a war would be costly because interconnection rates are a small portion of its business. It is clear that Safaricom is making a very healthy margin from voicecalls.

But the future portends lower margins and I think Safaricom shareholders should not ignore this especially in the medium-term when voice revenue will still be its predominant source of revenue.

2012 and beyond: US/Swiss model or the Nigeria one

The more I reflect on Kenya's history, the more I realise that how we are governed will be the key differentiator on whether we achieve our potential or not. The new katiba has given Kenya a potentially life-saving form of governance but only if its implemented to the letter. Below I review some of the new facets and their implications.

The 2012 general election will usher in

• an executive where only the president and his pre-nominated vp will be elected officials. The rest will be appointees from outside the political circle who will be vetted by the various parliamentary committees. This will work if you have a president who wants technocrats that can deliver in the particular ministry. The US model almost works but don't forget you can get guys like Donald Rumsifield. If done properly, we'll get a John Michuki-type in every ministry.
• County governance. This is new but it means that a lot of the current MPs will actually prefer being governors and senators than MPs. A positive because it means that we'll have a new crop of MPs. The downside is that your current MP might be angling to eat his cut of the 15% from the budget. In this respect, lets pray we don't get the dysfunctional Nigerian model but the super uber efficient Swiss one. Already in Nyeri, Elephant Maina is eyeing the governor seat to consolidate the horrible road he did in the area. Do you think any other road contractor will build roads there?

NSE: lull before a dip or a rise?

Despite a very positive referendum outcome with Kenyans voting overwhelmingly to look forward than backwards and doing so peacefully even in the volatile RV region, the NSE seems to have taken the news with a discernible lack of interest. Is the market ignoring these gains in the political environment or are there other factors at work?

Yes there was a rise pre-the voting day as it became clear that the YES team had done enough and moreover Kibz govt had anticipated any violence in RV by posting security everywhere, but a subsequent correction whittled these gains.

To my mind, the reduction in political risk should mean the NSE heading towards a 5,000 close by end of the year to reflect the gains in the economic arena not just from the YES vote but also the subsequent dividend from the same as well as the bumper agriculture produce that we should be seeing this year. This latter factor should mean lower produce prices this year and thus lower inflation feeding into higher savings and so on.

The future for Kenya's economy notwithstanding usual weather issues is frankly very bright and one would be advised to pick NSE shares that have either strong regional momentum or products that have a regional reach. Equity, Centum, DTB to name but a few have set their eyes on achieving the same sort of growth rates in EA that they have in Kenya.

Yes? No? the katiba referendum summary

If you:

Want to be able to recall your MP for non-performance. vote YES

Believe MPs should set their pay. vote NO

Want land policy removed from president's control with size set being set by parliament. vote YES

Believe current land policy is good and its good president has veto on who gets land. vote NO

Want an independent judiciary. vote YES

Believe the president should continue appointing favorable judges without veto. vote NO

Want Kadhi courts not to be GoK funded, but think Christians can get 1m signatures to amend. vote YES

Believe Kadhi courts (a) will cease to exist (b) are the most important item in the katiba. vote NO

Want president's appointments to be vetted and veto'd by parliament. vote YES

Believe president should have the right to appoint who he pleases. vote NO

Want an independent central bank able to impartially supervise the financial industry. vote YES

Believe that the president and his finance minister know the banking industry best. vote NO

Want a semi-centralised governance able to take local development decisions. vote YES

Believe a majimbo system that appreciate regional tribes is the missing development piece. vote No

Want an anti-abortion law that recognises that special urgent situations for mothers' lives can occur. vote YES

Believe that there is an anti-abortion law that can stop abortions occurring in Kenya. vote NO

Believe current katiba is better than the proposed one. vote NO

Want a katiba that is superior to current one and reduces chances of dictatorship. vote YES

Want a constitution that recognises that its impossible to get all Kenyans saying yes. vote YES

Believe a katiba ain't a katiba until all voters agree its the business. vote NO

Will forthcoming Katiba referendum impact NSE?

By and large, business loathes uncertainty no matter what the source. As do the investors who invest in such businesses. There is logic to this. A business will normally plan and target certain revenue and cost outcomes for the year or for multi-years. These will be primarily be based on it being able to sell as much of its product and services as possible while keeping the costs down. While there will be some scenario testing it will not usually include the impact of PEV or continued tense politicking.

Kenya has spent 47 years under one katiba and its not gotten us far from 1963 apart from population-wise. A large part of this is because we didn't know what we know today about governance. This katiba is the sum of our learnings over those 47 years. For 20 years we've seeked to agree what these are and now we have a document that summarises them. To continue dwelling on this is sheer waste given the other pressing needs that we have.

A Yes vote will bring closure to the yearning for a new form of governance. It'll mean that we have a katiba that takes us forward for another 47 years. It is not a static document i.e. it is amendable. 2012 general election will be held under new rules that we understand

A No vote will may condemn us to another 20 years of continuous search because we'll effectively have taken the energy out of a new katiba. A No vote will mean that 2012 is approached with apprehension. The issues which would make us vote No are not even small print but a symptomatic of a minority that refuses to see the woods for the trees. A No vote will mean that NSE definitely factors-in a fractious 2012 general election.

For all the above, its advisable to hold cash that will allow you to take advantage of some low priced stocks or average down.

You can now track your shares at CDSKenya website

This a significant step forward in helping the NSE regain some of the momentum from 204-6 period. The automation of share trading at a was huge step in increasing share trading and share ownership. The subsequent collapse of FT, Nyaga and lately Ngenye Kariuki accounts for at least 30% of the NSE losses suffered in 2007-9 period. The wisdom of increasing CDSKenya's visibility was an obvious step in trying to restore investors confidence that they would not lose their hard earned wealth. CDS Kenya under Rose Mambo's able leadership has been innovative allowing investors to register so they can get an sms when an order is transacted on their CDS account and also emailing monthly statements to investors so they can monitor their CDS accounts.

The online service allows you to view your account via http://www.cdsckenya.com/ and all you have to do is remember your CDS account number and the ID number or passport number you used to open your account.

Two things to note:

1. You will not be able to see any of the cash you may foolishly have left lying in your CDS account. Note further that if you broker was to collapse, only your shares are 100% guaranteed. Any cash will be subject to Ksh50,000 maximum payout.
2. NSE operates a t+5 days settlement system. Which in plain English means that you won't be able to see any sale/purchases made over the last 5 business days in you CDS account. This is a bit of a loophole that I am sure brokers and can exploit.

Proposed constitution: A review

Basically, this document is idiot-proof. Anybody can read this katiba and understand what each article says without needing an expensive lawyer or re-reading it severally.

Parliament:

Set parliament periods. Elections will be held on the 2nd Tuesday of August every 5 years.

Parliamentary Service Commission's composition continues to nag at me. i think its too MP-heavy and renders itself to their undue influence.

The MP recall clause- is in, but its not i.e. parliament has been given permission to come up with a law setting out the requisite criteria and procedure. However, article 105 does allow one to take a petition to high court against your MP basically declaring his seat vacant. And petition will be heard within 6 months.

Executive:

President has to seek parliamentary approval when appointing his/er Cabinet (now known as Cabinet Secrtaries), AG, Secretary to Cabinet, Principal secretaries, ambassadors , Cheif Justice and his/er deputy and ANOTHER.

Has to wait for 7 days after the elections before s/he is actually sworn into office (no more midnight swearing shenanigans)

Cabinet ceiling set at 24. Not sure why there is a floor of 14.

Cabinet secretary can't be an MP.

Cabinet secretary can be dismissed by parliament via majority vote (Kimunya won't have to die and resurrect)

Kadhi courts deal with muslim matters. Imho, they shouldn't be part of the civil service, but having been around for 53 years, it'd sheer hypocrisy to say I'm voting NO because of them. I can wait until the katiba goes through and then wage war proper.

Economy:

Devolved government has made it into the katiba complete with revenue (set at a floor of 15% of GoK revenue) and own senate.

Better control of public finance via a pre-budget statement that will allow parliament committee to consult the public.

An independent CBK-very very important especially for banking supervision and monetary policy.

Other of note:

National police

Amendments can be done via parliament and popular initiative.

Land policy

Dual citizenship

Make voting mandatory

I am ashamed when I read people of my generation who say they won't bother voting. I worry when I read that only 55-60% of people vote in Kenya and less in developed countries. Part of it is a lack of history. Most of the people who died or were detained without trial in the 80s and early 90s in Kenya did so while agitating for the right to be able to vote for people they wanted to lead this nation. That is the emotional part.

If you work, run own business, invest or own property, you pay tax. That is unless you are not on the tax avoidance thang.

If you pay for your groceries, you check they are green enough. If you pay for your car, you check steering, brakes, accelerator, cromes et al. And you pay more in your ta,x (30% every month of your income) than for all these other things part from may be your home. Its not just intelligent, but right that you care about how what you've earned with your sweat is spent. Your vote may even change how and when you are taxed. Vote because whoever you choose will decide how your money is spent.

After 2007, some may say your vote was stolen. It wasn't because everybody in Kenya is in GoK and we have all now learnt a few things. Like? Most politicians in Kenya are the same and it'll require us to reassess whether its presidents/tribes/personalities we vote for. Or ISSUES. The katiba debate is encouraging in that respect. Your vote is your way of saying you are engaged in what is happening in your country.

For those of us who are prayerful. Paul spoke about how prayer alone may not be enough without action which represents our faith in something happening. If you have faith that God will give us good leaders, put it into practice by voting for those good leaders!

NSE @ 6,000 a possibility in 2011

In 2007, when the NSE last reached 6,000, Kenya's economy was growing at around 7%. 2008 was 2-3% and 2009 was similarly anaemic. This year, God's favor in form of good and continuous rains mean that we are almost guaranteed 4-5% growth this year. Next year, with God's favor with the rain, we can touch 7% again assuming that we don't get into any early 2012 political skirmishes.

Because we never entered a recession in 2008-9, the economy has continued to grow and thus I believe we are poised higher in the NSE.

The private sector manufacturer and service firms should be announcing firmer or better than expected results for Q1 2010. By extension, financials which took non-performing loan hits due to PEV in 2008 and drought in 2009, will now see the upside in their balance sheets for which they've been restrained in growing.

All the above, plus the artificially lowered lending rates portend a higher NSE.

The key supporting point is 4,800 which we need to touch in 2010 so we can launch higher in 2011.

Which stocks?

Equity- we all acknowledge the step into IB was unclever. Not so Uganda and South Sudan businesses. Uganda ofcourse has oil and despite M7's re-election in 2011, its economy will continue a north-bound journey. South Sudan goes for a certain independence referendum in 2011. Both will support the upturn in Kenya's economy still Equity's bread and butter.

Centum- I think its a transformative time for this investment firm and James Mworia hasn't put a foot wrong yet. Getting into Carbacid when he did and breaking its logjam to allow trading resumption at NSE was a masterstroke. Exiting RVR and writing off the investment in advance all mean good thangs for full year 2009/10 (announcement due soon) and going forward.

I also fancy some manufacturing exposure to the likes of Crown Berger, Carbacid all which do well in an upturning economy.

Downside risks: as mentioned, any early 2012 campaigns will remind investors (specifically foreigners) that a new leader is due in 2012 and create tension. Another drought will have a similar impact to 2009.

Greece debt mess from unbalanced economy- can Kenya learn?

Greece's debt crisis which may lead to a complete economic collapse is as much about profligate spending as it is is about an unbalanced economy.

A balanced economy is made up of 3 key pillars whose relationship can be summed by this equation;

a - b + c = flourishing economy

where:

a - is the private sector whose growth is a must as it effectively generates the required tax revenue that is taken by the

b - government/public sector and used to finance various types of infrastructure from judiciary to roads

c - is the external flows in form of investments; loans/grants and aid

From the above equation, its clear that if you have a huge or growing public sector then the either financing will come from either external flows or a faster growing private sector. In any case, whether the cash is coming from the private sector or external flows, in a recession, neither will be able to sustain the huge or growing public. Even in normally growing economy (neither too fast nor too slow), a huge or public sector will eventually stall the economy. A time will therefore come when massive cuts in the pubic sector spending have to be undertaken. But, typically, the public sector employee unions tend to be the most well organised and resistant to change. Public sector can be used as a patronage system rewarding supporters of current regimes with jobs.

Greece is a typical case of the above happening. The public sector accounts for 40% of its GDP! In effect this is almost non-productive resource being used without concurrent growth in the economy. In a recession, public spending would need to be reduced and this can be a problem where the unions are well organised.

While Kibaki's govt has made giant strides in reducing govt spending by for example privatising various parastatals, its also clear that since 2007, spending has gone awry with deficits recorded every year and the 42 heavy cabinet doesn't help in this respect.

Einstein said intelligent is measured by how well you learn from mistakes and it is hoped Kenyans can do so from the Greece debt crisis.

Equity/HFCK boardroom myths; Mpesa in the UK

Despite all the talent and research time at their finger tips, both DN and Standard seem to have missed out on the fact that the Equity/Britak/Jimnah Mbaru fraternity owns 35%+ of HFCK. Basically, the 3 hold a controlling interest in HFCK. That they'd seek to have a BoD that is more amenable to their interests is no surprise. Is it wrong to do so? Not in Kenya. Note that unlike in the West where there are clear guidelines on the composition of Board of Directors and corporate governance generally, in Kenya, CMA/CBK/NSE are all silent on BoD. Hence, a lot of what happens in Corporate Kenya in terms of composition and BoD rules is copied from the West purely in the same way that we have democracy without the context. However, there should be rules that state that of the third non-executive directors, some should be non-shareholders.

Mpesa is in the UK. Not quite in the same, all path-blazing way that it has been in motherland, but more in an experimental manner. Of the 8 or so publicised agents in Greater London, only two were working the other day, and neither had a float to sustain a £250 send. Contrast that with Western Union or general banking presence. However, assuming you are sending school fees plus lets say farmer workers salary and need to do so urgently, then its recommended you use the Mpesa service. It costs £4 for anything upto £150 (compared to £21 with Western Union and £2 via normal bank) and will be with recipient's phone in Khayega in minutes (compared to 3 days for banks). Provident Capital have licensed some agents (the only operative one is E2 East Ham).

What lending rate should we be seeing from Kenyan banks?

The last 6 months have seen wailing pleas from CBK governors and media types calling for lower bank loan rates. Much have of it has been emotive/subjective.

Although there are many factors that are considered when deciding on the the correct loan rate, 3 are key. Cost of borrowing; return on capital; loan quality.

1. Cost of borrowing: Quite simply, a bank is gets its money from 3 sources in order of quantity; depositors, lenders and shareholders. The lenders will typically charge some internationally priced rate and shareholders are covered below. If you look at a typical Kenyan bank's balance sheet, you'll note that the largest two single items are deposits and loans. While we are can talk about the desirable type of depositor (i.e. raia like you and me who are seen as far more stickier than corporate or other financial entities), the key consideration here is the rate depositors require before they can deposit with a typical Kenyan bank. That is, the rate they lend to the bank. Per CBK, the current average deposit rate is 4.89%; typical savings rate is much lower at 1.81% and finally the interbank rate is 2.17% (its unusual for the interbank rate to be so much lower than the CBK rate in itself a sign of some dysfunctional issues). So Kenyan banks are paying 489 basis points for deposits. They are then not going to charge bank loans at anything less than 4.89% and possibly more if their borrowing from abroad (i) attracted higher interest rates and (ii) is a significant portion of their borrowing. We've overlooked the maturity mismatch issue i.e. the bank is borrowing short (you as a depositor can withdraw your funds at any time) but lending long-term (a bank can't take back its loan tomorrow). So lets say 5.5% to breakeven against cost of borrowing. But is this real cost of borrowing? What about staff costs, administration costs (IT, branches) et al. I'd say add 50bps. Thus arrive at 6%.
2. Return on capital: A bank has many stakeholders, but the shareholder is the key one as they can guarantee continuity from a regulatory and financial perspective. The bank's lending rate must therefore reflect the shareholder's desired rate of return on his/er capital to keep their capital with the bank. Straightaway, you'll note that the shareholder wants the regular income in form of dividend and eventually in form of capital gains. A potential shareholder (note not a speculator), will want to keep his/er capital with a bank share for say 2 to 3 years. He/she doesn't know what may happen in those 2/3 years i.e. the risk is high, but at the end of it they'll want a return on the principal and reward in form of gains or income for keeping the cash there. The alternative would be to stick the same cash in a t-bill and earn minimum 8.75% per year with guaranteed principal protection. The bank has to deliver an annual income of no less than 8.75%, guarantee the shareholder's principal by ensuring growth in shareprice and reward the shareholder for sleepless nights. Lets say we are now at 10%.
3. Loan quality: In Kenya, a bank historically relied on quality of collateral in form of a clean title deed. Many banks have learned painfully that (a) title deed may not be legit (b) may not mean much if there has to be recourse to the courts where you are asked to form an orderly queue at case number 900,001. Other forms of collateral such as shares; guarantors are costly to enforce. Secondily, the other way you judge the quality of your loan book is to have borrowers that don't already have 5 other loans. In Kenya, its not possible to tell this because credit scoring started this year and of course banks didn't share customer information. The risk of lending and guaranteeing that the loan will not go bad has to be rewarded. Add another 300bps to the 10%. Therefore 13% borrowing rate.

Why do Africans have European names?

3 reasons I have been given so far:

1. They were mythically told that adapting a Christian name was a mark that they had been saved and baptised and were a now a new creature with new name. Its a myth because no where in the Bible does it say that you have to change your name...
2. The white colonisers got fed up trying to pronounce Wambugu, Onyancha and said we had to have European names to get jobs on their farms. There is some truth here because my grandfather said it was either that or you were called brooryfoo (bloody fool) or "boy" and the later is anathema to the circumcising tribes.
3. To be more like our European masters, we adapted their names.

You see culture imperialism is the subtlest and most powerful form of colonialism. Today, Africans will laugh at you for having the temerity not top have a Christian or Western sounding name. We are no longer intrigued by the origins of our African names, our history, the history of our and origin of the names of places...

So why not the same for the Japanese, Chinese, Indians, Arabs and many other free nations?

NSE & 2012: Scenarios for investors to ponder

Investors who hadn't factored 2012 into their equation when investing in Kenya, will today have bashed the wall in frustration.

Although most of us only think of LEPEST in theoretical cases, in Kenya and some other parts of Africa, its must to peg some risk-weighting against each of these factors at a macro (investing in Kenya vs investing in the UK as an example) and micro ( the impact of changes in political situation on the prospects of a particular firm).

Lets consider likely before and upto 2012 and likely bearing on NSE:

• ODM/PNU break up: Initially, I thought RAO and Ruto were playing for the cameras. Until I heard Joshua Kuttuny say that their (some of RV MPs) strategy was to muddy RAO until he became unelectable. The weekend's events portend serious issues for ODM. People like Martha Karua are not really in PNU. Lets assume that the wantaway parties don't join up with anybody else. Would be the worst case scenario for Kenya imho because the nation would be ungovernable. Note, if Ruto et al leave ODM, they'd have to seek re-election
• ODM loses Ruto et al gains young Central/Kisii/Coast MPs: The compe with PNU and Ruto ensemble (aka KKK aka Klu klaxx Klan) would be interesting. If KKK lost against an ODM alliance with those MPs, Kenya would prosper despite pockets of violence in RV. A win for KKK would lead to more corruption with a rapture between UK/Ruto vs Kalonzo when he realises he'll never be Rais.
• Kibaki waits until new katiba is passed and goes for a 3rd term: Would lead to PEV all over again.
• Business as usual: ODM remains intact and PNU similarly continues to go thru the motions of breakdown though primarily a GEMA party. Most likely to lead to PEV repeat in my view. The mantra that drove ODM was hatred of the GEMA...

What a benevolent dictator of Kenya would do...

We've tried dictators, they didn't do it. We've tried democracy and so far its not delivered. So why not a benevolent dictator.

Definition - A dictator that has power because the people choose to allow him/her to; who must make wise use of power since the benevolent dictatorship system allows them to be peaceably removed from office.

I prefer the wikidictionary's defnition.

What should he (or she as it can happen) do on ascending to power in Kenya:-

Corruption -

1. require all cabinet ministers, PSs, heads of parastatals and judges to publicly (via adverts in at least two national dailies) their wealth within a month of being in office
2. make corruption (whether tkk or mega), a capital offence punishable with a death sentence
3. give those who are implicated in past corruption, 6 months to payback what they gained corruptly or get taken to court and suffer 2 above
4. create a special corruption court with lower threshold of evidence

Judiciary

1. Create special courts to deal exclusively with all cases older than 2 years.
2. target judiciary with reducing outstanding cases by 200,000 per year with sackings where necessary for failed targets
3. reduce judiciary entitlement to time-off. In fact make it compulsory for courts to be open on all but public holidays
4. and of course increase the number of judges
5. make corruption, rape, paedophilia, drug dealing, homosexuality and armed robbery capital offences i.e. death sentence
6. drink driving, speeding, drug taking, littering, robbery all become punishable with varying degrees of caning

Economy

1. Create an independent central bank charged with monetary policy (rates, inflation) and banking supervision
2. Create two universities via public-private sector initiatives. One exclusively for IT and another for agriculture
3. Require all public road works projects to have significant managerial as well as general Kenyan headcount
4. Reduce government holdings of parastatals to 25%
5. Move government ministries from Nairobi to another town via referendum - to create room to turn Nairobi into a proper commercial city. 2ndly to reduce the detrimental economic concentration in Nairobi
6. create an industrial corridor stretching Mtito Andei all the way to Limuru
7. Coffee and tea would only be exported as value added products rather than raw materials
8. All new buildings would have to include solar energy capability to power 50% of power installations in the building
9. Close all but those local government councils that deliver profitably. For the rest, use constituency funding to deliver services

Others

• To aid family planning now desperately needed, only couples will be allowed to have children and only 1 child at that. Any kids born out of wedlock, the parents would be punished (unless it was rape in which case, the family of the rapist would pay for the child until it was 18).
• cutting a tree down would require a licence and two that the cutter to have al;ready planted another 5 that have been growing for 12 months
• abolish the rvr venture agreement and instead have one that is completely performance-based. Alongside this, restrict heavy road haulage to a certain maximum weight

Harnessing the multiplier effect of the Diaspora $, £, ¥, €

The debate in Kenya about the efficacy of the diaspora remittance has been spilt into 3 categories;

Welfare givers-that is, diaspora remittances are seen as primarily useless because they only go help relas' consumption out in Kenya. However, this is ignoramus in the extreme. My simple maths tells me that if we assume that this bottle of milk equates to Kenya's store of money. Its quantity currently stands at 8 litres. If a diasporan comes along and adds another 1/8 of a litre, its no longer 8litres but its 8 and 1/8 litres. Whether it increases because of that is immaterial suffice to say there is more of it now. The other point is that this view ignores the circulation of money without which central bank policy the world over would not be effective in combating inflation and the like. If a diasporan sends 20k to his mother in mashinani for her spending she will go to the shopkeeper and buy her supplies. The shopkeeper will go to his supplier with the 20k and buy supplies. The supplier will go the manufacturer for more supplies who will go to the farmer for more materials.

Bubble creators: its argued that diasporans by following Kenyans down the road of currently popular investment avenues (NSE between 2005-6 and real estate since 2008), they add fuel to already overheating investment avenues and with their deeper pockets push prices to artificial highs. Agreed.

The diaspora are also involved in infrastructure projects as well as purely humanitarian projects.

Beyond these avenues, is a consideration of how a significant portion of the remittances can be used to create multiplier effects at a micro level i.e. via the remittances to relatives. And the first step has to be able to step back from the instinctive and emotional reaching for the pocket whenever a rela say they need help. How so?

If you take a typical diasporan. He will probably send Ksh100k per year as part this knee-jerk response to relas. Apart from genuine emergencies i.e. medical/nature related funding or parents/spouse, he’d be better off stepping back and asking the said rela to come with a income generating project that he can finance.

· Say the diasporan was to send Ksh50k to a rela two buy two dairy cows. Assume the dairy cow is those ordinary ones that can produce around 7 litres per day, 5 which can be sold to the local cooperative.

· At ksh23 a litre, that is KSh230 a day and if you assume spending equates to Ksh4,000*12=ksh48k per year.

· Not Mercedes buying income, but if the diasporan supports two of his relas on that basis, will equate to zero handouts the year after!

· Or a potato framing venture. Here, say the disaporan gives the 50k to his farming cousin who can use the same to lease an acre of land. Assuming 50 bags of potato per acre at Ksh1,300 per bag. That is another Ksh50k after domestic spending.

· Another example, the piki piki business can earn one around ksh300 per day and so forth…

Clearly, it’s a win win situation for the both the diaspora and the recipients of their remittances to view it this way.