Kenya’s Growing Debt Society
This summer, a friend of mine was visiting from Kenya and we got into a discussion about the booming real estate market and the growing economy. During this discussion, she said that her observation was that a lot of people were living off loans because she just couldn’t figure out where they were getting the cash from.
Today, I open up BD Africa and there’s a story about the growing number of defaulters that banks are now being forced to deal with and this is a potentially serious problem for Kenya because (like I’ve said before) – Kenya is a country with a very low level of productivity. If you have low productivity, you can’t produce the necessary jobs and without jobs, people will not be able to pay back their loans. So, what will these banks do?
Now, against this backdrop, add-in interest rates hovering above 25%, inflation at 30% and an over bloated government that is eating up 80% of the country’s revenue’s. Where is the money going to come from? Right now, most of the money is coming from the farmers. They grow food and they sell it internally (some of it is shipped internationally) – but outside of this core group, it’s a low productivity country (& don’t tell me you are seeing Kimbo and blueband in stores in Rwanda and that’ means Kenya is a high productivity country).
America has the same problem. They have a huge debt society, but they are still a country of production. Coca-Cola is an American company and people around the world are still going to drink coke. Microsoft is an American company and people around the world are still going to use software. However, America also has bankruptcy laws, which I predict, are going to change in the next couple of years because it’s the only way people will be able to get rid of their debts. When the republicans came into power in 1994, they changed the bankruptcy laws and made it more difficult for people to use the law to get rid of things like credit card debt and student loans. However, now, because things have gotten so bad and because the democrats are probably going to win this election, the bankruptcy law of 1994 is probably going to be re-worked in order to allow people to off load some of their debts.
Perhaps Kenya, with it’s growing debt society, should seriously consider introducing some kind of bankruptcy law that would allow consumers to either mitigate or even eliminate some of their debt. It’s really the only way at this point, both in America and in Kenya. In America because wages are not going to be climbing anytime soon and in Kenya because the jobs just aren’t going to be there.
Have you seen some of the outstanding loan figures that these banks are now stuck with? Barclays bank has Ksh.108 billion in outstanding loans! That’s one billion dollars. eek.
I’ve been saying for months that the economy in Kenya just wasn’t making sense to me because I couldn’t figure out what new things they were producing. In order to eliminate poverty, you have to create new wealth and you create new wealth by increasing your levels of productivity in areas of the economy that did not exist anymore. Things like high-tech (that did it for India) or manufacturing (that did it) for China.
I’m not seeing this new wealth creation in Kenya. What I’m seeing is in-breeding: Money was circulating within this small economy, but no new industries were actually being created.
I don’t see it as pure debt, I see it as financing, which is wonderful. Tell me how one would start an enterprise if they can’t borrow money, unless they have some tall and/or fat relatives and friends, the ones on whom we are apparently spending 80% of the budget? What I feel is needed is a reign on the interest rates and inflation. If money could be cheaper to borrow, then of course it would be easier to start profit making enterprises.
Here’s some other numbers that someone mentioned at the Harvard Africa Business conference in 2007: In Kenya, about 25% of the GDP is generated by Agriculture. However, of all the financing (what you prefer to simply call debt) that banks provide to businesses, farmers get only 5%. Clearly that’s a very inequitable distribution of resources?
If I can buy KCC and Brookside milk in stores in across East Africa, it most likely means that these two enterprises are making profits. Now we know who runs each of these, and as you mentioned, we know that smallholder farmers provide them with milk. What we need to do is move the farmers into profitable positions within the dairy value chain. And replicate that across the various agricultural value chains. By the way, one of the ways we can do this is by allowing them to add value to the ‘raw materials’, which means we have to give them access to finance. See, it’s not just debt!
What do you mean by: In order to eliminate poverty, you have to create new wealth and you create new wealth by increasing your levels of productivity in areas of the economy that did not exist anymore? I’m with you on creating new wealth, but … How on earth do you INCREASE productivity in a non-existing area??
KE,
did u study Economics Post Secondary ? just curious.
BTW, in Sunday Nation, see IMF was doing damage control, backtracking on their optimistic view, and classic Western organization style, brought out a representative that looks like the affected population.
KE about debt.., very prescient!!!
From business daily,
The risk for many banks is however in the fact that between 2005 and last year, most relaxed their lending rules as they raced to make large volumes of personal, unsecured loans for which the law now offers scant recourse.
Munge Murage, a partner at Muriu Mungai advocates, says he has instructions to aggressively recover loans from defaulters.
“I have been filing an average of 10 new cases every week,” says Mr Murage. “So far the default cases we are handling relating to Barclays’ customers are valued at close to Sh1 billion.”
http://www.bdafrica.com/index......temid=5822
To muddy the waters, I will ask about the elephant in the room that no one wants to address. If we are an agricultural country, do we have enough capacity to feed ourselves, leave alone export ? Food security is national security.
Are some of the clashes we have had, been exacerbated by a sense that we are “going to run out”? There are villages where families have subdivided the land to the point, where the inherited land cannot sustain a family. Can we sustain our growing population with only 1/3 (correct me if I am wrong) of Kenya’s land mass is arable? If we can’t what should we do? Maybe those ” on the ground”, and those who studied economics post-secondary can shed some light on this quandary.
Some might say that China in the late 70’s their version of this problem( 1 billon+), and got cracking…. governing a hungry, and at times angry population is no joke!!
I think credit is important if it is handled responsibly. Many businesses are run on credit and they do fine. The problem would be irresponsible lending.
******
As for Agriculture, it is very easy to feed Kenya and even produce for export if there is good strong leadership. Sometimes you have to force people to come to their senses.
It is not even an economic puzzle, it is just plain common sense.
If there are proper irrigation projects Kenya can produce rice, vegetables, sugarcane and fruits for domestic consumption and even export.
But I don’t see that happening so long as you have mediocre MPs who cannot think beyond their bloated stomachs.
Can you believe the MPs are debating the PIRATE SHIP in parliament? Exposing Kenya’s national security issues for the world to see. Which country debates its weapons capabilities in parliament? I saw these MPs on NTV last night boasting that they will grill the Defence Minister. No wonder and Ethiopian friend was teasing me about this whole saga.
They should be discussing projects, projects, projects to make the lives of wananchi easier.
I will not blame the problem on the economy on this one, I will blame the banks squarely on their reckless lending. Instead of financing SMEs (especially the micro SMEs and startups) they feel more comfortable giving unsecured loans to yuppies with payslips. They even put up ads everywhere of the way you just need to buy that new car!!! When they hawk and market these loans to yuppies the temptation to buy a newer sleeker car, 42 inch plasma T.vs, new furniture is great! Also the pressure to get an apartment in the lusher side of town is also high.
I got so many of those sales people from the bank trying to convince me the way I need a loan but thank God I never took the bait. You see to sales person,selling loans means earning commissions but no one is there to advice you on the financial implications plus the many hidden charges, change of interest rates etc that may inform you to make a better decision. So the ignorant masses driven by either greed or peer pressure end taking loans to keep up with the upward and mobile lot. Haven’t you met or heard of someone with BMW who couldn’t afford to fuel it everyday of the month? There are many such people still struggling to pay off the loan.
If they funded business instead they would have increased the productivity of these businesses, creating more wealth leading to more money in the economy for further extension of credit to even more businesses. The small businesses can even get more credit to expand even go regional. But it still very hard for businesses to get credit in Kenya.
However this problem is not unique to Kenya, I believe the banks have learn a lesson form the experience. The problem is also in SA with the ‘black diamond’ upcoming middle class having a trouble with debt because of relying too much to credit to do almost everything. Also in the USA, how many Americans have trouble with their credit cards? Or how many Americans are in debt? I think an average American is in debt. In fact these problem has been existing for long it is just recently it hit the corporates.
PKW:
You asked: How can someone start a business without financing? They can do it by bootstrapping, which is what most people encourage you to do. Bootstrap your business, then when you actually have clients lined up, go to a bank and borrow money for EXPANSION.
What was shocking to me in the bd article was not just the amounts of money that these banks had loaned out, but who they had loaned them to.
Now they are saying that 80% of these loans were given to civil servants and they are going to start docking the money from their government paychecks.
So, now, you have thousands of civil servants, many of whom don’t make a lot of money to begin with, who are going to see their paychecks dwindle quite significantly. Then, add in, a dwindled paycheck to the 30% inflation rate and you’ll end up with a lot of struggling people.
I see a lot of kenyan business blogs that are obsessed with trying to figure out whether a stock price will go up or down and quite frankly, I find that discussion to be downright stupid. Nobody can predict where a stock price is going to go. I think a more pertinent discussion (if you want to tell which way the economy is going to swing) – is to look at a countries level of production and you do this by literally asking what that country produces for export. If you produce nothing, the economy simply cannot grow and this seems to be what has happened in Kenya. The economic growth was artificial. It was not fueled by production. It was fueled by borrowing. Bankers are not entrepreneurs. They don’t produce anything and they are not the one’s who are going to fuel economic growth.
Now, those civil servants are going to be in big trouble because the government cannot afford to pay for their salaries without massive borrowing and now that the credit markets have tightened up, where is the government going to borrow the money from? Can you say layoff’s? When the layoff’s come, the banks will no longer be able to dock people’s paychecks and how will they recover their money?
If I’m a civil servant in Kenya and I get laid off, the bank can repossess my house if they want, but if I have a small business on the side, I’m not going to pay back that loan. With 30% inflation, people have more important priorities, like: paying rent, school fee’s and buying food. The loan can wait.
Bankers are so overrated.
I Recall not too long ago Barclays Kenya thru it’s CEO Adan M. came up with this “grand strategy” of building up one of the largest sales force team in kenya basically to go around and hawk loans to basically anyone with a payslip as NONI pointed out.
It seems this was a flawed strategy. Again i repeat I don’t always believe in “financial experts” wasn’t this Adan guy a superstar from Harvard Biz school ? and now his decisions gonna cost them billions in losses. well, what they have going is that they may be able to deduct money from people’s payslips…
I like that idea of bootstrapping, building up business then getting a loan to expand. HOWEVER, In reality, some times it’s not so easy, at times it’s hard to know what came / comes first is it building the business- but how do u do that without adequate resources ? or do you borrow the money and acquire these resources ?
what came first? the chick or the egg ?
K.E. you are wrong, the government does not borrow money to pay civil servants. Al least from the last figures, the government financed around 95% of its budget.
You are also wrong by saying Banking cannot generate wealth. It can generate wealth if we create policies that will make Kenya (specifically Nairobi) to be a financial hub in the region. Other smaller countries like Luxembourg have become wealthy like this. By this we streamline our banking sector, create policies leading to bigger banks etc
Tourism generates wealth. It has a big potential if we invest and market it and create a stable political environment. Dubai gets more visitors than its residents!! Can you imagine. Yet I believe we have more to show. I think we can make tourism work for us.There is a big potential here.
Agriculture. You seem to be putting it down. Remember we don’t have many natural resources but we can improve agriculture to be a net exporter of food. We can also develop Agro-based industries and improve current ones to process and brand our agricultural products. With growing world population, people will still need to be fed. We need to streamline agricultural sector that it can be profitable to farmers leading to more productivity. We where exporting beef to far of places like Morocco and middle east before the post election. K.C.C had also started importing milk many countries before the issue of supply hit them due to post election violence. I believe the same fate could have befell K.M.C. I think there is a big potential in agriculture. We have just scratched the surface.
The other thing which guys are waiting for is the I.C.T sector to take off. Through B.P.O we can export knowledge and labor (without brain drain) as jobs that could have been done oversees in richer nations start being outsourced and done by locals here.
Another area we can capitalize on is the Transport network and our ports. Because neighboring countries economies are growing (Uganda, Rwanda, Burundi, South Sudan). We can make our ports and transport network and ports more efficient to handle more goods in transit to these countries. Countries like UK, U.A.E, Singapore have capitalized on this area.
Well believe the government is doing something about the areas iI have mentioned. Its just watching and seeing how everything will play out and how its going to implement its policies even with raising challenges of high energy costs and rising inflation being pushed by global fuel prices.
Well about bootstrapping, its a good idea. But am also talking about companies that have been existing for a while. Having worked in a couple of SMEs , I know how the struggle with cash flow especially ones in the service sector.
Imagine working in a company operating in about 2 to 5 years, still trying to establish itself. Sometimes these companies even struggle to pay their employees. The accountant may be waiting to several invoices to come through to be able to pay staff. A financing situation where the bank will finance the company to pay its employees and pay back the bank the money when the invoices come through can help alot. It will lead to happier and productive employees and reduce staff turnover. Most start ups businesses are killed by high staff turnover. When there is high staff turnover there is no continuity in provision of services, retention of knowledge and skill development.The company end up getting a bad reputation as they fail to meet their obligation to clients and staff quit bad mouthing the company. I know many new businesses in the service sector struggle with this issues among others that a good credit.financing system can help.
Do you know in Israel most graduates are likely to end up working for tech start up or set up one of their own? After USA, apparently, Israel comes section in the tech sector. Go to Wikipedia and read more on Israel Economy. Its doing so well inspite of insecurities in the region and GDP rivals most western european countries.
Apart from my previous comment on areas that may fuel economic growth is for many entrepreneurs to pursue their dream and realise it. Start business employing 10 to 30 people. This is what will create jobs and create wealth for the masses. Its not waiting to Toyota to set its manufacturing plant here nor is it sweat shops setting base at EPZ. Its for people taking bull by the horns and starting businesses. But there need to be a working support system. A friendly credit system to support these budding businesses.
KE,
There is two crucial areas of our economy that still tickle my nerves.Horticulture and Tourism.Apparently they play a vital role in our economy.But what I don’t get is the fact that 99% of Horticulture export market is foreign owned (The flowers especially are not even stamped “made in Kenya” once they reach Europe).These corporations may make gazillions but how much of that is banked in Kenya?Yeah!!!they provide jobs but how much benefit really trickles down to the economy let alone poor pay to workers.Same with our inland and Beach hotels and resorts (except Matiba’s Alliance group if Baclays hasn’t taken it over already).Most bookings are done abroad which means most money is left overseas.Yeah!!!they buy curios and help common folks but are we as a country getting the fair share of what we deserve in these industries?
dee,
There’s a good # of wholly kenya owned hoerticultural export companies.
Even the ones domiciled abraod, I believe they are required to pay some of taxation on their income, remember, now in kenya it’s everyone and their momma paying taxes.
The hort sector massively helps kenya in job creation. Yes you do have a vast number of low skill workers such as the sorters andgraders, but at least they get something to take home, as oppossed to them having nothing. You have farm managers who have to be skilled in this area too.
It aslo benefits the country thru forex , coz most transactions are paid thru international currencies which are mostly significantly stronger than our shilling.
As for the beeches, I think the huge benefits are employemnt for the masses and for businesses catering to tourists whether it be curios, drivers , etc. and also the FOREX.
Some countries economies are wholly dependent on tourism, so I think it would be in our best interest to strengthen this sector as a stepping stone to other sectors of our economy.
Noni:
You can’t come here and tells us about all these “wonderful” things that the government is going to do and not answer a fundamental question, which is: where are they going to get the money from?
This line that the government is funding 95% of it’s budget through taxpayer money is no longer applicable in light of the bloated cabinet that now exists. The cabinet is going to eat up almost 80% of Kenya’s taxes. They simply will be very little money left after that to even pay civil servants. So, in a situation such as this, the government has a few hard choices to make:
1) Increase taxes (this is politically unpopular especially when people are struggling with a 30% inflation rate).
2) Trim down the massive cabinet (again, unlikely because these ministers are totally greedy).
3) Borrow from the IMF and World bank (not likely with this financial crisis. The credit line has dried up).
4) Cut costs especially to essential services like free public hospitals, free primary school education, laying off lots of civil servants, etc, etc (this is what you will soon see because it won’t affect the government ministers. Other people are going to pay the price, but not them).
Tourism:
The number of European tourists visiting kenya is going to go down, especially with the financial crisis spreading to Europe.
All the other things you mentioned (agriculture, transport, IT…..well, just forget about investments in those areas because the government just doesn’t have the money).
This piece was not about what the government should do. It’s really about how all this financial mess might affect you, your job, your money, etc, etc…
This bloated cabinet is like a big, fat, parasite: it is sucking all this money from the taxpayers and giving them nothing back in return. I never understood why people got excited about it.
KE, job well done on the last post, there is such a strong push to ignore, or if not ignore the coming crisis to some how wish things into fruition. It does nobody any good.
KEI O, about agriculture, maybe there is data to support your claim but it does not match my observations whenever I come back home. I see more ruralfolk running out of land, and that being the only economic activity that many depend on. Maybe seeing it day in day out it is not noticeable, but it is when I come back. The result, a young restless, hungry rural population. I would love to be wrong and mistaken more than anything else.
The reason I post here, is like KE, I think Kenya cannot depend on feeding, leave alone sustaining the high growth rates many want. There is a ticking time bomb.
We are not Ghana, or Uganda with lots of arable land, or commodities that will earn the country an income, to pay our debts, or finance our growth.
As for Noni suggesting that Kenya can self fund government expenditures, it is absolute balderdash, bordering on…. I don’t know what.
“in the 2008/09 budget, the country projected a Sh 127 billion ($1.74 billion) deficit, which it expects to partly bridge with a $500 million Eurobond.”
http://www.bdafrica.com/index......temid=5813
So we see the Kenya government going to the European credit markets when the markets are not even buying bonds from blue chip Western multinationals!!
There are very smart minds in Kenya, and the silence is telling. I am sure some of those minds have access to this blog.
KE and other armchair experts. Here is my challenge to you.
Kenya has many problems. That much you know and yap about them all day.
So what Kenya needs are solutions. I haven’t seen any from above discussion.
This a similar challenge that I put to our fellow Kenyans on Kenya Imagine. What is it you’ve done to grow Kenya? Have you helped one of you relatives set up one of those productive businesses you yap about all day? Have you helped any other fellow Kenyan make the step up from subsistence farming to productive profitable farming by for example setting them with a small zero-grazing business? Or even mobile repair shop? Would you be willing to put your money where your mouth is and set up a business to hoover up all those PCs that are discarded daily and send them to Kenya to help equip schools?
There 3 types of people in this world… doers, talkers and thinkers.
Kenya only needs doers right now…
KE,
Where did you get the facts or statistics that 60% of the budget goes to paying the bloated cabinet? It seems you have the facts with you or are you just making wild guesses?
And also all those Kenyan corporates that have been recording increased profits, yes including banks because of improved economic activity aren’t they paying taxes with K.RA recording improved revenue collection. Is that not money the government can use to fund development projects in part together with help of the development partners? Please spares us your negativity and rants and lets discuss constructive things like emerging opportunities for entrepreneurship, just like the title of this blog.
Mainat
Hehehehheeee. I like your kind of thinking. This what I have been saying all along.
All I have seen here is whinging – no thinking outside the box.
It is the usual Kenyan style of talkshop all day – then everybody scatters when the real problem rears its ugly head.
If Kenya cannot access credit from the international scene, what do we do? Do we fold our hands and walk away or do we come with ideas to suit our situation?
Infact, I think you have challenged me enough today – and I will explore areas in which I can contribute. Incidentally, I will be in Kenya next month.
KE,
Bootstrapping is great as long as one has the boots. Otherwise, we are all taking a walk-to the bank!
Hi K.E
Thanks for bringing upa topic that is close to my heart. I have watched in great disbelief as the banks threw money at people on the street. Apparently if you did not have the largest unsecured loans porfolio then you were not the best Bank!
I used to get three calls per week from 3 different barclays sales people, telling me how much I needed a loan. There was a regular sweep through my office building by bank sales people ( glorified hawkers). The last straw was the sight of a barclays bank in the middle of the JKIA airport parking lot………….I was shocked!!!
We are in a bubble and we should not even ask how america got into the financial mes she got herself into today, sub primemortgages are no different from unsecured loans.
The cracks are now showing: business day 2 days ago had a story of increasing loan defaulters……we should be paying attention. especially as the the real estate boom draws more debtors into its grasp.
A lot of the comments are pure Bullshit… (except about the money grubbing ministers & MPs)
Personal Loans: If an idiot borrows money thinking it is a ‘gift’ then they deserve to become bankrupt! There is NOTHING like a free lunch… so what if BBK hawks loans… it is NOT their job to teach financial responsibility… where were their parents?
MainaT is right… we need doers… I betcha 80% of the folks commenting do not even live in Kenya…
Things will get worse before they get better in Kenya. Growing pains. Corruption remains a thorn BUT I have to admit… the ‘coalition’ is performing far better than I expected.
Matiba: BBK should take his hotels away since he borrowed money when he was a politician. Pay it back! It was NOT a gift. BBK never said it was a gift. Perhaps BBK should give matiba a complimentary dictionary & highlight the word ‘LOAN’…
Loan defaults are part of doing business for banks… they all have some element of default… what Kenya lacks is a expeditious way to resolve these cases… as is a smart bank charges more on the pool of ‘risky’ clients.
BTW, the CBK prudentail guidelines do NOT encourage loans to SMEs. It’s a pity but banks that lend to SMEs often find themselves running afoul of the guidelines on individual loans. The saving grace is that other traditional loans may ‘cover’ for the SME loans.
Bank lends to SME. SME does not meet all criteria thus the loan is downgraded. The loan may not be ‘bad’ but prudence & guidelines require the downgrade. The borrower may be able to pay 100% of the loan given time but 2 missed payments & the loan is downgraded.
Kenya’s banking currently has low NPLs but they will grow nevertheless but when a bank makes 8% NIM… it can afford 2% NPLs. Expect more NPLs but keep it on context of the profits.
Loan ‘wastage’: Kenyan consumers waste loans on buying consumables rather than investments. We see loans taken on for LCD TVs & fancy cars… you can’t blame the banks for your idiotic choices. I see it happening everyday!!! Do Kenyans need 50 inch TVs? No… but they are more common than one would think!
MAINA T…
I also felt the challenge as Kei O did. what kenya needs are solutions.
I bet if we go back 40 yrs ago to a tiny swamp infested island called singapore, we’d find negative circumstances surrounding this country, however, their leaders thought outside the box.
“what can we do for singapore?”
I strongly believe in that philosophy. Lee’s look at Dubai as an example too. these guysw ere literally nothing, a bunch of desert nomads afew years back. I know pple will scream and shout about their oil- yes , which did help them, HOWEVER, I choose to believe they had visionary leaders and prudent stewardship of their resources that led to their success.
Naija has oil,but is still a backwater disaster relative to where it ought to be. Iran has masisve supplies of oil, yet it still imports oil and oil is still expensive for it;s citizens, coz of lack of adequate refining capacity- what a shame!!!
My point is to strengthen MAIN T’s point about thinkin outside the box aS THE ONLY WAY TO SUCCEED IN ANY ENVIRONMENT.
I Think Kei o Once mentioned that Kenya will never have the perfect political climate, it will never be perfect,someone will always feel disgruntled and betrayed. haveu looked at our zim brothers whose country has been completely wiped out of a middle class, people are eating panyas to survive.
The grand coalition was the only solution in kenya at the time. there’s no way kibz would have governed a country where half the populations doesn’t support you. The bloated gvt isthe cost that had to be paid and as such it’s like a cost of doing business.
One good outcome of the colation gvt is that everybody keeps tab on the other, to the point that now pple in the same party keep tabs oneach other
Coldtusker
I hear you 100% on financial responsibility.
I did not get this thing about SMEs and bank loans. Are you saying that banks are not allowed to lend to SMEs?
I remember there used to be a bank called Industrial Development Bank (IDB) that used to lend to SMEs only. I know it was run to the ground during the previous regime – but does it now exist?
*****
I, however, think that there should be Kenyan Bailout for individuals who borrowed in good faith during the calm 80s only for them to fall victim to post-Goldenberg interest rates of the 90s. Matiba is in this category. There are many others who lost their businesses and property although they are not as well known as Matiba.
MainaT:
You raise a totally irrelevant point and I will tell you why. Think of this blog as a mini-newspaper. It’s job is to inform and to provide commentary and analysis. That is why you are here reading the blog and commenting. Now, in this global economy, information is power and if you come to this blog and read something that you feel can help you in a practical way out there in the real world, then the blog, will have done it’s job.
For some reason, many kenyans don’t get this point. Blogs are about information. Nothing more, nothing less. They do not exist to change the world or to turn slums into high rise luxury buildings. However, if you want to do that, please feel free to go to kenya and change the world with your “doing” abilities.
Coldtusker:
I must say that I am beginning to read your comments these days, in a different light. I think you are a finance guy. You seem to have a lot of the lingo down (NPL’s, NIM’s, etc, etc). However, you seem not to recognize that this amorphous field called “finance”, which you seem to believe is rocket science, is in fact full of a whole lot of bullshit (your words right back at ya, bro).
I find it amusing to see you blaming the individuals for taking out these loans without thinking that their inability to pay these loans back, will in the end, affect these banks bottom line. Afterall, isn’t that what has precipitated this financial crisis? The bankers, whom you believe are geniuses, lent to people who they shouldn’t have and it has come back to bite them in the ass (as it should).
I think you have a very macro view of “finance” and you seem to not want to take into account the general economic policies (both global and domestic) that will in fact have an impact on what banks do.
Bankers are not rocket scientists. They are also not engineers. They don’t really create anything. The money that sits in their vaults comes from people who create stuff. Stuff like cars, aeroplanes, drugs, etc, etc. Without these creator’s, bankers are really nothing more than empty suits. This global financial crisis has finally proven that.
And by the way, those financial statements you like to read are so full of shit, it’s not even funny. A week before Lehman went down, the CEO was talking about how good their “books” were.
I’m amazed at how many people simply believe what CEO”s say about their companies profits. All he has to do is give a press conference announcing massive profits and as we’ve seen here, someone will come and tell us how “well” all these banks are doing because they are reporting such high “profits”.
Finance is bullshit and bankers are overrated.
coldtusker:
Can you answer the question about how safaricom will compete with zain when zain’s prices are 50% less?
all views on this thread hold water however as a businessowner in Africa myself, who has seen the original ROI on a service oriented business double, I remain increasingly optimistic and inspired by the goings on around me:
http://www.bdafrica.com/index......temid=5847
this tidbit on information pleases me much, especially since I know the nitty gritty origins of Wananchi (enough said). Offering a basket of cable T.V./internet/voice using cable for those in Nairobi and wireless outside for Sh. 900 to Sh. 3000 just makes me
at the opportunities and possibilities back home.
And at a time that the sky is literally falling in the West, I am sooooooooooooooooooooooooooooooooooo glad I sunk that home equity in to business at home!
SIJUI
…U should now call urself NINAJUA seeing how you manouvered the markets and sunk ur home equity into something profitable as opposed to others who bought flashy cars and stuff.
KE
” Finance is bullshit and bankers are overrated “….LOL……lol…..that will be my new line. Bankers were always overated in the West. However, at home in kenya, the term “Banker” is mostly synonymous with people working in the retail segment/ commercial banking. One could be a Teller at KCB and still be a KCB “Banker”
In the West, especially U.S., Banker would also refer to a retail bank worker but I think It’s more associated with Investment Bankers who just abbreviate their titles to IB or simply Bankers.
I Bankers are loathe here in the U.S. They’re seen as nothing morfe than salesmen in expensive suites with all their never ending “Pitches” and “Pitchbooks”
KE you strike me as an economist or it seems that’s what you studied, with your macro views about everything and your prefernce for the word “production” in most of your examples.
But the world turmoil in financial markets finally hit home woth the NSE breifly halting trading.
My concern is, where will the government of kenya raise money for it’s projects if the international credit markets are literally frozen.
MY Understanding/ simplified understanding of the world financial crisis is thus : The root cause of the Problem lieswith the banks. That is, the banks have lost CONFIDENCE in each other. I repeat in EACH OTHER, thus they cannot borrow or lend to each other.
anyone with another view of this crisis ?
Haki you guys have a good sense of humour – eti a teller at a KCB branch is a “Banker”. I will never stop laughing at that one………..
Sijui:
Hold on a second dear:
You took out a home equity line to fund your transportation business? Isn’t this what has gotten americans into big doo.doo? using their homes like an ATM machine?
You are going to have to tell us why, in the age of toxic sub-prime mortgages, why, taking out a home equity loan was a good idea.
Then, when you are done answering that question, I want you to tell us whether the oil prices are affecting your business.
But I do like your positivity. It’s uplifting.
Keep hope alive. Hope brings change. Change brings hope.
Obama/Biden 08
Mzeiya:
You don’t have to have a Ph.D in economics to figure out that you cannot create wealth if you do not produce anything.
KE: Puhleeze… I am a huge Warren Buffet fan and:
rule #1: Only invest in a firm if you TRUST the management
rule #2: Seek businesses with moats
rule #3: Buy a share in the business not shares of a business.
My buddy WB did not trust the management of many of these firms e.g. Fannie Mae & Freddie Mac… probably Lehmans, AIG & Bear Stearns. He did buy a a great price $5bn of preference shares in Goldman Sachs recently – after the debacle.
WB owns a large stake in Wells Fargo which is doing quite well, thank you. WF bid for Wachovia without resorting to federal aid or guarantees!
Berkshire Hathaway’s insurance firms will become much larger & stronger after things settle down as they will pick up lots of profitable businesses/units from the others. Also people would rather insure with BH (AAA rated) vs some chump firm…
All: It was lack of common sense that sunk may of these banks in the USA. As far as Kenyan banks go… the banks are forced to be more prudent BUT the borrowers should not borrow without thinking…
Sijui: Good for you. Unlike other who draw on HELOCs for frivolous expenses, you did so with a purpose. Keep it up! Are you in Ghana? I should be there early next year. I hope we can meet up.
That said… the USA allows for innovation. In 3 years, the survivors will come out stronger & wiser. That is the beauty of capitalism. Japan did not let the ‘bankrupt’ banks close up & the pain went on for a decade. I hope the Fed does not provide excessive bailouts… in fact, the bailouts favour the lousy!
BUT whereas there has been ‘aid’ to some of the USA banks, the weak ones will be left to die off or be absorbed e.g. WAMU and Wachovia. The group that will come out smelling like roses will be the smaller regional & community banks.
In Kenya, the top 5 banks control 70% of the deposit/loan market. The top 10 control 90%. The top 15 control 95%. The rest of the banks could roll up and close down & the effect on Kenya’s economy will be bearable.
Most Kenyans are not banked thus there is lots of cash OUTSIDE the banking sector thus the 5% is much smaller when compared to M3. If a bank collapses the losers are depositors but the loanees are still on the hook.
I am on Zain… Honestly… I do not care much about SafCon… they took Kenyans for a ride for too long…
SafCon’s price will remain depressed while Kenyans bail out in large numbers… but the business is a good one since ARPU will slow down but there are lots of potential users.
Coldtusker
Can you please minise your usage of jargon – what the heck is ARPU?
Not all of us are economists and we also need to understand these issues.
Coldtusker, I will be in Nai in December then set up home base in Arusha in the summer of 09 but hubbie is still based in Accra so we should link up! Its a cross continental thing for awhile
KE, all I can say is we were lucky and remained focus on divesting from the U.S. so we were very careful. We took out the home equity when the going was good in 05 and managed to recoup everything back in 07. The only issue now is trying to offload the house! We were lucky we bought a foreclosure so even in this horrific market, the prices have not plummeted to the point where we’ll make a loss. We’d like to sell the worthy investment and cut and run now, but worst case we’ll rent it out and ride out the storm.
Anyway fuel prices have aided us because companies are even more vigilant now about waste and theft of fuel, and we track both.
Bottomline as I said, perhaps my moral from this whole crisis is cheap credit is good, very good especially if used to facilitate production and investment, and African economies should emulate such aspects of capitalism. But you are right, cheap credit for basically consumptive use is dangerous and finding the balance between the two in our economy as well as our personal lives is what is so crucial.
Coldtusker:
You need to google the name: Nouriel Roubini. He is an economics professor at New York University who predicted this global financial crisis and nobody believed him.
I raise Roubini’s name here because the assumptions you have made about this crisis go against everything Roubini has predicted. According to Roubini, America will not recover from this in just 3 short years (how did you come up with that time line?).
Roubini’s essential argument on the banking sector is that the u.s. government has failed to itemize which banks are “good” and which banks are “bad”. So, now, with this 700 billion dollar bailout, you have the treasury department not knowing where or whom to disperse this money to and this is going to become a disaster.
Roubini is saying that they are still hundreds of banks in the u.s. that are essentially insolvent, but since the government isn’t trying to figure which banks are have money and which banks don’t have money, they are mixing the rotten apples and the good apples all in one basket. The result of this, is twofold:
1) There is no more inter-bank lending because none of the banks trust each other. They are still not sure which banks are hiding their bad books.
2) There is currently a silent run on many banks that is going unnoticed. i.e. people and institutions are withdrawing huge sums of money from u.s. banks and the government is ignoring this silent run.
So, Roubini is essentially saying that this thing is only going to get worse, not better.
On to my second point: How exactly do you trust the management of these companies you supposedly invest in? do you know the management teams personally?
You seem to read financial statements as if they were religious edicts written in blood by the supreme Ayatollah. And in Kenya, you need to be very careful about that because the country has such a lax regulatory and rule of law framework.
**NB: Have you seen what’s happened to Iceland? that’s what happens to a country when it tries to build an economy through “financing” while lacking any manufacturing base.
Sijui:
You are trying to sell your house? they’re predicting that housing prices are going to drop by 40% within the next year or two? Which means that you are going to have to keep making that mortgage payment until you sell it and even if you sell it (depending on when you bought it of course) – they may be no equity left in the house.
*
Kei O
I think ARPU is talking about refers to Average Revenue Per User. I think it’s a key metric in measuring performance of telecom firms.
KE
You’re wondering whether SIJUI’s sue of home equity was prudent ? we’rent you the one advocating for borrowing ONLY when you’ve built up business ? To me it seems, SIJUI had built up her business of Transport.
and KE , There you go again with “P” word Producing, Production, Produce..Economists words.
COLD TUSKER
You say you are now with zain ? what about the new orange ?
Warren Buffet has simple guidelines on his business targets, however how do you really trust Management or know / believe that what they’re saying is right ? I think KE or kei O Pointed out earlier that -how do you believe these management guys, just likew hen the CEO of Lehman had declared that everything was fine and the earnings were healthy, then Voilaaaaa, everything went bad.
Warren Buffet is a disciplined investor, However he’s had his gaffs too. You say he avoided Fannie and Freddie which is true. However I recall him not too long ago being asked in an interview if he had any regrets about Berkshire. His reponse was that he missed a huge opportunity to Buy Freedie Fannie and this “missed opportunity” MADE him and his investors loose out billions. so that means even he hadn’t seen the shaky state of Fredie Frannie’s books.
He did however make a good call with the tech boom.
SIJUI,
You’re in Ghana ? I’m surprised Ghanains don’t like Obama, I know the ones in The U.S. Love him.
do you eat that Waakye and Jollof rice dish ?
KE,
That roubini economics guy ? I saw him once on TV being interviwed and I though immeditaley ” just another economist yapping about uncertainities he has no clue about ”
But the more I listened to him, the more captivated I got. This guy is seriuos, I’d recommend everyone to try and hear / listen / watch him.
He’s very learned in this field and he explains complex things in a way that the average joe would undertsand and gain insight.
Forget Ben Bernank and al those monkey economists….
His the first one I heard say – commenting on the U.S. Gvt BAIL OUT
that ” The U.S. Gvt is privatizing gain and Socializing losses”
by bailing outthes etroubled bank. Meaning that when profits were made, it’s the execs and other investors who benefited, but when time to bail them out comes due to their losses the taxpayer has to pay.
Warren Buffet: His comments about freddie mac must be ancient… he bailed out in 2002-3 when he saw the deterioration in lending standards…
If WB had owned either FM… the firm would not be in this mess…
WB’s ‘mistakes’ are more profitable than many ‘experts’ best performances!!! When he bought General Re he saw the destructive power of derivatives & warned about them…
KE: I trust whoever WB trusts… in Kenya, yes, I try to meet management but some talk the talk… and it ends there… not easy but I can’t complain… why? Overall I am ahead of the game… (so far… I can’t talk for tomorrow!)
To all the commentators:
We are so ahead of the curve on this blog, it’s not even funny:
We said the IMF predictions of economic growth in Kenya were a fantasy.
What is the headline in Today’s nation?
The IMF changing it’s forecasts: http://www.nation.co.ke/busine.....index.html
We said that this global financial crisis would affect kenya’s ability to borrow money from the capital markets and that the country would run into deficit issues trying to fund this bloated government and what is the headline today in BD Africa? “meltdown leaves kenya in tight deficit financing spot”
http://www.bdafrica.com/index......temid=5813
Coldtusker:
You need to stop getting hung up on warren buffet and you need to start reading more about global economic issues so you can come to a better understanding about how all these things are tied in together.
Spending hours looking over a P&L statement of some company in Kenya is not going to give you a broad understanding of the economy, which I believe you are lacking right now. You’re a smart guy, but you have a very micro view of the world and that tells me that you are not a reader (at least not of books).
Kenyan pundit has an interesting post on the lack of a reading culture in Kenya and I must say, that i agree with her. Reading wikipedia is not enough.
I have followed this feverish conversation for the last few days and I am glad that there are some people who are thinking. Though high finance terminology did lose me a bit in a couple of places.
However, Mr. Cold Tusker, Sir. To blame irrational debt levels on an irresponsible public is not exactly a great argument when the economy comes tumbling down around our heads. Take a careful look at how things are being done in Kenya today.
Dishing out credit cards to people who have not asked for them, let alone able to afford it, chasing university students with just over 10,000/- in their accounts and insisting they need a credit card( where have we heard this before?) is not healthy.
Making it excessively easy for people to access credit means we have a greatly indebted society and guess what, most of these loans are unsecured or secured on future salaries. Now tell me what will happen when companies hit by the global meltdown start laying off workers. Is this such an outlandish scenario.
The regulators are obviously fast asleep and cant see it coming. Business daily has already rung the bell, default rates are up. But we are still seeing people buying over priced property and getting mortgages to pay for it.
I have scouted the housing market for a while hoping to buy my first apartment, but I simply cannot afford it, unless I move out to athi river or something. The prices are escalating unbelievably. so my strategy is is, build up the cash reserves and tradeable instruments and wait for the property market correction.
Guys, am I too optmistic that this will happen, I think not.
DMX,
you’re very correct on one thing; nairobi real estate is beyond overpriced. why should an apartment that earns a net annual rent income of about 500,000 have a purchase price of over 10 million? even the government borrows at higher rates!
if i were you, i’d actually go with athi-river, for real.
DMX,
How’s the Mombasa rd construction and by passes coming on ? If they are still on track, I’d think it would be wise for you to move there since commuting will not be an issue (in the future)
Nairobi real estate is definitely over priced. Demand Vs Supply ? Market correction coming up ?
KE + All other commentators
since we’ve seen the economic crisis has hit home and will definitely affect kenya negatively, being since wee were on a growth trajectory, WHAT SOLUTIONS / IDEAS would you put in place if you were kenya’s key Finance guy / Minister ?
Raise Taxes ? Sell state assets ? Borrow from other countries such as China, Japan or the Gulf area ?
seriously what would ya’ll do ? Let’s be abaout solutions as opposed to being “experts” at predicting problems
Mzeiya:
We are not policy makers here and don’t pretend to be. Like I said previously, the information supplied here is meant to hopefully provide you with some insight in terms of how YOU will make personal financial decisions in your life and in this case, if you are thinking of investing in kenya then use the information here and info from other blogs to become an informed investor. That’s it.
I don’t want this piece to dive into a hypothetical discussion about what we would do if we were finance ministers, since no one of us is.
So, for example, if you were thinking of buying a house in Kenya, the information supplied here might cause you to hold off on that decision since everyone is saying that housing values are over priced and are eventually going to come down.
We’re not here to change the world. Blogs are just information providers. They are not governments.
DMX:
The astronomical prices of homes in Kenya is exactly what has happened in America and in Europe. Credit was freely available and people ate it up and used it to buy houses. When they did that, the supply was diminished (great demand + low supply = higher prices).
What is going to happen in Kenya, is the same thing that is now happening around the world: Foreclosures are going to start rising. In response, the banks will tighten their lending prices. This will lead to fewer people being able to get loans to buy houses. Fewer loans means that the supply of available houses will increase, but without those loans, the demand will drop and when that happens, the real estate market will crash.
And it’s even worse in Kenya where the interest rates on mortgages are like 25%! America is already breaking and interest rates are still mostly under 10%.
KE
Coz we’re not finance Ministers or”policy makers” as you put it does not mean we cannot discuss solutions to some of these problems. It’s democracy where pple air their opinions both good and bad. If this was just a one sided argument / blog ( discussing problems only ) then I doubt it would as interesting or informative.
You personally may not want or have any solutions to what’s going on but others may, even if they’ll be suggestions. That’s what I’d like to hear from those that do.
Yes blogs are about information and more importantly information flow. Once a thread starts, it’s like a wild river, you never know where it will go, what course / path it would take or how soon it will end, so just let the discussion flow without limits as to what we’re supposed to discuss.
If Kenya had a Warren Buffet… no-one would listen to him…
In all honesty… Kenya’s economy can go to hell in a handbasket but can I make money?
Kenya is one of 50 (& counting) countries in Africa. If Kenya fucks up… there are others…
Sijui is in Ghana… Ghana is trying to become the gateway to W.Africa. Screw Nigeria… those idiots are sitting on black gold but can’t do real good for themselves. Yes, they have tried but they have a long way to go.
Therefore… I still believe in WB’s vision and common sense… he is living proof of good financial sense. Here is a guy who is among the richest (if not the richest) guy in the world and he did it thru good sense not a rich dad or stolen land (crooked wa ngengi & cronies) or luck (the waarabus).
KE
I think I will go with Mzeiya on this one. We cannot just articulate problems without even suggesting the solutions. Solutions do not necessarily have to come from policy makers or ministers. This is the mistake we have been making all along.
Can you imagine a minister like Munya (Labour) coming up with any viable soloution to a problem?
Even though the blog is meant for information, I believe that those who have solutions can post them here. Who knows who might read the blog? Perhaps Munya might even read the blog and get some inspiration.
*****
I have resolved to set up an IT room in my former primary school. Can you believe they do not have computer classes in this day and age?
This will be my empowerment project. This is my way of giving back to my community. This is my solution. It is not a national solution – but it is a solution that will touch some boys and girls and hopefully set them up for life.
Josh, Mzeiya. They are those whose only purpose in life is to say ” today I blogged about Kenya’s problems which 37m Kenyans already know about” and there are those who can say “today I blogged about putting an IT room in my former school”. I know which of those two I prefer. Its not hypothetical its real.
The point always is to move opposite the crowd. When you see everyone borrowing, stop and think. When you see everyone crying, its time to think and prepare oneself. After all youve seen the consequences, and know the consequences. The problem in kenya is aggravated by the clashes where many people never farmed, leading to high costs of food and gross unemployment. PEtrol prices made it worse and theres still political risk for investors to consider. Too much uncertainity, scared investors, scared farmers, politicians who dont know what to do,…. discussing somali captured ship instead of doing something to end this manace. This guys could end up blocking the entire route and what do you think happens to the price of oil… think double and you park your car. Most of these guys have nothing to offer, no leadership, no ideas, no innovation in terms of policy, and where are we headed for.. a new constitution, just to waste time and get hoodwinked, as the fatcats becomefatter, and the poor man gets auctioned. I think we need smart people….. not necessarily with masters and PHDs, but people who can lead and deliver the hopes promises and aspirations of the great people of Kenya