Automate Your Pension

It’s quite clear that we are all our own worst enemies when it comes to saving for the future or for eventual retirement. The desire to spend for needs and wants today overrides the prudence of setting aside a few shillings periodically.

There are so some of the common clichés about good savings:

They are sensible, but not always easy to do. One solution so this is to automate the savings process. This is to take the decision out of our hands. Stop trying to save by writing a cheque or taking cash to put in a saving account at the bank. Automating savings  saves the hassle and removes this difficult decision and choice to sacrifice today for a better tomorrow. (Don’t Kulegalega!)

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Automate, and lock away, your pension.

If someone is employed, their employer can deduct money on behalf of an employee through payroll and add it to a registered pension scheme. This has an extra benefit of being tax-free up to Kshs 20,000 (~$200) or 1/3 of salary per month. If someone is self-employed they can have their bank deduct a fixed amount each month via a standing order and send it to the pension company. One should use a bank that allows a free standing order, or one that it reasonably low in cost (e.g Kshs 100) for the transfer every month.

The amount channeled to pensions as savings (whether it’s Kshs 3,000 or 5,000 or 20,000 per month) should be a comfortable one that if someone loses their job, they won’t want to suspend making savings installments immediately, People often want to stop payment or to liquidate their savings for emergencies, or other reasons, and some pension plans are now adding insurance windows so that people can draw money for emergencies, without interrupting their savings.

Mobile phone companies intermediation in the financials sectors has brought financial products  within reach of millions of Kenyans that traditional commercial banks were not serving.  This is now coming to the savings markets too, and with Safariom’s M-Pesa, one can lock an amount periodically by sweeping up the balance in one’s M-pesa account. For now that money goes to a fixed deposit account, not a pension,  but that should change in the future.

Over Kshs 20 billion of payments are made on Safaricom’s Lipa Na M-Pesa service each month, , while Equitel, Equity Bank’s phone payment platform,  processed Kshs 62.4 billion worth of transactions in the first quarter of 2016. Hopefully more of these payments will go towards savings and pensions, and preferably through one of the Retirment Benefit’s Authority (RBA) registered service providers.

$1 = Kshs 100

Britain Exits the EU: What Does this mean for Kenya?

Britain’s decision to exit the European Union (EU), as announced from the results of Thursday’s landmark “Brexit” referendum has been a hot topic around the world. 33.6 Million Britons flocked to the polling booths on Thursday with the ‘leave’ campaign marginally taking the victory with a 52%-48% vote. There is however a general consensus of uncertainty with what the UK’s (United Kingdom) decision holds for the future, with particular relevance to what it means for Kenya. Britain bus

Britain is a key ally, as well as Kenya’s third largest export market with the value of exports at Sh40 Billion in 2015. The Central Bank of Kenya has already stated that it is ready to intervene and minimize disruption in money markets. Kunal Ajmera, COO of Grant Thornton Kenya provides an insight into how Britain’s decision to leave affects trade decisions and tourism in Kenya:

  1. Britain was not just any member of the EU but also one of the largest contributors and it’s most prosperous. Depending on how things unfold in the coming years other members may also demand for a referendum and this would ultimately weaken the EU substantially.
  2. The EU spends about 100 million euros per year on development co-operation in Kenya. With uncertainties over Europe due to Brexit we may see a reduced funding in coming years. We could see funding in key projects start to be cut.
  3. Investors anywhere in the world hate uncertainty and anxiety. Brexit leaves many questions unanswered and it will can take more than a year to get some clarity. Until that happens global economy, money markets and stock exchange may go through volatility and general negativity as we are currently seeing happen.Britain sign
  4. It is highly likely that US Dollar($) will gain strength against major currencies in the world and GBP(£) will lose its value, the initial figures show that on the day of the results alone, the GBP slumped to a thirty year low, falling as much as 11% in the hours after the result. This therefore means that the Kenyan Shilling will be under increased pressure. It would be wise for businesses in Kenya to hedge against a future raise in dollar value.
  5. The UK is Kenya’s largest tourist source market. At its peak Kenya received 198,000 tourists from UK in 2013. The tourist arrival numbers from the UK have only just started to increase in last few months after years of travel advisory and terror threats. However with GBP weakening due to Brexit, it will cost the British tourists more to travel to Kenya and we may see reduced number of arrivals from UK in near future.
  6. Kenya exports a substantial number of products to the UK every year. The UK is the second largest export market for Kenya after Uganda. So far these exports were governed by EU trade laws. With UK exiting the EU, Kenya may need to re-negotiate the terms for export and this may take even a year resulting in to disruption and uncertainty.
  7. In the immediate short term, the UK is bound to have slower economic growth or even recession due to the Brexit referendum. This will also affect how it trades with other countries in the world. Since the UK is one of Kenya’s biggest trading partner, businesses in Kenya that export to the UK are bound to be nervous and must prepare for slump in business.

Britain look rightHowever, Kunal offers consolation by highlighting the potential in this decision. He states, “It’s not all doom and gloom. Brexit also presents new set of opportunities. EU laws on import and export are some of the most stringent in the world especially with agriculture, dairy, and meat items. The UK can now decide its own rules for import and export, new products may become eligible. It is worth noting that Kenya’s largest export to UK is agriculture/horticulture products.”

For further insight into the Brexit developments and its implications keep following Grant Thornton Kenya on twitter and Facebook.

Imperial Bank: The End?

The Central Bank of Kenya (CBK) announced that today that the closed Imperial Bank (IBL), will not reopen. In fact it will be liquidated by NIC Bank, Kenya’s 9th largest bank.

This all started 9 months ago, on 15 September 2015, when the Imperial Bank group managing director (GMD), Abdul  Janmohamed passed away.  The bank directors then discovered fraudulent transactions that the GMD has orchestrated at the bank. They presented their findings to the CBK, who then shut the bank.

While the CBK blames the board and shareholders, the, the shareholders/directors say they were innocent of the wrong-doing perpetrated by the GMD; they had a hands-off role (complying with CBK rules for non-executive directors), and that their external auditors and the Central Bank were lax and should have flagged the 13 year fraud. The shareholders of the bank were optimistic that a strategic investor would buy the bank within 12-18 months of reopening. But it’s not clear if NIC has been selected to do that by the Kenya Deposit Insurance Corporation (KDIC). NIC will also assume the majority of IBL staff and branches, and announcements on the way forward will be made in the near future. 

Imperial Bank logo

  • NIC will pay Kshs 1.5 million to all depositors. Thereafter, it is expected that at some point, NIC will pay any remaining depositors about 40% of their proven deposits (there are individuals and institutions who had tens or hundreds of millions of shillings as deposits) (Last year, KDIC used KCB and Diamond Trust banks to refund Kshs 1 million to each depositor at Imperial Bank)
  • NIC will get access to operate the 26 branches in Kenya. But the 2015 bond information memorandum noted that Imperial owned no property. The Bank owns no Properties. It leases all the premises used for its business operations. In Uganda, the 5 branches there were disposed of in a sale.
  • It’s not clear how many of the 600 employees at Imperial are still around, waiting for jobs
  • The CBK statement notes that a forensic audit is almost complete. This is an exercise that the directors of the bank began after the GMD died to determine the extent of the hole in the bank.
  • Court cases will continue and KDIC will retain other assets of the bank (..cash, collateral, government securities, loans..)
  • If it heads to liquidation, the name Imperial Bank (name) will disappear.

$1 – Kshs 101

When Bankers own Banks

Managers and employees are often given a chance to become part owners in the banks. This ‘aligns their interests’ with the institutions and gives them an added incentive to help the institutions do better as it individually rewards them for the good performance. The incentives are usually facilitated through employee share option schemes (ESOP’s) which convey some tax benefits and discounted buying prices. Typically, in conventional ESOP’s,  there a general pool for all employees and another for senior managers.

The method of calculation and award of these benefits is done in secrecy, usually by board committees. This is to ensure the privacy of employees and security of their families, but one outcome is that any revelation of these perks sparks a lot of interest.  In fact, you sometimes find a higher level of disclosure of compensation practices at listed banks in Uganda and Rwanda, than you do with Kenyan ones.

Stanbic Uganda compensation guide

Consider these examples:

CBA: Shareholders include a ESOP who own 2.5%.

Chase Bank: Employees of the bank own  4.3% of Chase through an ESOP. Elsewhere a bonus to the former chairman was one of the deals that the auditors queried in 2015.

Cooperative Bank: Stories about shares to bank management and directors first surfaced in 2008, ahead of the IPO in which bank staff got 9% of the shares. and has been on twitter this year. The company’s accounts show that the CEO owns 2% and the bank links the story to a smear by a former CEO who has an ongoing tax case with the bank.

Equity Bank: CEO owns 4%, while an employee ESOP owns about 3%.

Jamii Bora:  The CEO own 1% and is also an investor in the largest shareholder of the company.

Family Bank: In 2011, shareholders voted in an ESOP for managers and a transfer of 1 % transfer of shares of the (then-new CEO , which he purchased at a discount as part of his employment package.

Housing Finance: Has has an ESOP since 2006 that’s open to  all employees: Eligible employees pay for the units by cash at a price determined by Trustees either in full or by instalments until price is paid in full. The Unit holder is not allowed to sell, transfer or otherwise dispose of Units registered in his name to another Unit holder or to any third-party whatsoever.

KCB:  When KCB CEO Joshua Oigara declared his wealth (assets of Kshs 350 million comprising land, buildings, motor vehicle, cash bank balances and shares) and salary (with allowances that totaled  Kshs 4.9 Million a month),  last year his statement added that  “..My public declaration is driven by the need for us as private sector players to initiate greater transparency. Kenya is bleeding from corruption mainly driven by secrecy in organizational operations..”

$1 – Kshs 101.

Pensions for Jua Kali, SME’s and Entrepreneurs

Most people only contribute to their pension savings for the period that they are formally employed with an employer that is enrolled them in a registered pension scheme.  But that only cover a small part of the work force, and limits the periods in which they can save.

For many medium and small businesses (SME) workers, their employers only enroll them in the statutory National Social Security Fund (NSSF)  in which all employees. Until 2014 when the law was revised, contributions towards retirement was a ‘token’  amount of Kshs 400 (Kshs 200 from the employee, matched by the employer) per month. The change in the law  allowed employees to voluntarily increase their savings and have the employer match that. The funds could be invested with NSSF in another registered pensions scheme that would presumably outperform the NSSF .

For entrepreneurs, there are a few individual pension schemes. One of them is Vuna from Alexander Forbes, through which one  can make contribution via mobile money, and benefit from extensive financial advice such as how withdraw funds early or how to apply use pensions savings to make down payments for mortgages. Vuna is designed for entrepreneurs (self-employed) , those who do short-term employment (contracts) or for people who work in organization where no pensions scheme has been established. They recommend a minimum savings of Kshs 5,000 per month Kenyans can save up to Kshs 20,000 tax-free per month). pensions for self employed and entrepreneurs

But a few years ago, the government realized that many young people starting out, or worked in the informal sector were not able to build savings. Either the process of registration was too diffcult, or the minimum amounts required for pension contributions were too high, nor did they have a steady income flow to enable them to participate in the formal pension schemes provided.

So, the RBA worked with Eagle Africa and created the Mbao scheme for (Jua Kali) informal workers. These are people who save irregularly and don’t have large amounts to save – they called it  ‘Mbao’ to refer to the Kshs. 20/= which is the minimum daily contribution that members can make. It was established by the Kenya Jua Kali Co-operative Society as a voluntary retirement savings scheme.. (and) was registered by the Retirement Benefits Authority (RBA) and Kenya Revenue Authority (KRA) (in) October 2009.

With Mbao, one can register on their phone via SMS, add to their pensions, top up their pension using mobile money (M-pesa or Airtel) and update their details using USSD.  As at the end of 2015, members were making about 31 million in contributions per month.

 ($1 = Kshs 101)