Category Archives: Investing in Kenya

Media Moment: BBC expansion in Nairobi

BBC Hub: Monday, November 5 saw the BBC launch their largest news bureau in the world outside the United Kingdom with Nairobi now being the home of the 300 of the network’s 600 journalists working in Africa.

This is all part of the W2020 project that aims to increase the impact and reach of the BBC.  Rachel Akidi, Head of East Africa Languages, said that in the last year, staff numbers in Nairobi has grown rapidly and significantly from 80 to 300 as several journalists who were familiar faces on local channels are now on BBC. The World Service team now produces 800 hours of new content comprising news, investigations, health, women discussion, sports, business etc, broadcasting in 12 languages, 6 of which are African, with the content distributed via TV, digital and radio.

The day also saw the launch of a fourteenth local program called “Money Daily” and the BBC has also set out to tackle the problem of fake news with a dedicated new program about this that launches on November 19.

TV stats: Meanwhile, Kenya has also seen some new television channels launch recently including Fanaka TV, an all-business channel, and SwitchTV. Another of the new channels has released some interesting statistics on TV viewership on Kenya:

  • Friday to Sunday has the highest TV viewership, in terms of hours consumed daily. But within a month, the period between the dates of from the 12th to the 25th of the month see the highest number of hours consumed.
  • Live viewership of events (e.g. sports, award shows) result in a significant decline in watching traditional media e.g. news, feature shows. Reality TV is mainly watched live due to social media engagement.
  • Wireless streaming does not work on all fixed wireless ISP’s in Kenya. It works over 3G and 4G, which offer a more reliable, but pricier, delivery model.

Kwese Goes Digital: Kwese, the Pan-African digital channel, pulled the plug on its satellite broadcasting services as it announced a switch to focus on digital broadcasting its Kwesé Free Sports, Kwesé iflix and Kwesé Play.

Kwese’s free to air service was in 11 African countries, but going forward viewers can download the Kwese app to their phones and subscribe for content, with Kwese iflix being free for 12 months.

GAA: Several people including a current Member of Parliament (MP) and a former Permanent Secretary were charged with obtaining money by false pretences and fraud.

This relates to a Government Advertising Agency (GAA) that was created a few years ago to handle all media advertising for the government. But for several recent months, leading media houses have been complaining about unpaid bills, with the Nation Media Group attributing its latest half-year profit dip to the Kshs 856 million (~$8.5 million) owed to it by the agency.

After Office Hours with Kris Senanu at the Nairobi Garage

Last Friday, Nairobi Garage hosted an “After Office Hours ” chat session with Kris Senanu, the Managing Director- Enterprise at Telkom Kenya. He is also a successful venture capitalist with diverse investments and is also a judge on KCB Lion’s Den, a televised local version of the Shark Tank show, in which entrepreneurs pitch for investors to fund their companies.

Excerpts from the Q&A  

Balancing Work and Investments: He has a fun day job at Telkom, but he’s an insomniac and is able to do investing work from 6 PM to midnight. He started investing as a “terrible hobby” when he was 21 and he has a high appetite for risk.

He’s Not Just Invested in Tech: “Investments depends on what is the value to me, the community, country and profitability.” He started his first business Yaka Yeke which was about bringing West African fashion, which he liked, to East Africa. Later he got a partner and started Mama Ashanti restaurant because he wanted to eat West African food and saw there was a demand for that.

He doesn’t own any company. He created Blackrock, with his partners, which he doesn’t manage, to consolidate and oversee his investments. They take a maximum of 33% of equity and let the other shareholders deal with the heavy tasks of managing companies while they provide guidance.  He puts in money based on plans, and milestones and has people who check on those. While he may go serve drinks at one of their bars, he does not dwell on the daily numbers but will read reports late at night.

Funding Decisions: He said a key thing for any entrepreneurs seeking funds from investors was to know what type of money to seek. It was not about “do I need equity or debt?” and what amount to ask for, but also about what you need at any particular time – one is for operational expense, the other is for long-term expense. if you go for equity, there is some money that is good for you, and others to avoid – and some companies get money and right from month one of the new funding, the business or environment changes.

He invests $10,000 to $500,000, and takes on riskier investments – and if it is an area he can add value and scale, it will get investment. He also looks at how passionate an investor is  “are they willing to do this for 10 years or is it just a side-hustle?”. Spreadsheets are powerful tools that guide, but also confuse with numbers that can obscure real basic business. Investment decisions take up to six months as they use evaluate, build relationships with, and get to understand the entrepreneurs.

Scaling Companies:  His main challenge in the last few years has been scalability – as he says there are good businesses around, but they don’t have the ability to scale. While many do okay in a single market or single country, when numbers are good, investors want to see the businesses go multi-market or multi-country.

He said Nairobi has a lot of venture capital, angel funders, and private equity investors – all with money and who are willing to invest in businesses, but that the lot of money is chasing the few businesses that show scalability, and the ability to be sustainable and profitable in the long-term.

Foreigners Getting Start-Up Funding in Nairobi: On this, he said capital will flow to places and spaces where the capital feels comfortable, and entrepreneurs in Nairobi are going to have to make people more comfortable investing big money with us – and to change that narrative about “capital flowing to foreign faces in local spaces.” He said that it could be a case that some local businesses seeking investors were not fully baked and were perhaps at a stage where they were better off going of debt (convertibles/loans) rather than equity funding. He mentioned an episode of the Lion’s Den where someone mentioned Cellulant in a way that offended him. He said that many managers at Cellulant were former colleagues of his and he had watched the company grow for many years, overcoming many tough times as it ventured across Africa. He said entrepreneurs have to, know when to raise capital, know what to ask for, and that Cellulant was now attracting big funding rounds because of their strategic funding decisions and people have to get better at that in Nairobi.

His Work Philosophy: “if you work your whole life for money that is sad; you have to find purpose.” His is to invest in someone else’s visions and help them grow their companies – At Swift, he was employee number 7 and the company grew to 150 staff, while at Access Kenya, he was employee number three, after the founders. He endeavours to grow businesses, create employment, make profits, then exit and move on to the next one.

Night Club IPO? “I have a philosophy is to create one million jobs” but he Knows that is not going to happen through companies, but if he can enable, through his cash, other entrepreneurs to create 10 or 20 or 50 jobs, he will do it. From 2009 he was saving $200 per month, along with some friends who planned to attend the World Cup in South Africa. But he really had no interest in watching soccer and after his wife persuaded him to meet with a young entrepreneur, he ended up giving him the money he had set aside for the World Cup. “I liked the guy, his swag and ideas.” That young man was Amor Thige and the idea was to put money into a nightclub called Skylux Lounge. It later became the top club in Nairobi for several years and changed the nightlife scene.

The Skylux experience led him to invest in another group Tribeka which went on to open five nightclubs – Tribeka, Rafikiz,  Zodiak, Fahrenheit and Natives, and they later added Ebony and Marina Bay at English Point, Mombasa. At its height the group had a turnover of Kshs 87 million a month, rounding out to a billion shillings a year – but what mattered to him more was that the chain was employing 472 people, which was more than the 380 jobs at Access Kenya, a listed company. They also considered doing an IPO for the group, seeing as Kenyans who liked drinking would also like to own a piece of the company, and some of their clubs cost as much as Kshs  60 million to build out. 

Where to Find Investment Information and Data? He said there’s so much diversity in Nairobi and cited a few conversations in sports bars about agribusiness that are leading him into investing in macadamia nuts. He is now doing research, scouting for companies and the best places to grow macadamia over the next few years – “it all depends on who you hang with and the conversations you are having”. He said you can get data on private companies from the right people who have no reason to embellish data, and added that even public companies in Kenya and South Africa audited by top firms are later found to have cooked their books.

Why Telkom Kenya?: He said he entered the telecommunications business while there was a giant monopoly, the Kenya Posts & Telecommunications Corporation (KPTC) – that had low-quality, high prices and poor service – and which constricted the growth of communications at the time. So when Access Kenya was sold to Dimension Data he saw working to revamp Telkom Kenya as his next challenge – to grow a viable challenger that disrupts, gives choice and opportunity in the era of another dominant company (read Safaricom). He sees this as his national service to give back to the people of Kenya, through the government, and the ecosystem, and that while people in the room may not appreciate it now, they will in five years.

Decision-Making:
  • Most difficult decision; firing the smartest person at the company, but who had the worst attitude. it was tough but it was for the greater good of the business.
  • Best decision; sticking to technology. Tech brings change and motion process every day, He’s never bored, he wakes up to have fun. It started while he was selling clothes and Wangari Mathai’s niece asked him to join her at Swift Global and use his sales skills to also sell devices and he’s never looked back.
  • Kris Senanu on his worst decision/regret; not having children earlier.

Kenya 2018 Budget Breakdown from Barclays

Barclays Bank has released a detailed budget breakdown of Kenya’s estimates for the year 2018/19. This was at an event for corporate investment banking clients of Barclays with a theme of “demystifying the national budget.” and which came a few days after Kenya’s Cabinet Secretary (CS) for Treasury, Henry Rotich had delivered his budget speech and estimates for the year to the country’s parliament.

The Barclays budget breakdown team featured Samantha Singh a Senior Analyst – Macro Research, Barclays Africa Group, Anthony Mulisa (Regional Treasurer East Africa), Peter Mungai (Head of Tax, Barclays Kenya) and James Agin, (Corporate Investment Banking Director). Anthony Kirui the Barclays Director of Markets said that while other accountants and audits had done budget analysis that mainly looked at the tax implications, the Barclays budget breakdown would focus on macroeconomic issues that affect their clients.

Some Highlights 

Revenue Targets:  The Kenya revenue estimates for 2018/19 are very bold, aiming for Kshs 1.9 trillion of domestic revenue, which is 40% more than last year. This is premised on a projected GDP growth for Kenya this year of 5,8%, but which Barclays expects will be at 5.5%

Tax Increases: Some new measure include import duties on iron, steel, oils, excise duties on money transfers sugar, private vehicles, and revised capital gains taxes, withholding taxes and business permit taxes. The Barclays team said that the income tax bill 2018 replaces some 1974 legislation that has not kept pace with time also changes the VAT act, and stamp duty acts.

The budget also moves several items from being zero-rated to be exempt, which means that suppliers are prohibited from claiming refunds and this will result in higher costs of products will be passed on to consumers. Also value added tax (VAT) on fuel products kick in from September 2018, while Kerosene taxes will also go up to match those of petrol.

While the CS mentioned reconsidering the 35% income tax on individuals, he was silent on that of corporations which are now likely to go to 35%, the highest in East Africa. The Barclays team said that Parliament needs to critically look at this, as the average corporate income tax rate across Africa is at 28%, while globally it is 25%. Also, the modalities of a new 0.05% excise duty on financial transfers of more than Kshs 500,000 ($5,000) need to be clarified.

Managing Deficits: Kenya’s deficits have been widening and this is due to lower revenues and higher expenditure, especially of recurrent items. Still, the government targets to reduce the fiscal deficit from 7.2% to 5.7% of GDP. The fiscal deficit is about Kshs 600 billion for 2018-19 is quite large; which the government plans to finance it with a mix of domestic and external finance, but Singh said it will be more difficult for Kenya and other African economies to get Euro Bonds as US interest rates are rising.

She said debt was not necessarily bad, but it was more about where the money went, which should be towards development, but not for recurrent expenditure or to defend currencies. The team was also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget while development expenditure is 25% of the budget.

Barclays expect foreign exchange reserves to remain adequate but that with an IMF facility ending in September, Singh said that international investors would want to see Kenya affiliated with IMF and have some standby assistance (even though the IMF is not popular), or it will be hard for them to continue to finance the fiscal deficit.

Debt & Development: The Barclays team was concerned that 4 out of every 10 shillings raised this year will go to pay for debt, and they were also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget. They noted that two years ago, 33% of the budget was going to development; now it is down to 25% and that is still going to come under more pressure as public salaries and recurrent expenditure goes up unless the government strengthens its public finance management, ensure efficiency in the collection of taxes, cut waste & corruption, and ropes in a large part of the population who are not making a fair contribution – and the team opined that if these three measures were achieved, the budget’s ambitious targets would be met and this could even enable future tax cuts.

Local Industry & Manufacturing Support: The Kenya government plans to grow manufacturing’s share of GDP from 9% to 15%. This will be enabled by raising customs taxes on iron, steel, textiles, footwear in order to promote local industries by protecting them from cheap imports. The government has also come up with offer off-peak electrical energy schemes at lower tariff’s to encourage businesses to manufacture over 24-hours.

Interest Rate Caps: In his budget speech last week, the CS Treasury requested a repeal of interest rate caps and the Barclays team was hopeful that would be approved by Parliament, saying that the cap had resulted in unintended consequences that were detrimental to the credit sector – with small businesses being unable to access bank credit and that t had also complicated monetary policy decision making.

Financial Behaviour: The team also discussed a draft financial markets conduct bill that was recently introduced as one of the alternative solutions to the interest caps and which is now going through public participation. They said that Barclays had given feedback on the bill which is likely to increase the cost of regulation through double licensing, and which is unclear on who it protects.  They said that the bill borrows from Western countries where there was aggressive credit expansion to people who should not have been borrowing, whereas here it is the opposite situation of there being too little credit.

Conclusion: The budget breakdown is a part of a series of sessions that Barclays will have on topical issues that impact their corporate clients, and another session will take place in Mombasa.

Draft banking conduct and consumer finance laws in Kenya

In a move that may weed out practices that led to the introduction of interest rate capping, the Kenya government has developed a draft Financial Markets Conduct Bill for consumer finance protection.

Some clauses in the bill of interest:

  • Advertising: A person without a financial conduct license cannot put out an advertisement for the provision of credit. This also applies to building owners (billboards?), or in newspapers, magazines, radio, television.  Also, lender advertisements must be truthful. They cannot be misleading by deception.
  • Credit Limits – cards/overdrafts: Once a credit limit is approved, a financier can’t reduce the credit limits or decline to replace a lost credit card
  • Credit ReferenceNo release of  credit reports to unauthorized people
  • In-Duplum: There is also roundabout way of reintroducing the in-duplum rule. There is a clause that if a loan goes into default, the interest, fees, and other charges to be repaid cannot exceed the balance of the loan on the day it went into default.
  • Insurance: Loans cannot require a borrower to get insurance from a specific company.  
  • GuarantorsThe new laws protect guarantors and requires that they be made aware of all clauses in loan contract before they give guarantees, and with no variation to guarantor terms allowed. This is probably inspired by one guarantor and default dispute involving a cousin of the President that has seen over a dozen cases litigated in several courts over 25 years.
  • Pre-Receivership Management:  The Central Bank of Kenya (CBK)  can appoint a person to assist an institution to implement its directives when the CBK believes a bank or its officers are not in compliance with the act. The new law provides tools to assist troubled banks without shutting them down, and CBK can also order some shareholders to wind down their interest in institutions within a specific time.
  • Spam messages? Bank shall not communicate marketing messages to customers unless the customer loan agreement authorizes it.  
  • Statements: Requires all borrowers to be given term sheets before signing for loans, and a  copy of the loans contract afterwards. They are also entitled to a free statement every six months and other copies within ten days of a request.
  •  Variations: loan agreements shall not have clauses to vary interest during the loan, or be based on a different rate other than the reference rate of the lender.  
  • Wide Regulation: The new laws will apply to all providers of more than fifty loans and issuer of loans have six months to obtain the new licenses. What of loan apps?

Whether this new law which cracks down on unsavoury banking and consumer finance and behaviors will ease out the 2016 interest rate capping law while assuring parliamentarians who  championed the setting of maximum interest rates that bank behaviour will be better-regulated remains to be seen. Also if the clauses will help borrowers who have shifted to other more expensive lending platforms regardless of the consumer finance terms and interest rates charged there.

But the bill also creates a host of new financial regulators including; (i) a Financial Markets Conduct Authority (ii) Financial Services Tribunal (iii) Conduct Compensation Fund Board (iv) Financial Sector Ombudsman (v) an Ombudsman Board who may trip over other existing financial regulators.The bill is in the public participation stage and interested persons can send in feedback on its clauses to ps_at_treasury.go.ke before June 5.

Kenya Income Tax Cuts, Increases, and Other changes 2018

The Kenya government, through the National Treasury, is proposing some long overdue changes to the country’s income tax laws, which are contained in a draft bill that will be submitted to Parliament.

The bill has new clauses that affect transfer pricing, new extractive (oil & gas) industries, phase out of turnover tax, and an apparent tax cuts. It comes after other recent changes to the tax code. Kenya also has an ongoing waiver and amnesty program for income tax and assets held outside Kenya to be declared and repatriated to the Kenya Revenue Authority (KRA)  by June 30.

Leading accounting and audit firms such as KPMG, PWC, and Deloitte have looked deep into the clauses, and these are some of their findings: 

KPMG:

  • Companies are to produce and maintain transfer pricing documentation and policies in place for the year of income.
  • The withholding tax threshold of Kshs 24,000 had been deleted.
  • Payments to non-resident petroleum contractors will be 20% (up rom the current 12.5%)
  • Developers who build over 400 houses to pay taxes of 15% on gains.
  • Micro-finance institutions (MFI’s) interest will be exempt from withholding tax.
  • Sports clubs & associations will get taxed on entrance fees and subscriptions.
  • Farms, warehouses or doing consultancy work for more than 91 days in a year are now considered permanent establishments. KPMG comment – This will require non-resident persons doing business in Kenya to re-think their operational models.
  • A listed company will pay 25% taxes for five years if 40% of its shares are floated.  KPMG  comment – this will reduce the impact of taxation as an incentive to list.

Deloitte:

  • Income tax rate of 35% on more than Kshs 750,000 (~$7,500) per month
  • Non-residents’ who receive their pensions in Kenya will pay a tax of 10% on transfers (up from 5%) 
  • A higher corporate tax of 35% for large companies with taxable income over Kshs 500 million (~$5 million).
  • Real-estate capital gains tax of 20% (up from the current 5%). Deloitte comment – Though the increment is quite steep, it enhances equity considering that CGT is regarded as a tax on wealth.
  • Equality: Each person in a marriage is now required to file their own tax returns: no more cases of wives having their incomes filed under husband’s income tax returns.  
  • Mining & Oil: Losses can be carried forward for a maximum of 14 years (There is no current cap)
  • EPZ holiday removed: Now EPZ’s will pay 10% tax for the first 10 years, and 15% for the next ten years (other companies pay 30% corporate tax).
  • SACCO’s: Cooperative societies to pay a withholding tax on dividends and bonuses of 10% (up from the current 5%) 
  • Subsidiaries in Kenya to pay 10% tax on dividends remitted to the parent companies.
  • E-commerce: The Treasury Cabinet Secretary will be allowed to introduce taxes on digital platforms.
  • Capital allowances reduced: The 150% allowance for investments outside cities has been removed, those for filming equipment reduced from 100% to 50%, and educational institutions from 50% to 10%.
  • Small businesses, that are licensed by counties, will pay a presumptive tax of 15% of the business permit fee. Deloitte comment – (this) replace the turnover tax, currently at the rate of 3% of a person’s turnover (KRA has faced challenges collecting) ..  will require collaboration with the county governments. 

PWC

  • All medical insurance paid by employers for employees is now tax-exempt (even for expatriate staff) and age limits for children covered goes up from 21 to 24 years.
  • withholding tax of 5% will be levied on payments to foreign insurance companies. PWC comment – this is aimed at promoting local insurance companies.
  • Income tax exemptions that have been dropped include income of the Export-Import Bank of the USA (relates to Kenya Airways?). Also on the income of stockbrokers from trading in listed shares. PWC comment – this may have a negative impact on the growth of the capital markets in Kenya;
  • 20% withholding tax on payment to non-Kenyan companies for horticultural exports. 
  • 20% withholding tax on payment of air-tickets to non-resident agents. PWC comment – may lead to increase in airline ticket prices in Kenya which may affect competitiveness of local airlines.

They also looked at other recent tax adjustments which PWC notes will mainly alleviate the government from paying VAT refunds.

  • Milk, maize, bread, bottled water, will all cost more after moving from “0%” VAT to “exempt” VAT as importers will pass on non-recoverable VAT to consumers.
  • Same for LPG gas, some medicines and agricultural pest control inputs.
  • Making housing affordable. PWC comment – the Government is also proposing a stamp duty exemption for the purchase of a house by a first time home owner under an affordable housing scheme
  • Betting/Gambling: For winnings, a 20% tax will be deducted at source i.e the betting company) on any prizes (this is up from the current 5%)

Other Clauses in the Income Tax bill

  • Parent companies are to file country-by-country reports with KRA within 12 months of year-end.
  • No capital gains tax is due on land if it is compulsorily acquired by the government.
  • No capital gains on listed securities.  
  • While there is a new 35% tax for the rich, the income tax bill appears to lower taxes for the low-income.  e.g. someone earning Kshs 40,000 (~$400) per month, who pays 5,932 in tax per month now after personal relief, will have a lower tax burden.  Income tax bands are expanded in the 10% range (now up to 13,000 from the previous 10,000) and there is also a higher relief of Kshs 1,408 versus the current 1,162) and the resulting net tax for the person will now be Kshs 5,009 for the month – a 15% income tax cut?.  
  • Tax rate of 15% for five years for local vehicle assemblers. This can be extended by another 5 years if the company achieves 50% local content value in the vehicles.  
  • Taxes waived on the income of disabled persons, amateur sports associations, and NGO’s (relief, poverty, religion, distress) whose regional headquarters are located in Kenya.  

Finally, other stakeholders are invited to review the proposed changes to the 103-page income tax bill and submit comments via email to ITReview2017_at_treasury.go.ke by May 24.