Category Archives: Pyramid schemes

Idea Exchange: Michael Joseph, Serena, Lotteries

Michael Joseph: Outgoing Safaricom CEO Michael Joseph will have an informal fireside chat session at the Nairobi iHub this month ( details here on how to attend). It will be staged like one of the Warren Buffet town hall meetings, and he will take questions from the audience and talks about his legacy at Safaricom.

Serena: last Monday had the bell ringing ceremony to launch newly issued shares of TPSEA (Serena Hotels Group) at the Nairobi Stock Exchange (NSE) after the company raised 1.1 billion shillings ($14.5 million) from shareholders. The funds will be used for: development of 3 hotel properties in Nanyuki, Nakuru and Elementaita (through Jaja Limited), buy 51% of Upekee Lodges who own two properties in South Tanzania, acquire Mbuzi Mawe Tented Camp and Mountain Village (Arusha) and increase the group’s investment in TPS Rwanda from 8% to 17% (through refurbishments of Kigali Serena)

Also at the launch:
– Amish Gupta of standard investment bank called for day trading at the exchange (with settlement at the close of business), which he said, would raise turnover by 150% at the NSE
– Eddy Njoroge, chair of the stock exchange called for more companies to consider using the Nairobi stock exchange for capital raising, noting that Serena were able to raise Kshs 1.1 billion in two months – faster than any bank loan of that magnitude. F. Okello, the Serena Chairman – who’s also a Barclays Bank director, diplomatically did not challenge that point.

Centum Diversifies: Results and resolutions passed at the 2010 Centum (formerly ICDCI) AGM were published in the newspaper on Monday. The extra-ordinary business approved by shareholders at the meeting included:
– Business of Reli holdings (a 100% subsidiary now called centum investments) which sold its shares in Rift Valley Railways for Kshs 265 million and paid dividend to centum shareholders
– Uhuru heights limited (a 100% subsidiary), which is developing a plot on Uhuru highway worth 35.9 million
– Runda Closeburn (a subsidiary) which is in the process of buying 100 acres of land adjacent to Runda for 1.16 billion
–> Used to be a shareholder of Centum, but lost interest when they became too vested in other listed companies that all investors had access to. Yes it is healthy for an investment company to have a liquid portion of the portfolio, but Centum, Olympia and other investment companies should invest in unlisted companies (railways, real estate, coca cola bottling plants) that not available to the public – that is their attraction.

Lotteries Galore Zain and Safaricom both have lottery claim to give away a million shillings each week. Zane actually had a press launch the day before Safaricom launched theirs, but did not go public till over a week after Safaricom Masonko 150 did. So did Safaricom pre-empt Zain? Or did Zain pre-empt Safaricom without getting all the necessary approvals or having all the operations in place? Anyway, Zain’s promo is to enhance their subscriber loyalty program, while Safaricom is to mark tenth anniversary of the company.

This week urban IT consulting launched Supapesa which promises Kshs 50 million of prizes’ and last month saw the conclusion of massive 90 million in 90 days. Mbugua Njihia wrote about the lottery, also known as Shinda Smart and which a Nairumor has it grossed Kshs 1.2 billion from over 20 million SMS messages received.

But the winners are genuine of the lotteries and appear in the newspaper clutching bundles of cash or weeping as they receive new car keys – I don’t know any of them personally, but I know many faithful participants who remit spend a few shillings each day, sending in the daily lottery SMS and all hoping (& praying) they will be the next winner.

But from what I know about gambling & lotteries is the house (organizer) is always the real winner, so it seems companies have landed on a new money making scheme based on unrealistic public expectations and naivety about the odds of winning prizes.

Pyramid Schemes in East Africa

Back in October 2006, I wrote two posts about pyramid schemes that had mushroomed and would eventually ‘burn’ thousands of investors in Kenya.

And the last year has revealed bigger pyramid scams in the form of Bernie Madoff and Alan Stanford, and just yesterday in the Kenya Parliament, some political leaders were un-masked as some of the master minds behind some of the collapsed Kenyan schemes.

Image of pyramid investors from another business daily newspaper article on pyramids
So what was the genesis of the schemes and how they ended? And more important, can they happen again?

Pyramids Rise
– Early investors reaped, and told others about their success – i.e. doubling, tripling or even greater returns in a few months span
– Some schemes were promoted by churches (who received tithes in return)
– Pyramids opened new offices and hired new staff all around the country
– New pyramids opened up cloning existing ones, but promoting a slightly different product/concept
– People took loans to invest in pyramids
– Peoples sold land/ shares / other assets to invest in pyramids
– Pyramid investors cut across all sectors from rural farmers to bank managers

Pyramids Peak
– Early investors reaped, but were greedy and ploughed back as much as they won
– Pyramids grew so big they overwhelmed their managers – some stopped accepting new depositors (but not new deposits which were essential to the chain)
– Banks complained they were losing deposits at a time when interest rates were very low
– With IPO’s few and far between, stockbrokers complained they were losing investors during a bull market period

Pyramids Fall
– Banks put the squeeze on pyramid schemes, by freezing these recipient accounts with the funds in them
– Pyramids without cash, tried to switch to different banks and accounts to process their funds
– Banks warned other banks and the Central Bank issued some cautionary notices on schemes
– Some pyramids tried to convert into cooperative societies
– Some schemes bad-mouthed other pyramid schemes as unstable
– When locked out of banks, pyramids moved to safe houses in residential areas where they continued to receive/pay cash
– media coverage kicked in; some angry investors complained on TV about lost money and brought media crews to the safe houses showing other angry investors
– Deposits dried up, and investors demanded their cash.
– Pyramid schemes all collapsed largely at the same time in 2007

Sifting the rubble

Could they have been prevented?
– They were unregulated: Neither the central bank, capital markets or co-operative sector regulator had over-sight over the schemes. Parliament was focused on micro-finance and anti money-laundering regulation bills.
– KYC: Schemes relied on the banking system to move around the money; and if banks applied true know your customer (KYC) principles, they’d have smelled a rat – with hundreds of people queuing in their halls to deposit funds into a single customers account

Unanswered questions
– What happens to the millions of shillings frozen in bank accounts?
– What happened to employees of these schemes? And if rogue stockbrokers were partly brought crash down by thefts from within (internal fraud /‘robbers robbing robbers’) could this also have happened at some schemes?
– Legal grey area still exists. Have any promoters being charged in court? Can any investors sue promoters for losses? The Cooperatives Ministry Task Force is looking at how to compensate investors – but is this justifiable?
– Can schemes rise again? History teaches us that pyramid/ponzi schemes will happen again and again. Maybe using mobile money transfers, or next time there’s an election. The Business Daily mentions they may have spread to neighbouring countries

Anatomy of Local Collapse

With Lehman, AIG, Bear Stearns, Merrill Lynch and other banks in the news, or in need of a rescue, it’s time to look how does this play out locally?

Kenya has experienced several collapses over the last few years – from listed companies (Uchumi supermarket), stockbrokers (Nyaga, Francis Thuo), insurance companies (Invesco), medical plans (Mediplus), Banks (Euro, Daima, Charterhouse), and numerous pyramid schemes.

What are the stages of collapse?

Before: First come the rumours, which can be whispers from clients facing frustrations, or sometimes well-meaning staff leak to their trusted clients that something is amiss. At any given time, a company could face this and currently, there are murmurs about a stockbroker, a transport company, and an insurance company – but none about banks.

During: Next the rumours gather steam and reach serious partners who deny the company access to cash that it needs to survive. The struggling company will by this time have stopped paying on time and will be known for inventing excuses for delays in payment. So suppliers will stop deliveries (bare shelves), customers withdraw cash and banks will refuse to lend to ailing to the company/bank.

An aside – in the current issue of the Financial Post, entrepreneur Dr. Manu Chandaria talks about the secrets of Asian company success including using supplier credit as the expansion capital – and he emphasizes that a growing company must have a perfect reputation with creditors to get the supplier financing to grow.

But eventually, word leaks out and depositors try and withdraw their cash from the bank or pyramid, a major creditor moves to seize assets, any of which may hasten the collapse of the company; Eventually the government or a bank may try and appoint a receiver, but often its too late.

After: If there is enough hue and cry or a serious precedent likely to have far-reaching effects, the government may step in and try and revive the company – the government has capitulated to the cries of shareholders, suppliers, farmers (sugar/coffee etc.) and politicians several times over the years and tried to revive numerous companies that have collapsed.

If it’s a bank, its depositors get paid up to 100,000 shillings ($1,400) from the deposit protection fund, if its an insurance or medical company it’s a total loss for subscribers who will have to source for new cover packages even if the company had enough assets left. The fate of shareholders is still been sorted out at Nyaga and Francis Thuo, while its a total loss for the thousands who ‘invested’ in unregistered pyramid schemes even though millions of shillings of their ‘profits’ remain unclaimed in bank accounts that have been frozen.

Employees of the companies quietly get new jobs and airbrush the unfortunate period from their CV’s

Lehman employees

Owners/Principals rarely face prosecutions, and having amassed enough to survive a few years of legal battles, may retire quietly or sometimes end up in parliament.

Locally: So far it appears that the successful AIG Kenya [worth ~$35 million] will be insulated from its parent problems. It will probably be absorbed by another local insurance company or CBA bank who are a major shareholder.

Kutwa Tuesday: death of the cyber café

Once, long ago, I wrote a paper about a business case to put up a cyber café in an airport terminal – for transit passengers to browse there as they waited for the flight to connect. That model is in place today in airports all over the world (not my doing) but its’ time may already have passed with wi-fi zones and wireless laptops whose users don’t need to use cyber cafe facilities anymore.

But even cyber cafes’ that are in town may be under threat.

Until three months ago I’d spend about an hour in a cyber cafe each Saturday and Sunday. I’d go there to my check my-email and then browse quite a bit when I was done.

But all that has stopped as I now check my email and browse for information I need to know instantly – from hotmail, gmail, sports scores, stock prices – using a plain old phone (not bambanet, or blackberry) as the Safaricom EDGE service is available on most of their phones even some of the cheaper ones. I get the information wherever I am and don’t have to visit a cyber cafe unless it’s to print a document or download a PDF report.

Oil slick
The sale of Somken petrol stations to the National Oil Corporation of Kenya (NOCK) has been put on hold ever since the previous NOCK MD resigned from the company. Haggles remain over the high price bid for the stations.

BAT smoke-out
BAT Ghana has voluntarily de-listed from the Ghana Stock Exchange.

Does that portend anything for BAT Kenya one of the blue chip stocks on the Nairobi stock exchange and one of the highest paying dividend stocks? Cigarette smokers have had their smoking freedom curtailed in Nairobi and other urban areas (Nairobi city has less than a half dozen outdoor smoking points) making them clandestine smokers who hide on staircases and bathrooms (but at least most bars retain a smoking section). What impact will that have on sales?

BAT Kenya manufactures cigarettes here and exports a significant amount to other regional countries (who have not curtailed smoking) which should cushion it slightly from the new laws.

Stockbroker still frozen
The statutory management of Francis Thuo stockbrokers (by the Nairobi Stock Exchange) has been extended for another six months.

the pyramids that collapsed
Much has changed in the one year since nyramid schemes were highlighted here. Since then they have come under increasing pressure from the government, SACCO’s and most important the banks who frozen account necessary for their operations (and who probably still hold the schemes ‘missing billions’ that investors are crying for).

The latest collapse was Amity and it was preceded by Sasanet investment co-op (suspended operations), Spell investments (suspended operations), Circuit investments (suspended operations), CLIP (suspended operations), DECI (suspended operations), and the Kenya business community savings & credit society (Kenya akiba) (suspended operations)

Kenya news on Youtube
Some people say they are tired of political news, while others can’t get enough of it. But the Nation Media Group has gone ahead and made their new clips available on Youtube

Pesa point wins
Two yard ago Pesapoint was launched and it began a battle with Kenswitch – another network of banks sharing ATM facilities. But today Pesa Point has signed up most mid-size banks and have a network of almost 200 ATM machines – and last month added corporate banking giant Standard Chartered to their network.

Convenient banking

making trades offs as convenient banking is not the same thing as cheap banking

Equity has been the fastest growing bank in the country over the last few years. It has won customers, now 1+ million, and has sent bigger banks banks back to the drawing board to woo & retain their customers.

However, while banking with them may not be cheap for a business, it is convenient, and offers finance and flexibility to an upcoming business. People coming from abroad complain about the cost of making mobile calls here – saying they are expensive. But compared to what? A taxi driver will make a 30 shilling mobile phone call to secure a 2,000 shilling job as his phone is his office.

Same with Equity their low entry minimums suit individuals and start ups. And while some of their charges are rather hefty (3% for ENC and 10% of amount for a temporary overdrafts), as a businesswoman told me today, their quick decision making and the fact that they are the only bank that can offer these facilities to her make them the optimal bank for now. Getting cheques cleared, guarantees, and payments to suppliers matter more to her now, than the cost of these services, and help her build a credit record for the future. Once she is more established,. she will look question the transaction costs and have other banks now wooing her business.

Other banking briefs

According to Africa confidential, Kenya is favored to be the new host country for the African development bank, with Botswana second in the ranking. However Ivory Coast is back in the running following the signing of a peace accord. More on homeless banks.

The CBR Bank rate was lowered from 10 to 8.5%

The Government has commissioned a study to look into the low uptake of youth enterprise fund and agriculture development funds. They are blaming banks for asking borrowers for collateral and 3 month bank statements – terms which were not spelt out in the funds. from an offline story from the East Africa:

CFC Stanbic bank pre –merger comparisons

Diamond Trust acquired a majority shareholding in Diamond Trust in the just concluded rights issue.

Equity Bank
– Looking to enter the money transfer business
– To buy Housing Finance bank – what do the bloggers say?

Family bank got admitted to the CBK bank clearing house earlier in June, just a few weeks after being licensed. Family took advantage and pressed for an exemption (on a two year waiting period), similar to that granted to Equity Bank when it also became a bank. from an offline story from the standard

National Bank is seeking to commit Ketan Somaia to civil jail over a 17 million debt

Pyramids schemes continue to
thrive despite numerous warnings. However, some schemes feeling a cash pinch are passing the blame to the central bank who are limiting the interest they can pay depositors to 10% p.a. – before they were paying over 10% per month.