Category Archives: SME solutions

Agro-ecology Explained

This week there was a Webicafe session arranged by the Route to Food Initiative on Agro-ecology. Route to Food has championed a petition in Kenya’s Parliament calling for the removal of harmful chemical pesticides that are sold in the country.

The session featured two experts; Dr David Amudavi of the Biovision Africa Trust and Nicholas Syano of the Drylands Natural Resources Centre (DNRC). Biovision Africa works with smallholder farmers in 13 counties to disseminate useful and practical scientific information through various channels, and they also have a program with the African Union working with 35 partners in 9 countries. The DNRC works with 800 farmers in Makueni county, training them on and sustainable agricultural practices such as indigenous plants and rainwater harvesting.

The organizations are all trying to ensure farmers can work with nature to achieve food security. This is at a time small scale farmers, who produce most food for the country, are most affected by climate change and get the least support from the Government.

Excerpts:

  • Agro-ecology is not a new concept. Agro-ecology is as old as agriculture. It borrows a lot from indigenous knowledge of agricultural practices, and it is only the term that is new.
  • Agro-ecology is not organic farming. Indeed, organic is just one of the ways in which farmers can apply agro-ecology practices, which all seek to promote the use of alternatives such as minimum tillage, conservation agriculture, crop-rotation, manure, inter-cropping, mulching, permaculture, agroforestry, and organic – that can all improve soil health and fertility through less, or no, use of chemical inputs in food production.
  • Agro-ecology as a science looks at how plants and animals get manipulated by man to stimulate production and consumption. There is a balance in the interaction of plants, animals and humans – and anything harmful to any of the three, or the environment, is not acceptable in agro-ecology.
  • Agro-ecology means food security: If you compare communities that rely on agro-ecology and those on monoculture, the ones that engage in diversified farming are more resilient to economic shocks – and governments should direct more research there to ensure food security and sustainable agriculture.
  • Challenges include low awareness and funding. Agro-economy can feed the nation., but agriculture gets a tiny share of the national budget devoted to research funding and even smaller for agro-ecology (estimated 2% of agricultural funding). Currently, most-research funding goes to mono-culture, industrial-based, crop farming that is also supported by political voices. This is compounded further by a lack of data on the uptake of agro-ecology. as well as people who can write well about agro-ecology.
  • In agro-ecology, if you plant trees, grow as many varieties of trees. In Makueni, DNRC has re-planted trees that had vanished – lost varieties of fruit, dry land species and nitrogen-fixing trees. They also plant acacia that grows very fast and is useful for honey farming and charcoal. Individual farmers bring in their small honey harvests and the organization sells them as a collective and share the money out. They also make green charcoal in a special kiln using pruned acacia wood. Over the last decade, DNRC has planted Moringa trees – and with the outbreak of COVID this year, they have seen great demand for Moringa seedlings, oil and powder.
  • One good agro-ecology practice is to have African farmers use seeds adapted to local conditions. These can be sold, re-used, and exchanged while avoiding some monopoly seed laws that restrict what farmers can do with their seeds and multinational intellectual property disputes.

M-Pesa App eases cash management and reporting for SMEs

In June 2020, Safaricom launched a new app for business owners that is a serious tool that enables them to do true real-time cash management, accounting and business banking on their mobile phones.  

Perfectly timed during the Coronavirus when businesses are moving shopping online, and paying more with M-Pesa over cash, the new Lipa Na M-PESA Business App allows business people to set up and manage multiple tills at different locations, keep track of cash and integrate payments from different tills.

By using the app, business owners get immediate updates on sales and receipts, giving them visibility of how different stores are performing and should reduce pilferage and leakage from cash sales handled by employees at different locations.

Payments collected through mobile money can be used to settle supplier bills, pay daily casual salaries or be sent to the bank, all using the app. A big plus is that businesses can obtain instants overdrafts to complete crucial payments, and this follows in the runaway success of “Fuliza”.

Crucially the Lipa Na M-PESA Business App creates a digital data trail, marries accounting and banking as they can now export their periodic statements to other systems like Excel or an accounting system for easier and faster reconciliation. This is expected to ease the record-keeping and payment efficiency of business owners, 170,000 of who currently use Lipa Na Mpesa and who can receive payment from 24 million M-PESA users across the country. 

Business owners can apply online for the new M-PESA business till numbers or to add to their existing ones. The requirements asked for from different entities, from sole proprietors to partnerships, companies and churches, are listed on the site. Decisions on applications will be made within 24 hours of providing all documentation, with new till numbers provided to successful applicants. Other status decisions such as pending, or rejected, with reasons given, will also be in the same period.

The Lipa Na M-PESA Business App is now available in the Google Android store and on USSD (*234#), while the iOS version will be out later.

KPMG on Kenya Taxes in 2020

Last month, Kenya’s President announced proposals to cushion residents from impacts of the Coronavirus that has affected many industries and companies by disrupting supply chains and reducing consumer spending. He cited measures such as reduction of income taxes, and Value-Added Tax (VAT goes down from 16% to 14%), that have now taken root in April 2020.

But the details of the proposal are now clear with the publication of the tax laws amendments. They are contained in a 97-page bill that is to be tabled at and debated at a special session of Kenya’s National Assembly (Parliament) on Wednesday, April 8, for their approval.

KPMG East Africa has nicely summarized some of the proposals in the bill, picking through the details. Some notable items are:

  • VAT: Items that were previously exempt including bread, milk cream, vaccines, and medicaments, move from the zero list to the VAT exempt list, and this may push up their costs.
  • Items that previously did not incur VAT but which will now be charged 14% include agricultural pest control products, tourism park fees, LPG, helicopters, mosquito nets, equipment for solar & wind energy, museum exhibits & specimens, tractors, clean cookstoves, insurance services, and helicopter leasing which previously did not attract VAT.
  • For investors: VAT is now charged on the transfer of a business as a going concern, as well as on assets transfers to real estate investment trusts (REIT’s) and asset-backed securities.
  • Income tax: Is reduced across different bands with those earning below Kshs 24,000 per month exempted from paying income tax, while the tax rate for top earners goes down from 30% to 25%.
  • Non-residents will pay 15% withholding tax on dividends they receive, an increase from the current 10%.
  • Corporate tax: This reduces from 30% to 25%.
  • Businesses earning between Kshs 500,000 to Kshs 50 million a year are to pay turnover tax, which will now be reduced from 3% to 1% of income, monthly. The previous upper limit was Kshs 5 million.
    It is now mandatory for businesses to keep records of all their transaction for 5 years
  • Anti-industry moves?: An electricity rebate for manufacturers has been ended, VAT has been introduced on goods used to build large industrial parks, and there will also be reductions of building investment allowances.
  • Kenya Revenue Authority: When KRA appoints banks as revenue collection agents, they are to remit collections to the Central Bank of Kenya within two days.
  • Removes a requirement that KRA publishes tax rulings in newspapers.
  • KRA may pay rewards of up to Kshs 500,000 for people who give information leading to tax law enforcement (i.e whistleblowers). 

The National Assembly will also consider regulations of a new Covid-19 Emergency Response Fund that the President announced on March 30. They will also dispense with appointments to the CDF board and the Teachers Service Commission, and consider any bills from the Senate.

So while Parliament debates this under the rush of emergency provisions, most of the clauses are financial items unrelated to Coronavirus.

Investment deal-making amid Corona

The East Africa Private Equity and Venture Capital Association (EAVCA) held a webinar today about the impact of Coronavirus, which appears to be a black swan event, on deal-making at private equity firms in the region.

It featured private equity (PE) and venture capital (VC) industry experts, Charles Omanga (Horizon Africa), Nigel Smith (KPMG), Paras Shah (Bowman’s Law) and Ananya Sengupta (PWC), with Kanini Mutooni (Toniic Institute) as the session moderator.

Excerpts from the session:

Coronavirus Impact:

  • Valuations A new challenge is convincing entrepreneurs that this is the value of the business because of Corona and when you come out of the pandemic how soon will it normalize – CO
  • “EBITDAC” (not EBITDA) will be a new measure of company performance and there will be discussions about measuring business valuations “before” and “after” Corona – NS
  • Businesses have had continuity plans, but none had foreseen such scenarios – shutdowns, closures of school, travel restrictions for extended periods etc – AS

Deal Pipelines:

  • The biggest request so far from investors is to scenario plan immediately on how long will Corona will take and what impact it will have on the businesses? Some deals will fall away – CO 
  • European and American investors are still sending enquiries for long term investments here – PS
  • People have not walked away from deals but provided 12-18 month periods for certain ratios to be attained – NS 
  • Deal negotiations are still ongoing, with signing delayed. In other cases, parties have come to an agreement but agreed not to sign, and that if the Corona impact is bad, they will walk away – PS

Banking Challenges and Bailouts:

  • Don’t expect reputable DFI’s to default, but they will enhance due diligence before releasing funds and decisions will take longer – CO
  • While CBK has given guidelines for lenders, the banking system is not awash with liquidity – NS
  • The Government of Kenya has been fast in coming up with measures such as taxes reductions, but in terms of financial support of SME’s business and workforce, it is unable to provide support like in other countries, where some governments have stepped forward to pay private-sector salaries – NS
  • Government has not had any talks with landlords – PS 
  • Funds may need to extend the period of resounding to cash calls beyond the current 10-14 days – NS

Opportunities:

  • Some local audit/consulting firms have seen an increase in the volume of work as PE firms are not able to come in and do their due diligence here. They are now asking local firms that can mobilize teams to digitize and upload data needed for transaction decisions – NS
  • Local manufacturers in pharmaceuticals and health will do well; also online education online entertainment and medical insurance – CO
  • Regulators have adopted technology to allow online filings and government agencies have been impressive – PS 
  • A good thing about crisis makes people think differently – and the judiciary is semi-open, with judges delivering rulings are online, but registries remain closed. This is an opportunity for Kenya to shine with its use of technology – PS
  • Tax cuts were offered by the Government, and if they stay that way, that will be positive  – PS 
  • Clean Funding: After days of shutdown, the world has come to realize the impact of clean technology is and how important it will be to invest in areas that clean the environment – AS

Advice for Businesses:

  • In a black swan event, Nicholas Taleb advises firms to exploit positive consequences and minimize negative ones – KM 
  • Force majeure clauses in Kenyan contracts, such as leases. are not common or robust, but there will be more of them going forward – PS 
  • Firms should engage with their banks, supplier and landlords – and fund managers should assist in arranging such discussions – PS
  • If a fund is already fundraising, proceed until you are not able to do more – AS
  • Some deal partners are DFI’s (e.g. IFC, DFID) that have emergency funding available for investees to draw down as loans or working capital. That happened during Ebola and now for Corona – AS

You can watch the webinar on YouTube.

Kenya Tax Changes in 2020

A look at some of the Tax changes that become effective on January 1, 2020, as a result of the Finance Bill 2019 that was signed by the President on 7 November 2019.

The highlight was the repeal of Section 33B of the Banking Act which had put an interest rate cap on commercial bank loans, but there are also other taxation clauses of note.

  • Import Declaration Fee levy has been increased from 2% to 3.5%. Also, the Railway Development Levy, which is an important component of paying for the SGR, has been increased from 1.5% to 2%.
  • Companies that list under the Nairobi Securities Exchange’s GEMS program for the next three years can be forgiven tax penalties and interest, provided they pay the principal amount. This move to encourage listing at the NSE became effective in November 2019. But if they delist within five years, that window lapses and all taxes due before listing will again become payable.
  • Taxes also go up for cigarettes, electronic cigarettes, fruit wines and spirits.
  • Motor vehicle excise taxes go up from 20 to 25% for cars over 1500 cc, and that for station wagons and race cars go up from 30 to 35%, but for electric-powered motor vehicles, that goes down from 20 to 10%.
  • Sports betting companies take another hit with a 20% tax lopped on to each bet amount, regardless of the outcome of the wager.
  • New economy taxes: The new year ushers in taxes on the digital economy market place – this encompasses “platforms that enable interaction between buyers and sellers of goods & services through electronic means” who are now liable for income tax and value-added tax (VAT). Along with that, a taxpayer PIN is mandatory when one is registering for a paybill and till numbers (to process mobile payments) through a telephone company
  • Real Estate Investment Trusts (REIT’s), which were exempt from corporate tax are now also exempt from income tax.
  • There is an income tax exemption for people who register under the Government’s Ajira Digital (online work) program from January 2020 to December 2022.
  • Green bonds: Interest income on all listed infrastructure bonds, or green bonds,that are a minimum three years to maturity will be exempt from income tax as will income on the National Housing Development Fund.
  • Turnover tax of 3% has been reintroduced and will be payable monthly by any business whose turnover does not exceed Kshs 5 million (~$50,000) in any year. EDIT – does not apply to companies already registered for VAT or those earning employment income rental income, engaged in management & professional services and limited liability companies. There is also a Presumptive Tax, a new tax that is 15% of the annual fee paid for a license e.g. to operate in Nairobi County and that can be offset when paying the turnover tax.
  • Environmental stuff: Plastic recycling companies will get a preferential corporate tax rate of 15% for five years and machinery and equipment used for plastic recycling plants are now VAT exempt. But, going the other way, equipment for the development of solar and wind energy, including batteries, which were previously exempt from VAT, now require the Cabinet Secretary for Energy to approve any such exemptions.
  • A taxpayer PIN is now mandatory when one is renewing membership in a professional body or with any licensing agency.
  • Mitumba and shipment consolidators are now recognized – if they have warehouses in the country of origin and Kenya, and have no history of dealing with substandard or counterfeit goods.

Meanwhile, the President said at the Jamhuri Day celebrations (on December 12) that a mortgage scheme he had previously proposed, and which entailed a deduction of 1.5% of salaries, would not be mandatory. Parliament resumes in February 2020 and we shall see if they amend that.

Extracts from reports done by KPMG East Africa, RSM Eastern Africa LLP and KN Law LLP .