The predator lurks in daylight … with a loan!

The other day I dropped by Judy’s hair salon for a quick touch up. I have been patronising this salon for several years; not really because she is the best hairdresser in town, but mainly because going to Judy’s always leaves you in stitches, literally!

No sooner have you settled in a seat than she starts to regale you with stories on who came to the shop the other day, who dyes her hair black yet we know her real age, who got married, who got divorced, the real Kenyan political situation and lots more.

However, on that day Judy wasn’t upto her usual customer information routine. In fact after she pulled my hair a couple of times, I asked her what was wrong.

It took me longer than my usual hour visit before I managed to leave.

Judy was in low spirits because she had taken out a loan from a local bank to buy shares on the Nairobi stock exchange. Specifically, Judy was the now-not-so-proud owner of 10,000 safaricom shares which as of when we spoke had lost 40% in value. However the loan Judy took out is still earning interest which in turn is eating into the salon’s kitty.

Judy is not alone. In fact the most recent IPO of the Co-operative Bank showed a lacklustre performance, not only because of the closing down of rogue stockbrokers, suspect trading of shares (Bamburi and Crown Berger) and the financial crunch. Investors such as Judy had no money to buy shares because they are now paying off loans for shares whose prices have plummeted. I dare even Joseph Nyagah the enthusiastic Co-operative Minister to try and convince Judy that Co-operative Bank shares are a good buy. In fact I dare the entire co-operative movement to pull off this one!

The NSE and Capital Markets Authority also have a dire job on their hands of convincing investors such as Judy that when they finally finish paying off the Safaricom share loans, that the stock market will still be a worthy wealth creation opportunity. I personally wish them luck in this endeavour.

From the media blitzkrieg over the Safaricom IPO with banks fighting for prime time media slots to pawn off loans to Kenyan investors, the Co-op bank IPO came and went very quietly. Maybe even the banks realised that trying to entice prospective investors to take out loans again would be in poor taste, especially following the debacle of the Safaricom share dip.

However this silence does not mean that the war for loans is over. The battle to flog loans is still raging. In fact on main streets of many Kenyan towns you find the ubiquitous tent sporting a financial institution's logo with marketers offering loans. Apart from a pep talk and maybe even a cup of tea for the lucky, you can get a house loan, car loan, education loan or even money to go to Dubai to buy goods that you can sell on your return. As long as you have a payslip, you can get a loan.

Then the banks have also become innovative in their accounts. One time monthly payment accounts are all the rage. However, these one size fit all accounts do not give any leeway if say you don’t use the majority of the features. You get charged every month regardless. Furthermore, consumers who previously would never have even thought of applying for a credit card are having them forced onto them. Most bank ATM cards at least double up as debit cards.

Banks are eating up Kenyan investors mercilessly… and it smells of predatory lending.

Predatory Lending

According to the US Federal Reserve Board, predatory lending includes:
1. Offering unaffordable loans without regard to the borrower’s ability to repay the obligation;
2. Inducing a borrower to refinance a loan repeatedly, even though the refinancing may not be in the borrower’s interest; and
3. Concealing the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.

According to Wikipedia types of lending sometimes also referred to as predatory include “payday loans, credit cards or other forms of consumer debt, and overdraft loans, when the interest rates are considered unreasonably high”.

Predators characteristically target the financially unsophisticated as well as those who do not qualify for mainstream credit products.

In the United States, the practice is prevalent amongst minority populations. Predatory lending in Native American communities is significant. The National Community Reinvestment Coalition in a 2000 survey found that nationally, Native Americans fall victim to predatory lenders more often than the general population and were 2.5 to 3 times more likely to receive “sub-prime” loans than whites.

African Americans and other minorities have also been found as being disproportionately led to sub-prime mortgages with higher interest rates than their white counterparts . An article on kenyanemergency blog called it a ‘financial Katrina’ which is unfolding, threatening to wipe out low-income neighbourhoods.

With such destructive loans currently being widely publicised in the media, one would think that this practice is a new phenomenon. However, Muhammad Yunus arguably the most popular micro-financier began Grameen ostensibly to protect small entrepreneurs from predatory lenders.

Barack Obama also used predatory loans as a campaign issue.

Closer to home, columnist Joachim Buwembo writing in the East African in the September 1-7 2008 edition in an article “Kampala debtors compete for 4Ws and space at Luzira Prison” talked about this consumer debt as a “new” disease. Reporting that in August four prominent Ugandans were imprisoned as a result of debts, Buwembo said that this crises has shown “how fragile our businesses and personal economies can be”. Ironically the same newspaper also had an article about the (central) Bank of Tanzania formulating a mechanism to reign in micro-finance institutions that were charging as much as 200% of the principle amount.

The current financial crisis and increased consumer indebtedness makes it clear that entrepreneurs such as Judy need to learn early and well how to manage finances responsibly and develop healthy “money habits”.

In simple English, that means when the deal is too sweet, think twice!

Opening the public procurement door to the small business entrepreneur

It has now become recognised that an important catalyst to business growth is enabling entrepreneurs to compete on the public procurement market.

Government is by far the biggest consumer of goods and services in any economy. Unfortunately, most small business enterprises are locked out of the public procurement system.

However with the current financial crises causing huge job losses, the need to make it easier for small businesses to win government contracts and thus protect jobs has gained in prominence.

In the UK where just today one of the largest employers British Telecom announced 10,000 job losses, the conservative party has also put the necessity for small businesses to competitively bid for government tenders on their agenda. The party has developed an action plan that calls for Whitehall to open up the massive £125 billion government procurement budget to small and medium firms across the country.

Other small business enabling action items include calling for the scrapping of a rule requiring companies to provide three years of audited accounts when bidding for contracts. This regulation acts as a barrier to startups simply because they may not have been in operation for three years.

They are also calling for the introduction of a single questionnaire to bid for government contracts worth less than £50,000. This would only have to be filled in once and logged for future contract bids. This process would radically reduce the administrative burden involved in bidding for government contracts.

Publicising tenders by requiring that all contracts over £10,000 be published online should also increase the number of entrepreneurs who find out about such procurement opportunities.

Finally, in line with the United States Small Business Administration, the conservatives are aiming for 25% of public contracts to be awarded to small and medium enterprises. This in their view would help to overcome the risk aversion that leads many entrepreneurs to overlook government contracts.

Trade Assistant Minister Omingo Magara during the launch of preparations for Global Entrepreneurship week (slated to begin on 17th November) said that his ministry was seeking ways in which to encourage and enable local entrepreneurs to compete on the public procurement market. The conservatives action plan would go a long way in achieving this.

Refugee communities in Kenya have changed the look, taste, speed and style of business.

Today thousands of bloggers are writing about the various challenges faced by the 11 million refugees who have no country to call home and the 40 million more who have been displaced because of war and natural disasters.

At Yipe, we thought as part of our contribution to the initiative, we would pay homage to the refugees that have had a positive impact on the way we do business.

Since Kenya's independence, the country has been home to refugees from the Horn, East and Central Africa.

All these communities have had an effect on the way we do business here in Kenya:

Uganda

Kenya has played host to Ugandans fleeing Obote, Amin, Obote II and other Presidents during the country's tumultuous years. Coming from a country where the academic system was developed, many refugees were quickly employed in Kenyan schools. Their impact on students who would later in life become entrepreneurs was that these teachers not only taught excellent English and Maths (both essential for running an enterprise) but they also gave budding student entrepreneurs a world view.

Once Museveni was installed, the number of refugees seeking asylum diminished and many of the ones living in Kenya returned to Uganda. Some of the Ugandan exiles even went home to leadership positions.

However evidence of this relationship persists as Kenya remains a leading trade partner to Uganda, and if one looks at the trucks plying our highways, you tend to find a bunch of matoke banana's tied to the chasis!... yes, they even made an impact on our diets.

Rwanda and Burundi

Many exiles running away from the genocide and civil war taught french in Kenyan schools, opening up francophone countries for local entrepreneurs to venture into.

Apart from french tuition, Rwandese exiles were also influential in the "mitumba" second hand clothes market.

With stability many returned to their countries, however similarities in work ethic between Kenyan entrepreneurs and these neighbours persist, leading many Kenyan entrepreneurs to set up enterprises in these countries.

Ethiopia

Fleeing first from Haile Selassie then Mengistu, many Ethiopians came to Kenya. Their impact has been on the introduction of delicacies such as their definitive dish injeera, and the number of Ethiopian restaurants in Nairobi seems to be on the increase.

Interest in Ethiopian crafts has also led to the establishment of Ethiopian art galleries.

Somalia

After Barre's fall, Somali refugees sought refuge in Kenya. Whilst the more fortunate ones found asylum in western countries, in true entrepreneurial fashion, the community managed to set up an informal but efficient money transfer system. These money courier outfits became so popular that even Kenyans in the diaspora started using them because they were cheaper than Western Union and also the money would get to the doorstep of the person receiving the money.

Congo

Refugees running away from the late Mobutu introduced a sense of style, lingala music and of course dance (ala Kofi Olomide!). This "haute" culture remains with certain radio stations and nightclubs devoted to lingala music. Their artistes have also enriched Kenyan entrepreneurs who have promoted their concerts in the country.

Even though they arrived in Kenya penniless, afraid and without hope, these communities have left their footprints indelibly marked for Kenyan entrepreneurs, opening more doors to business opportunity.

Thus, we pay homage to these communities... Let's unite to re-unite refugees.

Audacity of Hope: Lessons for Kenyan Youth

Depending on where you are, you either heard a lot about Africa Youth Day or nothing at all.

The day which passed with little fanfare had the theme of "Peace, Solidarity and Positive Values promoted by the African Youth" which is ironic because in Kenya, this year has been marked by youth unrest. Starting off with the post-election violence where the youth were mobilised to forment chaos upto the school unrest where secondary schools were torched.

In the aftermath of the student crisis, a sense of frustration and hopelessness emerged amongst the youth. Frustration because their opinions were neither sought nor heard in matters that concern them, and hopelessness in an education system that drums in information but does not guarantee a job at the end.

But there is hope and today marks a great day where youth power to be the engines of change has resulted in a candidate, Barack Obama as a presidential contender. His campaign has shown what when they put their mind to it, and form a united front, the youth can indeed dictate who will lead them.

Kenyan youth can now stand up and be counted. Like the youth campaigners for Obama, they can refuse to be passive and be instrumental in moving their own agenda. The Waki Report in graphic detail talks about how these same young Kenyans were used in settling political and ethnic scores of others. For the ones that lost their lives, or the ones who murdered, raped or looted all in the name of politics, where are their politicians now? What were they fighting for?

The Obama campaign has shown that the youth have taken matters into their own hands. Obama is their candidate and reflects their ideals and understands their needs. To make sure he is elected they have volunteered their time, efforts and resources to make sure that there is true change in America.

The word “audacity” means to be daring, bold, courageous and brave. From the moment he declared his candidacy, the Obama campaign has reflected these values.

The lesson we can learn here is that true change can only come if we believe that we are the drivers of change and are bold enough to step up to the starting line, and the run. It is now in the hands of the youth to be proponents of a new political system, the system as written in the book Audacity of Hope (2006) that “we have a stake in one another, and that what binds us together is greater than what drives us apart, and that if enough people believe in the truth of that proposition and act on it, then we might not solve every problem, but we can get something meaningful done”.

Youth Fund: it is not enough just to open the gates of opportunity

“You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, ‘You are free to compete with all the others,’ and still justly believe that you have been completely fair… it is not enough just to open the gates of opportunity. All our citizens must have the ability to walk through those gates. This is the next and more profound stage…” - President Lyndon Johnson.

Teething problems in both the youth and women enterprise development funds have emerged. This week, no less than the Planning Minister Wycliffe Oparanya was urging financial intermediaries to relax their requirements for youths seeking to cash in on the enterprise fund loans.

Recently, the minister for Gender and Children Affairs, Esther Murugi had also expressed concern that over Sh700 million meant for women projects had not been disbursed.

Water, water everywhere and not a drop to drink!

It seems that there is so much money available but the means of accessing it are dead ends. In common parlance: money, money everywhere, but no way to get it in the pocket.

As long as these funds rely on financial intermediaries, they will continue to have problems of their target populations being unable to access these funds.

After all these intermediaries are banks, and banks are in the business of giving loans whilst enforcing conditions and requirements that make it difficult for the person taking the loan to default. So, without any culture change in the banking fraternity, you can still expect the loan officer in the bank to ensure that the youth or woman entrepreneur has a viable business that will pay back the loan. This will happen regardless of whether the government wants to throw the money at these people. If that is how they will measure their performance in terms of beneficiaries of loans, then we suggest that they put a desk in front of the Kenyatta International Conference Centre (KICC) and give loans to any Tom, Ochieng or Wanjiku who happens to be strolling past them.

Both the youth and gender ministries should not feel toothless if they cannot reach their stipulated number of entrepreneurs. They also must remember that small business owners have a natural aversion to exposing their business to risk, and thus are hesitant to take out loans.

In seeking funds, small business owners tend to use what can be described as the ‘pecking order’ model. This suggests that entrepreneur’s attitude towards and use of financial sources are most positive towards first, internally generated equity (for instance injecting own savings into the enterprise), followed by debt financing from sources such as banks.

Small business entrepreneurs also prefer sources of finance associated with the least information asymmetry. It is easier to approach your brother for a startup loan than it is to wade through the rigorous formalities of a bank loan. For one, you need a fully developed business plan, something not many people in business have. This requirement is also asked for when seeking finance from the youth and women’s funds.

There is also the ‘theory of the discouraged borrowers’ (Kon and Storey, 2003) which posits that some existing small business owners believe they will not be successful in obtaining external finance and therefore do not apply.

Apart from a shyness in opening oneself to be asked confidential questions on one’s business, there is also the overriding need to maintain control of one’s business. Thus such firms prefer using retained profits and cash flow to fund their business development, rather than opening up themselves to losing control of their enterprise. This is why seeking capital from personal savings or other informal sources (such as family and friends) is the preferred option for entrepreneurs who seek to minimize intrusion into their businesses.

The emergence of the micro finance sector has somewhat filled in this gap as a particular type of informal finance that takes the form of a small loan to individuals. However, as can be seen from the rapid growth of Equity, Family and K-REP Banks, these institutions have now outgrown this approach and their operations are now more akin to commercial banks than the informal micro-finance.

So instead of forcing entrepreneurs to take their money, the two funds can actually reach more enterprises if they become innovative in assisting existing small business owners to expand their businesses.

Apart from solely financing entrepreneurs, the funds could have more impact if they were in a position to expand business opportunities by providing collateral support, mentorship and technical assistance, which are lacking or too expensive for many small enterprise owners.

Loan guarantees can assist entrepreneurs with the potential for success but lack the current capacity to qualify for conventional bank loans to access more funds than are currently available within the funds. This will enable such businesses to expand so they can achieve the economies of scale that are necessary to compete with larger businesses.

Both fund managers can also learn lessons from the US Small Business Administration (SBA). Innovatively this independent agency is mandated to enter into contracts with Federal (government) Agencies and then sublet these contracts to small firms, that is apart from assisting small businesses in obtaining government contracts.

The Small Business Act (1953) which created the SBA also has a small business subcontracting clause in all government contracts over $10,000, requiring Federal Agencies to publicize in the Commerce Business Daily (CBD) all procurements over the small purchase threshold and any others with subcontract potential.

In lieu of setting up that table outside KICC, this could be a more impactful solution to both funds, that is if their sole measure of performance is how many groups of entrepreneurs they finance.

No small business owner would pass up the chance to grow their business by receiving technical expertise or collateral to access higher value loans. Neither would they refuse to competitively take part in the profitable public procurement market sector.

Don't just create jobs - empower the employer

Juma sits on a bench at the Kenyatta National Hospital waiting to be called for his physiotherapy session. He has been coming every week for the last two months after he got injured in a car accident whilst driving the company car.

A driver by occupation, Juma was employed by Antoinette the owner of a small boutique in Nairobi. He has always had a good relationship with his boss who also happens to be his aunt, but recently he can see that she is not as happy with him as she was before.

Everyone in the boutique, including Juma knows the reason for this. It is because he can no longer drive and it is now becoming a drain on Antoinette to keep paying his salary as well as his medical bills.

As an employee of a micro or small enterprise, Juma is hardly any different from what other employees in such businesses face. It came to pass that Juma lost his job at the end of August. Antoinette explained that she needed a driver and as he was unable to handle a car for the next few months, she had to hire someone else.

Decent work

Job creation seems to be the buzz word going around these days. Even the newly inaugurated second National Economic and Social Council was directed by President Kibaki to address youth unemployment. There are approximately 3 million unemployed youths, but are they really any worse off than our recently unemployed friend Juma?

This week marked the commemoration of the World Day for Decent Work. The day brought together global trade union advocates with the declaration that every person on earth should have access to a “job that enables them to live a good life in which their basic needs are met”.

Not just any jobs, but decent jobs.

To most people around the world, lack of decent work means poverty. A 2007 UNDP on employment in Kenya (Pollin et. al) found that the earnings received by the majority of Kenyan working people placed them close to the official food consumption poverty line. In their survey on non-agricultural enterprises, monthly earnings in 2007 for employees was Kshs. 2,370 for all firms, Kshs. 2,200 for informal and 6,000 for formal sector enterprises. The informal sector salary is well below the national minimum wage level.

In the same year, about 475,000 jobs were created in the informal sector whilst formal sector jobs went down 50,000 positions. This is why the push for entrepreneurship development has become even more vigorous. The government understands that entrepreneurs are the drivers of economic prosperity and empowering them translates into jobs.

The 475,000 jobs created last year is no mean feat, but can they really be described as jobs? With the majority of the positions being low paying, with low job security, working within poor workplace conditions. Even the unions do not have much clout in these small enterprises so the workers have virtually no social protection or recourse in the event of job dismissal.

One cannot blame these small businesses or their owners for that matter. They are also struggling and face challenges on a daily basis. This mainly results from sub-optimal capitalization, shortage of entrepreneurial skills, weak market linkages and lack of business development services and associative networks. The overall result is an extremely high rate of enterprise death.

So Juma is without a job, all because he was in the wrong place at the wrong time, he has lost his livelihood. And you really can’t blame Antoinette either, she has a business to run.

Decent Job Creation

Just creating jobs is not enough. There are various reforms that will ensure that enterprises are able to offer rewarding job placements. These are just a few:

• Improving the physical and financial infrastructure in order to enhance private enterprise productivity and competitiveness;
• Ensuring greater access to financial resources especially for institutionalization and expansion.
• Ensuring that an enabling environment for business is in place.
• Promoting entrepreneurship development by ensuring that the three keys for entrepreneurship supply of entrepreneurial spirit, human and venture capital are abundantly in place.
• Providing technical assistance and business development services to MSMEs;
  

In short, first ensure that the entrepreneur can pay a decent wage, then act on job creation.

Business Planning: Looking forward to 2012

As much as politicians may try to deny it, campaigns for the 2012 Kenyan elections are on. Leaders are being anointed as flag bearers, this not even long after the bloody chaos that marked the beginning of 2008.

At Yipe, we just put up a new advice section for start-ups, but whist doing that I thought, is it worth the bother? After all, apart from the lives lost and people displaced living in camps, many entrepreneurs lost their livelihoods. It must take a lot of faith on their part to take the bull by the horns (so to speak) and begin a new venture.

As political parties race to comply with the requirements of the new Political Parties Act, news reports frequently tell us this or that leader has been appointed torchbearer to vie in the next elections.

Now, every start-up has (or we hope has) a plan, but seriously have we planned for 2012 and indeed 2013 after the results are declared? Unless your business plan is to re-locate out of Kenya, this is a critical consideration. If we don’t it will be as someone (it may have been Judge Johann Kriegler recently formerly of IREC) said, what happened at the beginning of 2008 will look like a Christmas party in 2012 if nothing is done to prevent it.

It seems like the debate for an official “grand” opposition to our “grand” coalition has taken over the national agenda as opposed to pertinent issues such as constitutional review and the agenda 4 items.

So if politicians have forgotten to ensure that 2012 and 2013 are safe for doing business in Kenya, what can the micro and small entrepreneur do? Should we just have a four year plan and spend the beginning of 2012 closing or looking for (gullible) buyers for our businesses?

Will there be any repercussions of what happened this year on consumer demand come 2012? Maybe people will be scared to spend, remembering how prices skyrocketed because normal product distribution channels were closed. This effect could trickle westwards and affect markets in Uganda and Rwanda who bore the brunt of delayed shipments (particularly of fuel) when the Mombasa-Kisumu highway was blocked.

On the other hand, the post election violence may mean booming business in 2012 as consumers stock up in case of the re-emergence of violence. However, this will be felt in a slow market come 2013. What about the kiosk owner in Kibera, Mathare or any other flash-point for that matter? Have they thought if they will stay open past the elections? And if so, how will they manage to get their products past the protestors and the policemen, that is assuming that their property is not looted.

Location, Location, Location: the mantra for business

It matters not where you are in Kenya or indeed Uganda or Rwanda (if you depend on supplies from or through Kenya) for that matter, your business will be affected in some way if due to the early campaigns and jostling for prime positions in political parties means that nothing is done regarding constitutional reform, poverty and inequity, unemployment, cohesion, land reform and transparency, accountability and impunity (Agenda 4 Kenyan National Dialogue and Reconciliation).

On an individual level what can we do?

Recently I did a test that asked me to describe myself in 10 words. My answers in order were my gender, occupation, physical attributes, nationality, belief system and my roles in family and the wider society. It’s a test you should try. Simply imagine you have 10 words to describe who you are to someone who has never met you. But know there are no correct answers for this test. In a nutshell you are who you believe yourself to be.

What does our social identity have to do with our role in 2012 and 2013? The post election violence was mainly driven by ethnicity, with members of one community attacking the other, and the victims responding in revenge attacks.

That means that my ethnicity either marked or saved me from being a victim of the violence. Yet from my top 10 social identities, my ethnic group is not a priority in how I perceive myself as a person and member of Kenyan society. In fact in terms of grouping I feel more affiliation with my fellow entrepreneurs, women and Kenyans long before my tribesmates. Yet, and I can't help this, there are other people who have made assumptions about me based on what community I happen to be born in (note: I said "born in" and not belong to). They have already foretold that come 2012 I will vote for a certain leader. If say that leader happens to win or lose, I will bear the brunt of their animosity if I happen to be in the wrong business location at the wrong time. That I cannot help.

But I can help in how I conduct myself and business to show that we are above ethnicity. I can be Kenyan. By treating every person I know and customer fairly and equitably (barring the one’s who don’t pay on time!).

I can ensure that amongst my small social group there is understanding that we are all Kenyan, East Africa or African for that matter. The Ubuntu spirit sums it up: if you hurt, then I hurt.

Leave the politicians to the campaigns (however early they have begun), but when they approach us in 2012 to take up arms or fists against (their) perceived enemies, know that it may be YOU in that IDP camp come 2013 figuring out what business to start-up with the Kshs. 10,000 from “Operation Rudi Nyumbani”.

Ok… I just realized there is hope for the start-up section!