Have you walked into a bank and failed to secure a loan for lack of sufficient collateral? This is common when one is looking for funding to start or scale their business. But why does the conventional banking regime insist on loan collateral? Every commercial bank has a committee of credit approvers who analyze the risks involved in advancing credit to applicants. This committee is commonly referred to as BCC in Kenya’s banking boardrooms. It relies on an applicant’s credit rating from a credible credit reference bureau, turnovers in sales as indicated in bank statements and the amount of collateral provided by the borrower to secure the loan. This criterion limits many entrepreneurs from accessing seed and growth capital for insufficiency of collateral in assets like land, buildings, vehicles and stock.

A paradigm shift is now happening where ambitious entrepreneurs, large established businesses and strong institutions are banking on the strength of their strategies to convince lenders to fund their growth. This concept was first embraced by fund management companies before a handful of commercial banks adopted similar credit approval policies for business borrowing. So what exactly is business plan borrowing? The question can best be answered by explaining the concept of partnerships in business. Partners join efforts to complement each other. One may offer their professional practice while the other may help with marketing, funding or technology expertise. Anytime you involve a partner in your business, it becomes necessary that you document your vision and ways of attaining that vision. This provides harmony between partners and helps to test the scalability, sustainability and profitability of the business in the future. When borrowing from a fund management company, a business plan unites the entrepreneur’s vision with that of their lending partners.

Fund management companies will be comfortable lending to establish entrepreneurs whose financial requirement is significant or at least USD 100 million and return on investment projected to be at a higher rate than the interest rate. Business Plan loans are however classified as risky loans thus attracting higher interest rates in the range of 14% to 19% while collateral–based borrowing in Kenya attracts an average inveterate rate of 13% across top–tier commercial banks. It is therefore advisable to partially secure your business plan loan where possible in order to negotiate for lower interest rates. Business Plan loans also work best for thriving sectors where cash flows can accurately be forecasted.

Kenya is known for a good number of things on the global map. The country’s tourism sector has enjoyed prominence thanks to white and sandy beaches on Kenya’s coastline, annual wildebeest migration across the Mara River, Snowcapped Mt. Kenya, hot springs and lakes of the Rift Valley, a sizable share of the World’s second-largest freshwater lake and host to humanity’s cradle land in Turkana. Lately, Kenya’s main export has shifted from Agricultural produce and tourist services to Labour. Various reports by the World Bank project Kenya as a leading economy in Africa by 2030 not for oil or precious stones but for its highly sought-for labour in the global market.

According to a CBK Survey published in December 2021, Diaspora remittances to Kenya have increased tenfold in the last 15 years hitting an all-time record of USD 3,718 million. This is more than 3% of Kenya’s GDP. Remittances flow into the country to majorly meet needs in food, healthcare, education and housing. Most Kenyans who live abroad left in pursuit of jobs and higher education. Other reasons for leaving include marriage and diplomatic duties. Most Kenyans living in Asia take up jobs demanding fewer skills while those in Europe and Oceania have to work longer to save and send money to the country.

In sending remittances, most people use formal channels and over 60% of those who send money to transact monthly at higher transaction charges that would be avoided through the creation of a more favourable platform. Such a platform needs to be as convenient to use as banks, money transfer companies and mobile operators but affordable as Hawalas and secure as Credit Unions. This is the intelligence being used by Suleiman Shahbal, owner of Gulf African Bank, to set up and run a diaspora Bank. Suleiman Shahbal and his support team are working around the clock to register Kenya’s first diaspora bank within the 3^rd Quarter of 2022. Having successfully disrupted Kenya’s banking landscape with Islamic banking products and procedures through Gulf African Bank, Mr Shahbal is convinced that opportunities in diaspora banking are his’ to grab. To register a bank in Kenya, one needs a number of licenses and approval from regulators among them the Central Bank of Kenya, Capital Markets Authority and Competition Authority. He also needs to deposit a cash reserve with the Central Bank of not less than 5.25% of total domestic and foreign currency liabilities.

In late December 2021, Kenyan banks reported record profits and dividends making them one of the best-performing companies on the bourse. To put it into context, the sector recorded Kes.197.6 bn net income with the total issued dividends topping 51.7bn. One might wonder how this is possible owing to the fact that the economic effects of Covid 19 are still being felt across every sector. This issue delves deeper into why this performance has been so impressive that many wonder whether they (banks that posted massive profit declines in the prior period) operate in an economy different from that of the other players.

Even before the pandemic, the world economy had shrunk with large economies experiencing an economic slowdown. With the pandemic, credit was frozen and most loans proved uncollectible. As per IFRS 9, banks had to foresee credit default thereby, passing huge provisions for loan losses. This saw the banks post a net cumulative profit of 107.3bn. As the restrictions eased, customers continued servicing their loans, allowing them to lower these provisions (by as much as 70%). The net effect was increased net income.

Another reason could be attributed to income diversification. Most banks have leveraged on technology to meet the ever-changing customer needs. As such, banks have strived to increase non-interest income. This has seen the income growth over time, becoming an element with a significant impact on their mandate. Also worth noting is that these banks have developed an insatiable appetite for government debt. This has guaranteed a constant stream of income at a time when our government has become a net borrower.

Cost reduction has also played a significant role in boosting profitability. In comparison to 2020, banks cut their operational costs by as much as Kes.42bn. This is seen in the transition to online platforms as well as soft mobile phone loans. Banks have been closing unprofitable branches in a move that has saved lease costs. With mobile and internet penetration growing daily, most branches are set for closure. 

Over the years, the Kenyan market has been the major contributor to the sector’s mandate. With the EAC now connecting the Indian Ocean to the Atlantic Ocean, local banks have been on an expansion spree. This has seen regional entities contributing more revenue and profit. For instance, Equity Bank’s expansion into the DRC has seen to it that one third of the revenues came from one of Africa’s most populous countries where they are ranked second in terms of assets. This growing trend will see the exposure of our locally owned banks reduce as regional entities’ contributions increase

The banking sector has always played a crucial role in the success of any economy and its performance is a good indicator of economic success. Going forward, banks should increase lending to SMEs to guarantee a significant impact on the general economy.

We live in an interconnected world thanks to international trade. This interconnectedness has always guaranteed free movement of capital and resources thereby meeting the different needs of the world’s population. International trade heavily relies on the concept of free trade and stability. As such, any instance of political instability as well as unfavourable regulations usually results in capital flight. Previously, markets have always reacted to geopolitical events and this is set to continue since political stability and free markets lay the backbone of international trade. We, therefore, focus on what happens when there is uncertainty in the financial markets. 

In 2017, after the nullification of Kenya’s presidential polls, the stock exchange shed more than 10% of its previous trading, prompting a halt in trading. This was majorly driven by sell-off in the listed blue-chips. Bearing in mind that our market is dominated by foreign investors, any uncertainty would result in a sell-off. This was replicated in the 2020-2021 period when most investors sought for safeguards against the coronavirus pandemic. Data from the said period indicated that foreigners were net sellers which ended up boosting local investor’s holdings in certain companies such as KCB. 

Another negative effect of uncertainty in any country would result in their currency depreciating against the dollar. Since international trade is settled in dollars, any uncertainty forces sell-offs. With this huge sell-off by foreign investors, there is increased demand for foreign currency which puts pressure on our local currency. As such, it will cost you more to buy the dollar due to increased demand. This is the same effect the Russian Ruble is going through as investors and companies dump their securities. 

Any country suffering from internal issues is normally isolated from the global system with ramifications such as sanctions and being shut from the global payment system. Trade sanctions might impede free flow of capital and goods as foreign companies are not allowed to trade with the sanctioned country. A case example is Zimbabwe who have borne sanctions for the longest time after the government’s infringement on property rights. Another case example is Russia who have been locked out of the global payment and settlement system (SWIFT) for invading a sovereign state.

Any uncertainty be it global or local, shall automatically result in negative effects towards the local economy. These effects often lead to isolation as capital always goes where there exists security and attractive returns. 

Climate change poses an existential threat to mankind with developing countries set to face the toughest impacts that come with it. To put this into perspective, in the current year, the prolonged drought situation in Kenya has predisposed close to 2.1 million people (from the ASAL regions) to food insecurity. Other than prolonged droughts, the rainfall patterns have also changed resulting in low rains in the food-producing counties. Also, torrential rainfalls and floods experienced across East Africa in 2019 and 2020 could be attributed to climate change. The threat to our people’s livelihoods is real despite Africa having contributed only 3% of historical carbon dioxide emissions. This calls for urgent solutions which can finance can provide since all interventions call for funding.

The role of finance in averting the impending climate catastrophe has been discussed by many scholars in different forums. In 2020, President Kenyatta presided over the cross-listing of Kenya’s first green bond at the London Stock Exchange with Acorn realizing an 85% uptake. Issuing instruments linked to sustainable investments will play a key role in mitigating climate change. Therefore, Kenya’s capital market has provided a framework for green finance.

As an incentive, the capital market, in partnership with the government have exempted these green finance instruments from tax thus attracting both local and international investors. With the cross-listing option, Kenyan companies are set to access adequate funding from developed markets given the premium ratings these instruments have received in the past.

The capital market has also offered guidelines in sustainable reporting by listed firms. This has seen more and more firms report their ESG (ENVIRONMENT, SOCIAL, AND GOVERNANCE) as part of their annual reports providing both qualitative and quantitative measures with regards to their climate change mitigation initiatives. To this end, most listed firms are incorporating their sustainability efforts. Therefore, the markets ought to offer guidance in ESG reporting and even make it compulsory for new listings to promote the net-zero goal as enshrined in the Paris agreement.

The effects of climate change are massive and a lot has to be done to avert the worst outcome. As players in the world order, African exchanges and capital markets have to play their roles as investment gateways even as governments seek more funding in international forums. With collaborative efforts, climate change provides new and innovative investment avenues that are not only profitable but also sustainable.

Foreign remittances to Africa have increased over the years as more Africans are absorbed into the world’s job markets. To illustrate this growth, more than $540bn crossed borders to low and middle-income countries in 2020, surpassing development aid and FDI. The amount remitted to Sub-Saharan Africa (SSA) was a paltry $42bn with $17.2bn remitted to Nigeria alone. These amounts have been resilient despite the pandemic that left many jobless in the host countries.

Also, worth noting from the world bank report were the remittance costs. Africa had the highest remittance costs with a $200 transfer costing about 8.21%. This is way above the world’s average of 4.9% recorded in Asia. Intra-continent transfers were also among the highest in the world. For instance, the cost of sending money from South Africa to Botswana, Zambia and Malawi stood at 19.6%, 17%, and 16% respectively. Other expensive corridors included Kenya-Tanzania, Tanzania-Uganda, and Angola-Namibia. Bearing in mind that these remittances go directly into the pockets of family and relatives, their impact is huge as most of the money is used to finance education and other daily needs.

These remittances are poised to increase as more Africans are employed as expatriates. Another avenue that will significantly contribute to remittances is the uptake of remote jobs. As such, nations should create a conducive environment that will lower these remittance costs. One of the ways to lower these costs is through actualizing the African Continental Free Trade Area (AFCTA). This will see free movement of capital, labor, and goods resulting in lower transaction costs.

Another initiative is leveraging Africa’s FinTech prowess to facilitate global transfers. Africa has one of the most developed money transfer services such as M-Pesa. Through partnerships with international remittance services such as PayPal, Western Union, and MoneyGram many obstacles shall be eliminated thus reducing the time and costs involved in transferring money globally.

The most innovative and upcoming solution is the adoption of cryptocurrency and blockchain. Since most of the population has access to a smartphone and internet, receiving money shouldn’t be a challenge. This decentralized platform allows for speedy and low-cost peer-to-peer transfers thereby, providing the much-needed funds for development. As global remittances increasingly contribute to the GDP of African countries, lowering these costs will increase funds available for spending thereby contributing significantly to improved wellbeing since the funds are less susceptible to misappropriation when compared to development aid.

In 2021, news of GameSpot’s short squeeze and the collapse of Bill Hwang’s Archegos Capital hit headlines of financial papers as top and remarkable stories. This got me curious on what to anticipate in 2022 for African Capital and Money markets. Here are some of the trends to watch out for this year;

Foreign Direct Investments in African Start-Ups: The year closed on a high with Nigeria and Kenya attracting huge funding from global venture capital firms. In 2022, we expect to see more fundraising as these start-ups scale-up their operations. In January alone, Kenyan start-ups; Zanifu Capital, Poa Internet & Copia have secured funding to a tune of $79 million. With this expected to go on in the year, the countries to watch out for are Nigeria, South Africa and Kenya.

Digital Currency Uptake: With crypto and digital currencies becoming a common phenomenon globally, countries are looking at ways of rolling out their digital currencies. El-Salvado led the race by being the first country to adopt bitcoin as a medium of exchange. Everywhere, central banks are invested in research and drafting regulations as they prepare to launch their digital currencies.

Banking Sector Performance: With normalcy returning after a two-year Covid-19 pandemic, business performance is poised to record significant gains. One Sector worth reporting shall be Banking. The pandemic forced these institutions to conservatively write-down their loan books as they restructured most of them to ease their clients’ burden. This saw a dividend freeze and abnormal profit declines. With the pandemic behind, banks have begun recording profits every quarter and by the time they publish their books, this previous year’s performance is expected to be one of the best. More focus will be on central banks’ guidelines on the capital requirements and dividend issues.

Mobile money: One of the most significant innovations to hit our continent is mobile money. The pandemic saw the amount of cash transacted via mobile money hit new highs. With resumption of transaction fees, the bottom-line of telcos and other licenced players is expected to increase. This will also spur competition as other financial institutions especially banks scramble for a share of these monies. A good example is Equity Bank’s till that allows for business payments across different networks. It will be of great interest to see how it takes on Mpesa’s dominance as it offers a
one-stop shop for business and customers to transact directly from their bank accounts.
Credit to SMEs