While it was previously possible for Kenyans to
become millionaires overnight through corrupt government related deals, a new
breed of billionaire entrepreneurs in Kenya is making it through shadowy transactions
on the NSE.
This is the traditional functioning of the stock markets.
Companies are put up on the stock exchange either because their shareholders
are seeking to reduce their risks in their investments, or as a means of
accumulating extra capital for growth and development.
That is how it works when it works
properly; the trouble in our case is that it is only a small clique of players that
are benefiting from this arrangement. The pyramid of beneficiaries narrows even
more towards its apex, with a very small group involved in nearly all the
dealings. These men happen to sit on boards at the regulatory Capital Markets
Authority (CMA), the Nairobi Stock Exchange (NSE), the
largest stock-brokerages and investment funds, and also on the boards of the top
public and private sector performers.
The recent wave of privatizations
and the phenomenon of overnight millionaires spreading under the Kibaki government
have drawn mixed reactions across the country. While many Kenyans are praising
this as evidence of "a new entrepreneurial drive", others posit the possibility
that there are financial improprieties underlying this fabulous wealth and that
the unprecedented surge is leading to financial bubbles and ultimately to
widespread distress when these burst in the future. The danger, these skeptics
warn is that a gullible IPO-euphoric public, who seem to be piling their eggs
in one basket, are woefully unprotected given the conflict of interest among
those who should be safeguarding the public interest.
This is especially critical given that the clique of big-time players
controlling the financial industry and stock trade in particular extends beyond
the private sector, right into the public domain and includes
functionaries close the Kibaki administration. The government is charged with
the responsibility to safeguard against financial shocks to the wider economy and it is very
surprising and worrying therefore, when government functionaries come out
breathing fire, in defense of their private sector fellows in the stock trading
business. The same offices that are charged with protecting the public against
unscrupulous financial practitioners, are instead acting as guardians of the
financial industry, ignoring and rubbishing allegations of impropriety.
Foremost among these is the recent controversy surrounding the wildly successful Equity Bank. First conceived
as a mortgage finance institution, and then reinvented as a micro-credit
finance corporation, and eventually a bank, Equity has attracted not just local
but international attention. From humble beginnings, it quickly spread in Nairobi and Central Provinces, and then grew into other parts of the
country. Today its 54 branches are now home to over a million individual
accounts, with the most rapid expansion phase having occurred in the last three
or four years.
This growth has been in part aided by the government's poverty-alleviation
policy speeches in Western capitals, with the privately owned Equity Bank placing
itself conveniently to handle hundreds of millions of shillings from the European Union (EU), Swiss Contact, DFID,
AfriCap, World Bank, UNDP and others for various programs related to its own rural expansion programmes. So successful has Equity been at selling
itself, that is has now become a conduit for donor assistance based on its well-marketed
theme of advancing finances to rural entrepreneurs.
However today, much of the focus is on the credibility and integrity of Mr.
James Mwangi, the bank's present CEO, a 42 year old billionaire previously
affiliated with the defunct Trade Bank. Trade Bank you will remember was among
the political banks of the late 1980s and early 90s that went down with billions
of customer deposits. The connection to Trade Bank itself, while not proof of any malfeasance, is cause for worry,
but that aside six additional counts of financial impropriety at Equity Bank raise
questions that would take the shine off its heady success. These questions take
on an even greater significance given the fact that the bank's customers are
among the most vulnerable in Kenyan society and also that among the embattled
Chief Executive's closest friends and business allies is the chairman of the
NSE and a powerful stockbroker.
Nearly one year after the bank Mr.
Mwangi played a big part in building was listed on the NSE; his financial
fortunes have dramatically risen from around Ksh. 300 million to a massive Ksh.
2.6 billion. The question then is whether this is the result of naked
market forces, or the fruit of a collusive band of behind the scene dealers who
have the power and the means to manipulate trades on the Nairobi
bourse.
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angels with dirty faces?
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Mwangi's business association with NSE
boss Jimnah Mbaru, himself the owner of large stockbroker Dyer & Blair, has
become the focus of numerous inquiries especially given that Mbaru's fortunes
have also undergone a meteoric rise in the last 5 years. The NSE boss also
commands stakes in Britak (20%), TransCentury group, Equity Bank and in the Housing
Finance Company (7%). The TransCentury connection has by itself caused worry given its prominence in several deals associated with government
parastatals like KenGen, the Kenya Power and Lighting Company and Kenya
Railways. The latest concerns however are fuelled primarily by the impending deal
between Equity Bank, the Housing Finance Company and Britak.
The disquiet is accentuated by the now clear pattern by which financial deals involving
this tightly knit circle of players who double up as investors, brokers and market
regulators keep increasing their investment profiles through backroom deals,
while stringing along a gullible public through offerings on the Stock Exchange.
Glaringly obvious for starters, is the fact that Mwangi's holding at Equity Bank is equivalent to 7.3% per cent of the
Bank's listed shares. This is above the five per cent limit set by Kenya's banking laws, but is still far less than
the close to 30% that Mwangi is accused of holding, through company employee-proxies.
With the cat now out of the bag, the Equity CEO has in recent weeks attempted
to offload part of this excess, effort which he claims is precluded by a
commitment made to the CMA that directors
would not divest of their holdings in the shares maiden three years on the
bourse. Incidentally, given the market's keen appetite for Equity stock, the
illegally held 2.3% if offloaded on the bourse would net an enormous Sh826 million, leaving him with stock worth
Sh1.8 billion in Equity. Was this the plan all along? It would indeed be a
curious oversight on his part that it escaped his notice that banking laws
explicitly set a limit to how much he could own in Equity stock.
Assistant Minister Bonny Khalwale set the ball rolling on the matter of
financial mischief with an attack on Equity Bank from the floor of the House
only to be rebuffed by Treasury Assistant Minister Peter Kenneth who rose to
defend Mr. Mwangi's reputation. The
following day, Khwisero MP Julius Arunga took his turn, casting the net wider
to include Mbaru who he alleged had been using his cross-shareholdings to
manipulate Equity's share price. These allegations are not as outlandish as
some may make out. News organizations reporting from the bourse highlighted the
unusual movement of Equity's price on June 10 NSE, which did not seem to be
responding to fundamentals. Instead of falling after a bonus issue, the share
had continued to rise from Sh80 in April onto Sh133 then and Sh142 by July
17th.
Even after two days of negative publicity, the stock only slid to Ksh 133. Looks
like much ado about nothing? Well, the fact is that a financial institution of
Equity's significance is vulnerable to adverse market perceptions and such
consequences as runs on deposits. This would push the bank towards insolvency
and cause nightmares in the wider economy especially because Equity's nest is
cast so wide. The bank has over 1.1 million accounts and a staff of over a
thousand employees.
To further underscore the exigency of the situation, consider the fact that Mbaru
and the TransCentury Group, in which the NSE boss is a major investor, had
previously expressed an interest in buying a controlling stake in the Housing
Finance Company. As a result of a sale price that the investment group
considered too high, the bid was dropped. It is therefore interesting that
Equity is now chasing after the same Housing Finance Company, engorged now with
billions of mwananchi shillings, but essentially still controlled by part of
the same interests that influenced the bid for the former HFCK.
Matters have come to a head now, with
the revelation of the shareholding improprieties revealed in a KPMG audit and
in the revelation of the disagreements surrounding the resignation of a former
Equity bank board member, Wanjiku Mugane. The former board director is said to
have been intensely displeased with the manner of dealing with clear breaches
of company code and sought boardroom intervention to preclude a collapse in
public confidence. She was quickly forced to resign and remedial public
relations measures taken to control likely damage. The special audit
report from KPMG however, did not find any evidence of wrongdoing although its
findings were in many instances inconclusive- for example with regard to the
departures of senior staff and the employee proxy shareholdings.
Undeterred, and
with the backing of the Ministry of Finance, Equity Bank has now moved on in
conjunction with Britak, to acquire a significant stake in Housing Finance.
Equity and Britak ar aiming for a large 25% holding in the nation's largest
mortgage lender. Behind the company names Equity and British American (Britak)
however, are the real owners; the usual suspects Mwangi, Mbaru and Wairegi
(another Equity Director). This
leaves us open to the very clear possibility that with the deal going through
given their massive influence over the financial services industry, Britak
would acquire a 20 per cent stake, due to the National
Social Security Fund (NSSF) and the Treasury if they do not take up their
rights in the up coming issue. Then Equity could
still buy 4.9 per cent without flouting the takeover rules.
With Britak already the largest
shareholder in Equity with a 10.99 per cent stake, this consortium could now control Housing Finance. Combine this with their
influence across the financial industry and you have an unchecked behemoth with
the capacity to cause total mayhem across the sector.
Our experience with
political banking, the likes of Euro Bank, Trade Bank, Delphis and so on should
have us paying closer attention. Even more critically in this case is the fact
that the losses could extend also to the Nairobi bourse, impacting not just on the savings
and investments of hundreds of thousands, but also on the financial stability
of the entire economy. It is absolutely unacceptable that the very same forces
that stand to benefit the most from collusion to interfere with market forces,
should simultaneously be charged with safeguarding market probity.
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Have you ever considered the fact that these MP's are being used by the foreign competition to soil the name of a successful local bank, or would you rather Equity Bank went under?
Instead of being envious of another Kenyan's success, how about starting your own company and putting on the bourse.