Page 1

“Together we Achieve” Editorial team note: Here we are once again with the second issue of the Monthly review highlighting some Key events that happened during the month as well as our index. We hope it lives up to expectations as well as draws more readerships. As usual, all our communication channels are open so please don’t hesitate to contact us…Till next time, enjoy

Suffesa Editorial Team Director – Timothy Abwoga Contact: Assistant Director – Lilian Mwikali Nzesya Contact: Designers – James Phillip, Kenneth Mbuthia, Analyst / Writer: – Brian Gachichio Karanja Contact: Editor: Edel Were Contacts: Contributory Writers: Bob Wanyiri Kamau Waweru Valentine Njoroge Shirleen Kikunze

“Together we Achieve”

Contents Ill – Fated August Arbitrage The Deficit Dilemma Financial Economist Today Index Performance Stock of the Month Stocks to Watch

“Together we Achieve”

Economic Highlights – Ill-fated August Value Added Tax… Can I now cry over spilt milk?


he main financial news that has hit the headlines and social media is the new VAT act 2013 which imposes a 16 per cent levy on basic commodities that were previously zero rated. The law which took effect this month affects commodities such as milk, newspaper, maize flour, charcoal, books and mobile phones. Let’s put things into perspective. If I walked into a supermarket with 100 shillings in 1995, it would have been possible to buy five loaves of bread and about five packets of milk. The “kadogo” (small) economy at that time even permitted one to buy half a loaf of bread if a full loaf was beyond reach. The cost of living was generally favourable. In 2000, the same amount of money would have probably bought three loaves of bread and two packets of milk. Add five more years (2005), with the same net worth and your shopping basket would contain only two loaves of bread and a packet of milk. By 2010, a hundred shillings was only enough to buy a loaf of bread and a packet of milk. Looking at things now, with inflation rising to 6.98 per cent and the introduction of the new VAT act one can only be left to pray for a two fish and five loaves of bread kind off miracle to feed a household each month. If I walked into a supermarket, actually, if I walked to a kiosk with 100 shillings, I would only possibly buy a packet of milk (which is currently 55 shillings) and four bananas (10 shillings each). It is wonderful that the government is inadvertently ensuring that I eat healthy fruit ridden breakfast,

but it is the cost of living of millions of Kenyan that I’m more concerned about. The Treasury issued a statement saying that it shall not budge despite calls by opposition politicians and our toothless Consumer Federation of Kenya to review the new VAT laws. The only way that these laws were to be justified, is if the value they claim to add was to trickle down to the ordinary Kenyan. But perhaps it is a necessary evil, a bitter pill of sorts that comes with the achievement of a middleincome country status as intended by the vision 2030. A middle-income status means that the cost of living has to go up, but it also imperative for the government to ensure that the standard of living follows suit. The value that has been added to these basic commodities must be seen.

Arbitrage Riskless opportunities…


hen an opportunity to make money comes into my mind, and I share it with my friends, they call it “arbitrage”. To those who this term is new, it means making riskless profits. Listening to people, in matatus, class, common joints and eateries, and in the media, you won’t miss hearing how many have brilliant business ideas- ideas on how to make an extra shilling. Have you ever sat in the Hilton Square in town? ...whose benches are always full of people from all walks of life, waiting for an opportunity to the copious job applications they have sent, and listen many of them converse. I did it once, and it was hilarious; listening to the many ideas people have that they think can take them from rags to riches. Business ideas are not homogenous, they vary in all matters and respect depending on various situational/ economic factors. In high school, arbitrage was when one attended a “funkie” or a school trip, bought biscuits at Kshs. 320 and sold them at Kshs. 1 for the 600 biscuits in the carton

making a Kshs. 280 profit for each box of biscuit. Some invested in burning blue movie CDs at Kshs 50 when on midterm and selling them to students at Kshs. 150 when they resume. Say, they sell over 200 copies; they walk away with a cool Kshs. 20000 profit. I don’t say this is right, but money is money, and the end justifies the means. Or does it? In college, the cards change, the players change and the game changes. From checkers to chess. The ideas are more elaborate, players are more enlightened, losses are more painful, critics are even more annoying and to be honest there is more room for error. There are some commandments that I think are worth living by: 1. Do not depend on your parents' wealth. Someone may come tomorrow to dupe you and you will lose everything. Learn to do things on your own. 2. God has given everyone a talent. Pray about yours, discover it, and work on it. Then it will work out for you. 3. Do not just sit down and Ping, Tweet, Face book while others are making money with their talents. Be wise for once, the owners of these social networks are using us to make money. 4. It is good to appreciate good things, but learn to appreciate it wisely and stop arguing unnecessarily about football and players. When will people argue about you also? Think about it! 5. Learn to get a lady close to you to be successful as they say; without a woman, a man cannot be successful. 6. Learn to solve problems on your own; it’s a good way of making it in life. Don't copy others, tap little from them and modify it. 7. Stop drinking and smoking too much as it may damage your life. Do it socially.

Suffesa| ©2012

“Together we Achieve” 8. Learn to have a good heart, help people around you if you have the power, as they'll use their heart to bless you. 9. Think about impossible things and try to make them possible. Bigger people started from somewhere. Off course some of these are what most of us hope to live by, so the next time you see a post by me, it won’t be on historical facts of making money but on how to actually use what you have; skills, resources, connections, capabilities, strategic ideas to make the shilling. Until next time, live by these words from Khalil Gibran:

“A little knowledge that acts is worth infinitely more than much knowledge that is idle.” By Bob Wanyiri.

The Deficit Dilemma A perspective…


enya's budget deficit keeps growing by the year. Our appetite for capital investment and increasing wage bill keeps pushing the boundaries in terms of the budget deficit and the Kenyan bond markets are neither wide nor deep enough to absorb these pressures sufficiently. Such factors coupled with the high cost of borrowing are making it almost unsustainably expensive for the government to borrow from domestic markets. Champions of Kenyanism and sovereignty also do not like the idea of issuing Eurobonds and borrowing from the international market. So what to do? A few preventive measures can be done to restore sanity and sanctity to our national coffers. Reduce our expenses - recurrent and capital. But no! We need roads, county governors must have KES 100 Million villas and Vision 2030 needs a massive capital investment outlay. Teachers must get paid

(remember the strike), nurses and doctors must get paid (remember the strike) and MPs must get paid (remember the stomachs).The reasonable man will agree that the easier decision to make is to increase our income then. Easier here is being used very loosely. But it makes sense. Human beings like things and we develop tastes and preferences. Rather than harm our stomachs, we'd rather deepen our pockets. Easier said than done.

I propose three ways we can improve the state of our national purse. The following contains radical ideas that may just work, reader discretion is advised. First, impose a capital gains tax on real estate transactions. Calm down, let me explain myself. The real estate sector has been on hyper-drive since 2002 and shows no sign of growing. In some quarters, Nairobi and Mombasa have been tagged as top global destinations for real estate with some of the highest returns worldwide. To capitalize on this phenomenal growth - and not to stop it - a small, say 5pc, capital gains tax can be introduced. Debate can go on regarding this, whether sale agreements will have to be filed in order to establish the capital gains or what not, but it is the idea I am proposing. Its implementation can be discussed some other time. Suffesa| Š2012

“Together we Achieve� Secondly, increase the cost of mining licenses to respectable levels and impose special corporation taxes on them. Mining licenses as they are now are ridiculously dirt cheap compared to the extraction value of the minerals they give access to. Increasing their cost will give the government a much needed cash injection. Imposing higher taxes on the profits of such companies, higher than non-extractive corporations, shall reimburse Kenyans for the reduction in their mineral endowments. And while the common thinking that if crude oil is mined in Kenya, pump prices will drop reigns, this is not necessarily true. Ask Nigerians. A sure way that all Kenyans can benefit is through the high tax rate and redistribution of these funds to the people via the government machinery. Third, incentivize tax compliance. Yes, tax compliance and death are the only certainties in this mortal life but no, Kenyans are not particularly good payers of tax. And you know what, I understand. Why would I pay my KES 467 of PAYE when I know only 30pc of it will contribute to development? With the 70pc being scrounged upon by our never-ending knack for consumption. Why would anyone do that you know? But what if we incentivize? Give the people good reason to give unto Caesar and pull at the heartstrings, invoke patriotism and make it a national honour, not duty, to pay tax. And my suggestion of an incentive is development. Reprioritize and restructure. How else can Vision 2030 be achieved anyway if we do not make the painful about-turn? Or are we deluded that we'll become a middle-income level country in the next 17 years just like that? No. I am convinced that if we start spending our money right, there will be

greater incentive for Kenyans to give to the cause of prosperity. Notice that all the solutions suggested (or any other you may come up with) all fall back on politics and political good will. Over to you Mr Politician. By BGK

Financial Economist? The final stretch…


hree weeks into the last year of school. Sort of reminds me of final year in High School only I have nothing to look forward to at the end of this road: way past the freedom that comes with being 18 and slightly over the new sense of

“Together we Achieve” occurred to me during my first Financial Modelling class about a year ago, which at this point in life doesn’t at all seem like the premature assumption it was back then. At this point I think, going into this, I feel as if I was the naïve little girl in the story books you read about. You know a little red riding hood of some sort? I was bright. Wait. I am bright. Heck, my poorest grade in my KCSE was an A- and yet now, that’s about as rare on my transcripts as finding me in school on a Friday (chuckles.) I can’t help but feel duped… cheated… as if it’s too late. Problem is, I can’t think like that. You know when Dr. Phil and Oprah and Cathy Kiuna (used for emphasis) constantly remind you that you have a purpose? I am surrounded by people who are always on my neck about how brilliant I am, and can be, and I realize I can’t give up, I won’t. This is not an advice column in any measure. I found out recently that this is actually a serious Financial was; Here’s to not having it all figured out. Here’s to sticking it in those cats and exams regardless of the tarmacking we will do after graduation, and man will we tarmac. But most of all, here’s to just graduating.

maturity that comes, or at least should come with, being 21. It really is quite the scary world out there, clichés aside. Especially when you’ve been through the reality check that is Industrial Attachment and as if to spit on your fresh wound, one of your esteemed lecturers tells you, point blank, the industry has no place for you. What next? What now? I’ve simmered through the possibilities of a career in the world of Finance. As I sat through my 8-5 job, day in, day out, for 8 weeks straight in the Group Finance Department of a reputable firm, it slowly occurred to me that this might not be the ideal place for me. Okay. I lie. This might have actually Suffesa| ©2012

See you on the other side… By Valentine Njoroge

Today… Ali Bomaye…


he banking sector in Kenya is what I'm meant to write about but honestly, I have no idea how banks work; I’m not Martin Oduor neither am I James Mwangi. ‘Nostro’ and ‘Vostro’ are words I recently heard from my lecturer and prove me wrong but Kenyans don’t care how banks work; so I’m going to be honest with myself and talk about what I know: my day today.

When I woke, I thought I would be studying intensely but it is apparent I failed measurably on my plan. My morning went pretty much by the book, covering a serious load of work before it all went wrong. Someone decided to buy me a sumptuous lunch throwing my day totally off course. After lunch I decided to be young for once and go out on a date, furthermore yesterday was valentines .So today begins from now; a Langata to town matatu ride costs 50 shilling on a bad day but today it cost 80 shillings. Considering that I was going out for a date and my stingy nature, this was already a bad day. I get into the matatu and this man, Francis Mwachari (if you are wondering how I know him calm down I’m getting there) has 50 shillings and no more. He glanced at me and explains his case so I part with another 50 shillings and tell him to keep the deficit, this is followed by some awkward silence and he starts explaining how the situation in Dar es Salaam is different in terms of traffic. So, here is this man without transport money and here I am this Strathmore educated economist. I throw out a string of lines laced with economic jargon and clearly, it throws him off track. Then I realize it may become a one-sided conversation and I become Kamau, the young boy who still fears his mother’s wrath. Francis has a lot to offer; he lost all his documents recently and is in Nairobi trying to replace them. He may not portray this but he is a tower of wisdom, well-articulated and has an intense mastery of the bible. What I Iearnt from Francis today is worth more than what my parents have paid so much and sent me to school for. I finally get to town and meet my date. Francis had warned me about women with artificial hair. Suffesa| ©2012

“Together we Achieve” Normally my date would have donned a well-kept Mohawk but luckily, today she has none. She’s a lady from a different clan from me and we have a friendship that would otherwise be unorthodox, but behind all these, she has a lot to offer. A milkshake and a bowl of ice cream later, we are both laughing hysterically but unfortunately, it’s time to go home. Honestly at this point, I can’t tell what tribe she is but I can tell we won’t vote for the same person in the coming election As soon as the matatu leaves town it’s grazed by a Rongai matatu. If you didn’t know a Rongai matatu views Nairobi as a haven to act out all its madness, I guess it’s because it may take another two days before making the trip back into town. I’m seated with a lady going home after a day at her business in Muthurwa. Unluckily, one is never lucky twice so I don’t get her name. The driver is an inspired character, this I can tell from his driving and his political views. He tells me he never wakes up early but always sleeps late. The reason behind this is ingenious considering he does not study equilibrium demand. Now I’m home. So what are banks in Kenya? In theory, they drive economies but this is a flawed argument. Banks feed on us. What Francis ,me, the matatu and the lady passenger have in common is that we all woke up feeling like Mohammed Ali in Congo, and the sun shining on us was the world singing Ali Bomaye. In essence, banks make all the profits but Kenyans do all the work and that is what I know about banking in Kenya. By Kamau Waweru

“Together we Achieve” The index composition remained the same with no stock moving in or out of the index. Index composition is displayed below.

Index Performance…. Market exhibits resilience… Indicator Stock index Performance % Market Capitalization ( Kes . Bn ) P/E Ratio *Source – Suffesa analysis

Index Allocation

Suffesa Stock Index Previous

Current 3,567.66 84.82 9.02

% change 3,844.89 7.77% 87.10 2.68% 8.29 -8.09%


he Suffesa Stock Index showed a steady increase in its performance within the first three weeks and began gradually decreasing thereafter. There was a 4.27% gain in the Market Capitalization from 3,567.66 to 3,844.89 as opposed to the Nairobi Stock Exchange Market Cap which recorded a loss of 7.34% from 4,962.66 to 4,598.16. The second week recorded the highest market capitalization of 3,971.61. The prices of most stocks in the third week were high which was a contributing factor to the increasing market capitalization. Clearly, the highlight of the month was the second week of the month as it showed a relatively good performance across all stocks on the bourse. There was an average increase of 1.32% in the prices of most stocks during this week. The bourse was characterised by a lot of volatility this month. The NSE All Share Index only recorded a positive performance during the first week of August and began to gradually decrease thereafter. It recorded a 1.91% loss within the four weeks from 123.86 to 121.49 although generally it performed better than the previous month. The good run this month was attributed to anticipation of half year results by banks and other firms. Index SSI NSE - 20 share Index NASI

Week 1

Week 2 3,567.66 4,962.66 126.19

Suffesa| ©2012

Week 3 Week 4 Gain / Loss Points change 3,971.61 3,742.94 3,844.89 7.77% 277.23 4,806.52 4,706.80 4,598.16 -7.34% (364.50) 121.27 119.64 116.31 -7.83% (9.88)


Price Change

Centum Investment Co Ltd Ord 0.50



CFC Stanbic of Kenya Holdings Ltd ord.5.00



Crown Paints Kenya Ltd Ord 5.00



E.A.Portland Cement Co. Ltd Ord 5.00



Eaagads Ltd Ord 1.25 AIMS



Housing Finance Co.Kenya Ltd Ord 5.00



Kenya Power & Lighting Co Ltd Ord 2.50



Liberty Kenya Holdings Ltd Ord.1.00



TPS Eastern Africa Ltd Ord 1.00 Uchumi Supermarket Ltd Ord 5.00







*Source – Suffesa analysis We anticipate the SSI Index to pick up in the next month given the stable macroeconomic environment characterized with a low Central Bank Rate (CBR) and a robust growing economy. As such we expect the bourse to rebound as investors come back to the market. However, recent disruptions in government operations may still put investors on alert as recent events show that the devolution agenda may be in jeopardy. This follows on the back of the introduction of the VAT bill 2013. Prices of goods have increased abruptly and this is expected to put some upward pressure on inflation. Currently, inflation stands at 6.70%.

Stock of the Month ‘Aequitas Equitas’


oes the phrase one for all and all for one ring a bell? Does providing for all really pay off? One bank seems to break the norm in its endeavours. Equity Bank has consistently broken records with its ability to constantly post profits amid stable and unstable macroeconomic times. It has evolved from a building society, a Microfinance institution to the now all inclusive Nairobi Securities Exchange and Uganda Securities Exchange publicly listed Commercial Bank.

With over 4.1 million accounts, accounting for over 52% of all bank accounts in Kenya, Equity Bank is the largest bank in the region in terms of customer base. The solidness of Equity Bank is underpinned by its shareholder’s funds base of over Kshs. 19 billion , making equity bank one of the most capitalized banks in the region. Investors who put their money with the bank would have more than doubled their money’s worth going by the current share price of Kshs. 35.00 The bank’s half year results are a testimony to the bank’s strong growth witnessed. The Bank’s net profit for 6 months to June rose by 16.00% despite a slowdown in its regional subsidiaries. The Bank reported a profit of Kshs. 6.3bn for the half year, up from Kshs. 5.4bn realised in the same period last year, boosted by impressive growth in the Kenyan outfit. Much of the growth was attributed to a decline in interest expenses which dropped by 31.7% to Kshs. 1.7Bn.

“Together we Achieve” In addition, the bank seeks to gain a competitive edge by focusing on customer service through provision of efficient and quality services to clients as well as slowly progressing its loan book from retail to corporate clients. These sound fundamental values of Equity Bank coupled with its positive financials make the firm a definite security to watch in the future. Despite, small hiccups here and there concerning its systems and sustainability of its growth, the Kenyan outfit remains a key player in region. In light of its impressive growth, equity bank has managed to bring more unbanked into the financial system. Truly, it is a bank for all. It is ‘equidade’ By ATM

Stocks to Watch Housing Finance


The bank has already established itself in Kenya, Uganda, Rwanda and Tanzania and seeks to grow even more given its feasibility studies for possible acquisitions in Zambia. The listing of the firm’s shares will help it achieve its expansion strategy by creating a platform for raising additional capital.

his firm is one to watch out for in the next 10 years. Kenya is a growing economy and has invested in the infrastructure sector. With the super highways coming up, development of houses and estates near the roads will be common and this is a window of opportunity for Housing Finance to start up real estate projects. In the next 5 to 10 years, people will be able to buy a house built, financed and insured by Housing Finance at an affordable rate. Several insurance companies have increased their stake in the mortgage lender. Their aim is to improve living standards within the cities.

Even though a staggering Kshs. 7.9bn in investments in subsidiaries have not yet yielded any significant returns for the bank, the outfit still remains hopeful targeting long term growth strategies by entering into partnerships with companies and global payment systems to further deepen its agency model that has worked well thus far.

Housing Finance has also introduced a cyclical mortgage product in order to provide potential home owners with one-stop solution. This product is said to improve on the flexibility to individual circumstances. This product can save clients, especially self-employed borrowers, a significant amount of interest while increasing the rate at which debt is reduced. The Cyclical Mortgage also

Suffesa| ©2012

known as Makao will contribute to their rate of growth by increasing their client-base. The product is deemed a game changer by experts and is one that has put the firm on the radar of international firms.

“Together we Achieve” By Shirleen Kikunze



he power-generating company currently commands approximately 80% of the market share and is in the process of setting up a geothermal portfolio. The motive of this geothermal portfolio is to provide a cheaper and reliable source of power. This project will enable Kengen to double or even triple their profit margins in the coming years.

In August, Kengen signed a steam field development contract with Synopec International of China worth Kshs 11.6 billion. The project is jointly funded by two organizations, that is, KFW and World Bank. The geothermal project that is being funded is believed to pump further 25% current capacity to the national grid once it is completed in 2014. Kengen is also seeking funds for an ambitious power plan. Their main focus is the establishment of enough power plants all over Kenya to boost their revenues. The company needs to raise over Kshs 360 billion in the next four years to finance its project. If the company successful enough to come up with the funds and set up the power plan, Kengen’s total revenues will double after 5 years, putting the firm as one of the top energy firms in the region. Suffesa| ©2012


Note: Any Suggestions towards improvement of the Suffesa Monthly review is welcome. We look forward to your views and comments on our Facebook page and contacts alike. If you wish to become an inaugural part of the editorial team at Suffesa Monthly Review or contribute, don’t hesitate to contact the person below: Lilian - +254 719 339 906.

“Together we Achieve”

Report by: Strathmore University Finance and Financial Economics Student’s Assosciation – (SUFFESA) Email – Disclaimer: The content provided on this document is provided as general information and does not constitute advice or recommendation by SUFFESA and should not be relied upon for investment decisions or any other matter and that this document does not constitute a distribution recommending the purchase or sale of any security or portfolio. Please note that past performance is no indication of future results. The ideas expressed in the document are solely the opinions of the authors at the time of publication and are subject to change without notice. Although the author has made every effort to provide accurate information at the date of publication all information available in this report is provided without any express or implied warranty of any kind as to its correctness. You should consult your own independent financial adviser to obtain professional advice before exercising any decisions based on the information present in this document. Any action that you take as a result of this information, analysis, or advertisement is ultimately your responsibility.

Strathmore University, Student Centre, Clubs office, Madaraka, Nairobi. Tel: +254 725 471260 (Club Official)

Suffesa monthly review August issue  

An insight into East Africa's largest economy.