Jaindi Kisero: Safaricom refund: Can’t we ever learn from experience?

The Safaricom refund saga is a total mess. According to the latest statistics from the Central Bank, cheques for a whopping Sh1.67 billion have yet to be refunded.

Poor investors have been made to wait for months on end for their money. As a matter of fact, the refund process started way back on June 9, 2008.

Clearly, somebody has minted millions from these inefficient systems. Mark you, the total cheque refunds amount was Sh92 billion. The opportunities for minting money by lending it on a short-term basis are very huge, indeed.

Admittedly, both the Central Bank and the Capital Markets Authority have lately been working very hard to try and sort out the mess.

What I don’t understand is why these regulators should pretend to be serious about resolving this problem when the cheques refund problem was anticipated long before the IPO was launched.

As far back as November last year, the Kenya Bankers Association wrote to the authorities forewarning them that over-subscription of the Safaricom shares would inevitably present an insurmountable cheque refunds problem.

The association went to the extent of suggesting what needed to be done to pre-empt the messy situation.

Apparently, these warnings fell on deaf ears. The upshot is that what we are now reaping are the fruits of failure to act on sound advice.

We are also paying a heavy price by not learning from experience because all these problems we are seeing now were experienced during KenGen IPO.

When, during an IPO, you allow the leading commercial banks to hold the funds for long periods pending the processing of the refund cheques, you create major distortions in the money market.

You end up with a situation where a huge proportion of the cash in the country end up in the vaults of a couple of the receiving banks.

The liquidity strains lead to a rise in inter-bank rates and precipitate short-term fluctuations in foreign exchange rates.

During KenGen, the Kenya Commercial Bank, which was the lead bank, found itself holding much more money than it could handle.

Worse, it could not lend the money to other banks as it did not have credit lines with most of the small banks. Several such small banks almost closed shop.

The worst hit was the clearing house where settlement of transactions became a major problem with commercial banks finding it hard to source funds to settle their net debit positions.

The whole financial system had to endure untold pressures.

The question here is this: Did we really have to go through these pains again with the Safaricom IPO? Wasn’t it obvious that the Safaricom IPO would exert a bigger strain on the financial system?

What was so difficult in allowing more banks to join the three receiving banks – Citibank, National Bank of Kenya and Equity Bank?

In their letter, the bankers’ association had suggested that the Safaricom IPO would need at least five more banks.

Besides suggesting that more banks be involved in the transaction, the association had also suggested that Safaricom be handled through a system known as “delivery versus payment” – an arrangement in which investors only pay for the shares on allocation.

Under such a system, you are allowed to support your application by a guarantee or a letter of confirmation from your commercial bank.

Since an investor doesn’t have to pay in advance, the problem of refund cheques is completely obviated.

I hope that these suggestions will be taken on board during the Cooperative Bank of Kenya IPO. The mess over Safaricom refunds should never be allowed to occur again.

If there is a lesson learnt from the Safaricom IPO, it is how the ordinary Kenyan has become used to easy credit. The cheap and plentiful money then available is what created the over-subscription.

Relative to the size of the economy, household debt is on the rise. When we brag about economic revival citing Safaricom and other developments in the financial sector, we forget that our economy is yet to experience the vitality produced by sustained investment in a productive capacity.

Three factors are responsible for the economic activity we are witnessing: credit-fuelled consumption, big budget deficits, and growth in the business service sector.

Trying to understand this economy through a public response to an IPO is like trying to understand the human body by staring at people’s faces.

Although it is important, it is only one dimension of the bigger picture. There is more to development than reliance on sectors where people take dividends and fees from handling wealth that has been produced elsewhere.

For this country to experience sustainable growth, we have to invest more on brick and mortar – on infrastructure, manufacturing and agricultural activity.

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