Archive for October 2008

Capital Markets Authority: The State of the Kenyan Capital Markets and the Restructuring of Discount Securities Limited

Capital Markets Authority
Press Statement

The State of the Kenyan Capital Markets and the Restructuring of Discount Securities Limited

October 13, 2008

The Capital Markets Authority and the Nairobi Stock Exchange would like to make the following observations on the current global financial markets crisis.

We would like investors and the general public to note that the crisis is as a result of credit problems (credit market) and is not directly due to stock trading strategies adopted in the equity market as happened in the 1987 crisis.

Basically, the global financial crisis is as a result of subprime mortgage lending; subprime mortgage lending is one given to a borrower with a low credit score. Most of these loans were adjustable rate mortgages with low rates for the first few years, and then a ridiculously high interest rates later on at the reset point. But many of the big subprime lenders had a habit of downplaying the risks when dishing out record numbers of these loans to Americans.

The lessons for Kenya includes the following

1. There is a case for highly capitalized financial institutions in line with the Finance Bill 2008-2009 for investment banks and stockbrokers and the Finance Act 2007-2008 requiring banks to inject higher capital. As a result of the credit boom in the US economy where the crisis began, asset prices were inflated. Likewise, the profits of the various financial institutions were inflated as compared to corporate profits of non-financial industry players.

2. All financial sector regulators should adopt a risk-based supervision approach; Risk management by each financial institution, with the regulator risk profiling and continuously reviewing the risks independently. Currently there is over reliance on the institutions' themselves.

3. On its part the accounting profession must more than ever before act as the beacon of public trust for the capital markets. This is because both the regulator and investors place a lot of premium on the audited accounts when assessing regulatory risks and investment choices respectively. Accountants must be vigilant and never let anything cloud their judgments about the underlying commercial realities of firms. This is crucial because the public places great trust on the stamp of approval provided in the auditors' reports.

We would like to indicate that the fundamentals for our Hsted companies are still intact while our licensees have not been affected by this global problem. So far the contagion effect has not been felt in Kenya. Ironically the low level of development of our market and it minor presence in the global context has ensured that Kenya does not suffer direct contagion effect. What may affect us if the crisis escalates is spiral effect of a depressed world economy.

It is against this background and through our continuing inspection of all licencees that it has come to our attention that Discount Securities Ltd. have been experiencing corporate governance challenges.

The Capital Markets Authority and the Nairobi Stock Exchange shall be intervening with a view to restructuring Discount Securities Limited through strengthening its corporate governance structures to ensure its business continuity in the interest of the capital markets and the investing public in Kenya. According to the Capital Markets Act section 33(A) (1) c and section 33(A) (2) c the restructuring plan is manifest in the following;

1. Appointment of an Independent Executive Managing Director; KPMG will be incorporated as the new Executive Director of Discount Securities Limited, replacing Mr. David Githaiga.

2. The Authority will not suspend or revoke the licence of Discount Securities Limited during the period of the intervention. The firm will remain open and will continue trading at the Exchange under this arrangement until such a time that the authority will determine.

3. Following a successful restructuring of Discount Securities Limited, and with a view to enhance the shareholding structure, the NSE and CMA, together with the principals of Discount Securities Limited will assist in finding viable third parties to invest into the company.

4. During the restructuring process, should the need for additional funds arise, the same will be availed within reasonable limits and in form of additional capital 5. Both the Capital Markets Authority and the Nairobi Stock Exchange wish the investing public to note that this is not statutory management but an intervention under Section 33 A (1) c and (2) c (reproduces herein).

33A. (1) This section shall apply and the powers conferred by subsection (2) may be exercised in the following circumstances;-
1(c) if the Authority discovers (whether on an inspection or otherwise) or becomes aware of any fact or circumstance which, in the. opinion of the Authority, warrants the exercise of the relevant power in the interests of investors:
2(c) Notwithstanding the provisions of any other written law, in any case to which this section applies, the Authority may appoint a competent person familiar with the business of the licensed person to its board of directors to hold office as a director who shall not be capable of being removed from office without the approval of the Authority other than by order of the High Court;

Prof. Chege Waruingi
Capital Markets Authority

Mr. James Wangunyu
Nairobi Stock Exchange

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Cooperative Bank IPO


The Co-operative Bank of Kenya is the fourth largest bank in Kenya and has over the years made immense contribution to the Kenyan economy. To build on this growth the Bank has already announced plans to raise an estimated Kshs 10 billion in additional capital by way of an IPO through the Nairobi Stock Exchange. The funds raised will finance the Bank's mortgage products, Information and Communication Technology (ICT) infrastructure and expansion of the branch network.

The IPO Steering Committee has reviewed the issue at length and taken recognition that the listing comes at a time when there are some notable challenges facing the capital markets both locally and abroad, key among them being:
  • A potential international global recession precipitated by the collapse of key financial institutions in the United States
  • Current inflationary pressures impacted on partly by the international oil prices, and
  • Current investor apathy in the post Safaricom IPO period.
This notwithstanding, the IPO Steering Committee has deliberated on this issue at length and taken cognizance of the comments expressed by the Nairobi Stock Exchange and noted the following;-
  1. Co-operative Bank commendable business and operation restructuring over the last seven years with a full circle turnaround in its profitability from the hitherto years of loss making may perhaps be our economy's best documented case study of a corporate turnaround and there is great appetite by ordinary Kenyans for this share particularly considering the solid base of the 7million member Co-operative Movement.
  2. The Bank has continued to report excellent profitability with the profit before tax of Kshs 1.7 billion as at 30th June 2008, indicating that they will exceed the Kshs 3.3 billion target for the year 2008.
  3. The issue provides a guaranteed minimum allocation for the retail investors as a measure to encourage participation and provide equity to all investors.
  4. The issuer has put in place a highly automated IPO processing infrastructure particularly for efficient processing and timely payment of refunds.
  5. The prevailing circumstances also provide an opportunity for this IPO to rejuvenate the market and re-institute the market appeal by investors in the market,
  6. There is no feasible basis to determine how long the current bear in the market will prevail.
In view of the foregoing, the IPO Steering Committee has re-affirmed that the IPO will progress as scheduled this year.

We invite all Kenyans to plan to purchase a piece of this Kenyan success story when the offer is formally launched.

Jimnah Mbaru
Dyer and Blair Investment Bank
"The Transaction Advisor"

James Wangunyu
Nairobi Stock Exchange and
SIB and FIB Consortium
"The Lead Sponsoring Brokers"

Gideon Muriuki
Managing Director
Co-op Bank of Kenya Ltd
"The Issuer"

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Uchumi Supermarkets Turnaround Success: 95m After tax Profits

Commentary on 2007/8 Performance

Following the closure of Uchumi retail trading by the board in the financial year ending June 2006, revival of the chain stores was commenced under the Specialized Receiver Manager (SRM) and interim management on July 14, 2006. Reopening of only 14 of Uchumi branches continued until February 9, 2007 under the "Uchumi Rescue Plan (URP) whose emphasis was reinvented "Uchumi" for turnaround.

The performance recorded continued to improve following further implementation of the URP during the year 2007/8. The upswing in sales revenue, and trading margins by 27% and 22.8% respectively in 2006/7 compared to the previous year was followed by 50.8% and 61% growth in the sales and gross profit in 2007/8 compared to those realized in 2006/7. The absolute gross profits increased by Shs.585, or 61% to Shs.1,549 million in 2007/8. This is a gross margin of 22.8% of net sales revenue compared to 21% of the previous year 2006/7.

Additionally, customer numbers recorded in the year increased by 73% and 46% compared to the 2005/6 and 2006/7 levels respectively, resulting in the highest customers per square foot per annum recorded in the recent past. These were despite the higher taxes charged on the packaging materials, higher cost of doing business and the inflationary pressure on our esteemed customers. The positive growth results were attributed to focus and redefined core purpose (business objectives) together with operational efficiency, and the re-launched Uchumi brand.
The management remained focused on operating costs that increased by Shs. 185 million, or 17% to Shs. 1,254 million compared to the above noted marked increase in gross profit.

After recorded financial costs the profit before tax increased from operating loss of Shs.257 million in the previous year to the profit of Shs. 106 million, a turnaround of total Shs.356 million. This is a marked milestone for the chain store as the last recorded profit was back in 2001/2. The resultant performance was equivalent to Shs.0.53 per share compared to 2005/6 pre-receivership loss per share of Sh. 4.17.

Further, the business substantially met its bargain in corporate obligations to the pre-receivership creditors and current suppliers, and the secured debenture holders. Current assets grew from Shs.764 million in 2006/7 to Shs.900 million of which cash and cash equivalent increased by Shs.40 million to Shs.116 million. These were complemented by prudent management of inventory. Post receivership suppliers' debt is in term, and total current liabilities after reclassification from term loans of Shs.547 million stands at Shs. 1,453 million.

In the year settling of term loans of Shs. 150 million and interest charge of Shs. 189 million were done. In the same year, pre-receivership suppliers' debt equal to Shs.594 million was cleared.
The part implementation of the URP to date has resulted in marked gains in customer and products strategic adjacencies. While the upswing in business performance continues to be realized, the SRM in consultation with the Advisory Committee and the secured creditors recognized that Uchumi will technically require to restructure the balance sheet through increased equity to correct the previously eroded shareholders' funds and simultaneously align the company competitive positioning through growth strategic adjacencies and lower debt carrying capacities that are planned to plummet profitability.

The process of selecting appropriate strategic equity partners which is one of the identified routes to source equities is at an advanced stage, and in the docket of the Advisory Committee. Accomplishment of this exercise will take the company closer to its journey to the NSE, the ultimate objective of URP.


For the Year Ended 30th June 2006 30th June 2007 30th June 2008

Kshs 'OOO Kshs 'OOO Kshs 'OOO
Net Sales Gross Profits 3,551,833 4,503,241 6,792,354
Operating Expenses 785,486 963,694 1,549,031
Profit /(Loss) from Operating Activities -1,368,712 -1,068,130 -1,253,586
Finance Costs -583,226 -104,436 295,445
Profit (Loss) Before Taxation -167,854 -152,124 -189,344
Taxation -751,080 -256,560 106,101

Profit (Loss) After Taxation -751,080 -256,560 95,069
Profit (Loss) Per Share Basic and Diluted -4.17 -1.43 0.53


NON CURRENT ASSETS 1,004,007 820,220 729,407
CURRENT ASSETS 487,117 763,537 899,756
TOTAL ASSETS 1,491,124 1,583,757 1,629,163


Share Capital 900,000 900,000 900,000
Reserves -1,738,712 -1,999,450 -1,903,999
NON CURRENT LIABILITIES -838,712 -1,099,450 -1,003,999
Term Loans 802,472 1,597,950 1,180,089
CURRENT LIABILITIES 1,527,364 1,085,257 1,453,073

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Electoral Commission of Kenya's response to Judge Kriegler's Report


The Electoral Commission of Kenya (ECK) considers that some excerpts from this Report contain critical messages which have not yet been brought to the attention of Kenyans. In an effort to promote voter education in this regard the full text of the excerpts as they appear in the Report are reproduced.


Page 10
"Constitutional and legal framework - Although Kenya has a legal framework for the conduct of elections, material defects in the framework combined with a culture of lawlessness at election time bring into question the capacity of the law to provide a sufficient framework for political competition."

"Wider responsibility - Though the ECK is primarily responsible for the flaws in the 2007 general elections, Kenyan society has long condoned, if not actively connived at, perversion of the electoral process."

"Long-term commitment - This culture of electoral lawlessness has developed over many years and cannot be reversed without a concerted, non-partisan commitment to electoral integrity on the part of political leaders, which commitment will need to be sustained and monitored over time."

Page 23

"What IREC sadly found out was that the ECK and the elections it delivered in December 2007 are no more and no less than the people of Kenya deserved. Whereas Kenyans and their leaders were content to go through the motions of a democratic election, they knew within their heart of hearts that they did not care to guard this democracy. They together with their leaders engaged in unacceptable practices:"

Page 24

"In order to start trying to prevent a recurrence of the tragic aftermath of the 2007 general elections, from President to peasant, will have to do an agonizing stocktake of where their country stands. They will have to show their commitment to the rule of law, and its equal applicability to all citizens irrespective of economic, social and political or any other belief. "

"No! The solution does not merely lie in constitutional and legislative changes. The culture of impunity in Kenya needs a fix too. The relevant law-enforcement institutions also need to do their jobs properly."

Page 29

"Beyond the Constitution and sections 3-3B of the National Assembly and Presidential Elections act, there is no law governing many of the ECK's institutional and operational aspects. This is in stark contrast to the situation in some countries in Africa (such as Malawi and Ghana) and elsewhere where this is provided for in a dedicated law to back up constitutional provisions on ..........."

Page 41

"Over the years a number of carefully reasoned and cogently substantiated submissions and recommendations by the ECK urging fundamental reform of virtually every aspect of Kenya's constitutional and legal framework for elections came to naught. A letter dated 3 May 2002 from Chairman Kivuitu to the Secretary of the Constitution of Kenya Review Commission, is prefaced with the observation that "it is difficult to separate (electoral law) from the rest of the Constitutional provisions and other laws that indirectly affect the electoral process." it made a number of recommendations which could sensibly be repeated verbatim today.

They relate, to name a few of those more salient in the present context, to the assumption of presidential office, gaps in the enforcement of the Electoral Code of Conduct, the empanelment of an electoral court, service of an election petition and, crucially, the size of the Commission, criteria for the selection of Commissioners and an inclusive and transparent appointment process. Many other proposals were made relating, for instance, to reinforcing the ECK's independence by having it report directly to Parliament, staggering the three elections, establishing a truly professional secretariat with "specialists skills and competencies" and providing for "effective enforcement of electoral rights". One can but speculate as to the course of events in December 2007 if these recommendations had been taken seriously. "

Page 42

"It is indeed ironic that the ECK, the composition and legitimacy of which has been so trenchantly criticized since the 2007 elections, itself made proposals for reform which could have prevented the fiasco. However, these proposals were not pursued, or they were frustrated by a political agenda that did not give them the attention they deserved. As things stand now, there is nothing in law to prevent the relevant policy - and law-makers from taking the ECK's advice, discussing all or aspects of it with the ECK, and then incorporating the final result of those deliberations into electoral law reform proposals. However, owing to the lukewarm response the ECK's proposals have received, IREC is constrained to make recommendations on an issue that probably does not require more than a change of attitude.

There are other matters, however, on which the ECK requested legal reform that IREC does not believe require such reform - for instance, the use of modern technology for transmitting results."

Page 55

"The electoral campaign was, as is shown elsewhere in this report, extremely robust and at times violent and unruly. Indeed, this was no surprise. Political parties in Kenya have over decades been guilty of such conduct. Comparison with the well-known and respected Code of Conduct for Political Parties Campaigning in Democratic Elections published by the International Institute for Democracy and Electoral Assistance (International IDEA) shows that they have been breaching each and every international norm for many years. "

"There has also been scant respect for international norms relating to abuse of state resources for political advantage."

"During the electoral period, parties consistently lack respect for laws or regulations and the Electoral Code of Conduct is blatantly violated. The ECK has confirmed to IREC that the few politicians who were fined for breaches under the code in the run-up to the 2007 general elections have refused to pay the fines. ECK has had to file proceedings in the High Court in order to enforce its orders but to date these cases remain undetermined. Parties condone, without censure, their candidates' violation of electoral regulations."

Page 59

In conclusion, political parties breached most of the rules in the national and international books regarding the orderly conduct of campaigns and elections. While Kenyans must improve the entirety of the regulatory regime that currently governs elections, the greater challenge is to inculcate an ethical and responsible political culture. The culture of impunity maintained by all political players would certainly strain any law-enforcement mechanisms that are established.

Page 63

"In the public meetings held by IREC many Kenyans doubted the value of opinion polls. Some even averred that the polls were manufactured by partisan pollsters in order to influence them to vote one way or another. Several interlocutors proposed that if opinion polls could not be avoided altogether, then they should cease several months ahead of the poll. Many Kenyans took a different view: the polls predicted that their particular presidential candidate would win the election: this did not happen: therefore the elections must have been rigged."

Page 64

"The Commonwealth Election Observer Group on Kenya Elections 2007 observes that in the lead-up to the elections, the MCK and the ECK developed guidelines aimed at ensuring responsible media coverage, upholding professional standards, impartiality and independence. These were, however, often flouted. The observers particularly noted the unethical publishing of anonymous advertisements by some media houses."

Page 66

"IREC's review of newspaper coverage during 2007 revealed many instances in which highly sensitive stories were reported in language that had the potential to heighten public anxiety. An egregious example is this report in The Standard on 26 December, 2007:"

Page 68

"KEDOF faced serious challenges. There was deep-seated antagonism within KEDOF between a number of groups, each of which felt it was uniquely placed to manage the coordination and funding. Its work was dogged throughout by internal differences, weak leadership and delayed implementation. The EAP report states that KEDOF "reflected in microcosm the ethnic, political, personality and other divisions that exploded so dramatically after the election."

Page 69

'The ECK Guidelines for Election Observers sets out the role, rights and privileges of observers comprehensively and gives a summary of principles and practices for election observers, which by and large accord with the international principles."

Page 70

"Some observer reports published locally and internationally had the potential of exacerbating an already intensely volatile post-election period. The most potent and influential of these is a document authored by some four domestic election observers, titled Kenyans for Peace with Truth and Justice (KPTJ): Kenyan Elections Observers ' Log: December 29 - 30, 2007. Under the sub-title "Countdown to Deception: 30 hours that destroyed Kenya", the authors made a number of bold and emotive statements, some of which unfortunately lack a credible basis."

Pane 72

"Wananchi's verdict. During IREC's public meetings countrywide, many Kenyans expressed the view that religious leaders right across the country were partisan, depending on their ethnic community. Kenyans across the political divide also stated that many of the accredited CSOs used the opportunity to propagate partisan ideas under the guise of educating citizens on their civic duties."

"With regard to election observers and civil society, PNU's supporters accused observers of having been partisan, unprofessional and interested only in furthering their selfish agenda. It was averred that both domestic and international observers, including ambassadors, openly supported one political party and therefore did not give an objective assessment of the elections. NGOs were also reported biased in their involvement in the process and their final evaluation. It was further averred that some of the NGOs were specifically constituted for the purposes of advancing partisan positions in the 2007 general elections and that thereafter they ceased to be operational."

Page 81

"All the parties conducted the primaries themselves using party rank and file officials and other people hired for the purpose. From observers' accounts, citizens' views obtained during IREC's public hearings and political party submissions, it is clear the nomination of parliamentary and civic candidates was decidedly not without incident. According to media reports, the primaries of the major political parties were chaotic and marked by logistical challenges. Claims of vote-buying were rife. In others there were claims that the real winners had been replaced by others.

Some candidates received "direct nomination" after their parties waived the requirement for primaries in their constituencies, eliciting protests. Not unsurprisingly, some of these problems culminated in violence. In some cases, this violence sealed some aspirants' fate, when their parties denied them nomination certificates on account of sponsoring and/or being engaged in violence."

Page 95

"That being the case, it is likely that political parties poured in money which led to severe spending inequalities in the electoral process. Seeing that bribery is a common phenomenon in Kenyan elections, the use of huge amounts of money then adds to the unfairness of the campaign finance equation because those candidates or parties with wealthy supporters are able to spend far more than their opponents. Add to this the fact that some state resources were applied in the election in favour of specific candidates and/or parties and an ugly picture of skewed campaign financing emerges even more clearly."

Page 99/100

"Some of the media houses, unfortunately, did not observe media ethics and standards. They did this understandably to win a larger audience for commercial purposes or for prestige. As a consequence, they ended up not helping Kenyans but added fuel to the flames."

Page 100

"Hate speech is said to have characterized the 2007 general elections in party rallies: text messages, e-mails, posters and leaflets were other vehicles of incitement. When travelling around the country, IREC noted that this problem was widespread. There is a general view that most radio stations lack professional journalists able to control an audience or regulate talks. Their journalists lack training in conflict reporting or moderation."

Page 102

The ECK and the Media in 2007
  • "This is a sterile and futile debate - and the sooner it ends, the better. Neither side is completely blameless, but that is beside the point. The ECK and the media are bound together by mutual interests and reciprocal rights and duties.
  • Many journalists still do not know or understand how the ECK functions; they still do not know the ECK's procedures, their purpose or significance, and can therefore not report responsibly on these matters. The ECK is at least partly to blame for this dangerous state of affairs.
  • A good working relationship with the media is an indispensable element of sound electoral administration and the ECK was seriously remiss in not realizing this and vigorously addressing the challenge."
In the interest of the country and its bright future, Electoral Commission of Kenya (ECK) urges all Kenyans to give due attention to these messages and effect them. ECK undertakes to do likewise whether that has been highlighted in the Report or not. As a nation we must move and look forward with determination to genuinely shape our destiny in unity and love. This we can only do if we shed off our prejudices.

Electoral Commission of Kenya

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