Executive Summary

• Fixed Income: Yields on government securities continued declining for the sixth consecutive week, and the Government is re-opening a 5 and 10-year bond to raise Kshs. 20 bn for budgetary support;
• Equities: The market was on a downward trend during the week, with NASI, NSE 20 and NSE 25 declining by 1.4%, 0.6% and 0.8%, respectively. During the week, Equity, DTB, CIC and Bamburi reported their FY?2015 results. Equity Group Holdings FY?2015 performance was uninspiring in tandem with most banks that have released results so far. All banks have reported negative earnings per share growth except KCB Group, Equity and DTB;
• Private Equity: Increased private equity investments in the first quarter of 2016 demonstrate a robust year for private equity in Africa;
• Real Estate: Provision of quality infrastructure is essential to attracting foreign investors? flows;
• Focus of the Week: With the onset of regulatory checks by CMA, and the recent spates of companies? board conduct conundrum, we examine the state of corporate governance in Kenya and the measures to enhance transparency.

Company Updates

• Cytonn featured in the March 2016 SME Entrepreneur magazine. See link on: Cytonn's Cutting Niche In Real Estate
• This week we launched our Franchising business. If you are an entrepreneur who wants to be part of innovation in the high growth real estate sector, visit this link for the application forms: Downloads Section
• Our Senior Investment Analyst, Duncan Lumwamu, discussed the increase in diaspora remittances on CNBC Africa. See link: Duncan Lumwamu on CNBC Africa
• Our Head of Private Equity Real Estate, Shiv Arora, discussed the impending split of the Old Mutual Group on CCTV Africa. See link on: Shiv Arora on CCTV Africa
• Our Head of Private Equity Real Estate, Shiv Arora, discussed CMAs new code on corporate governance of NSE listed firms on CNBC Africa. See link: Shiv Arora on CNBC Africa
• We continue to beef up the team with other ongoing hires

Fixed Income

T-bill subscriptions remained high this week, with the subscription rate increasing to 286.1%, from 174.9% the previous week. Key to note was that the subscription rate on the 364-day T-bill was highest at 353.0%, indicating investors are locking in yields due to expectations of rate decreases. Yields continued on their downward trend, with the 91-day, 182-day and 364-day papers coming in at 8.8%, 10.9% and 12.3%, down from 9.1%, 11.3%, and 12.8%, respectively, owing to:

1. The government?s intention to reduce the budget by Kshs. 93.8 bn leading to a reduction in domestic borrowing for the 2015/16 fiscal year by Kshs. 53.3 bn, and,
2. High liquidity in the money market as a result of high government maturities of Kshs. 15.9 bn this week, following another Kshs. 14.5 bn last week. This was also evidenced by the interbank rate declining during the week closing the week at 3.7%, from 4.6% last week.

The shilling remained relatively flat this week, marginally gaining 0.2% against the dollar closing at 101.4, compared to 101.6 at the end of last week. On an YTD basis, the Kenya Shilling has appreciated by 0.9% against the dollar. As indicated in our Cytonn Monthly ? February, we expect the shilling to remain stable during the year. In the month of January there was a 19.9% increase in diaspora remittances to USD 137.5 mn compared to USD 114.6 mn in January 2015 and was 2.5% higher than the December figure.

The government will re-open a 10-year (FXD 1/2013/10) and a 15-year (FXD 2/2013/15) bond during the coming week with tenors to maturity of 7 and 12 years, respectively, to raise Kshs 20 bn for budgetary support. Given the (i) declining interest rates over the past 7 weeks, with the 10-year and 15-year trading at yields of 13.8% and 13.9%, respectively, and (ii) relatively high liquidity in the money market, (iii) low inflation, (iv) a stable shilling, and (v) Government being ahead of their borrowing schedule, we expect rates to remain in their current range. In addition, the Government is comfortable with the current rate environment and is lengthening duration. On a risk adjusted basis, the bonds are not too attractive but for investors who want to participate, we recommend investors to bid at a yield of 13.5% - 14.3% for the 10-year re-open and 13.8% - 14.8% for the 15-year re-open bonds.

In a move that is likely to trigger inflation levels back up, producers of excisable goods announced that they would be paying Kshs Sh1.50 more in excise duty stamp fee and other costs associated with installation of a new sin tax system. Inflation rates had come down to 6.8% in February from 7.8% in January, and was expected to decline further in March, but this development is likely to distort the expectations pushing the rates of inflation back up. The Brewers, juice processors, soft drink makers and water bottling firms through the Kenya Association of Manufacturers have promised to pass on the costs associated with installing of the new so-called excise goods management system to consumers. Despite the fact that this move shall improve the Government?s tax revenue collection on the negative it could exert inflationary pressures.

The Central Bank of Kenya announced plans of introducing an Annual Percentage Rate (APR) pricing model, whose main objective is to enable bank customers to compare the different bank loan rates on a common computational model. This follows complaints by CBK that banks have failed to incorporate the Kenya Bankers Reference Rate (KBRR) as a guide when setting interest rates leading to higher lending rates. The APR mechanism will allow borrowers to compare bank loans on standardized parameters instead of focusing on interest rates alone. Among some of the parameters that are to be captured by APR include (i) one off loan processing fee, (ii) insurance cost, (iii) security charging expenses, and (iv) the actual interest charged on a loan facility. We believe this will help address the shortcoming of the KBRR as (i) it will give the customers visibility of which bank offers the most competitive rate, and (ii) banks will be obliged to price their loan rates in a comparative basis rather than in isolation. This further cements our view in our Cytonn Monthly ? January, that CBK should not expect markets to price off an arbitrary metric such as KBRR, and should focus on making the banking sector more competitive and transparent. It appears that the new CBK Governor is enhancing market discipline in the banking sector, which is good for both the sector and the financial markets.

The government is way ahead of schedule with its domestic borrowing programme, having borrowed Kshs. 208.2 billion for the current fiscal year compared to a target of about Kshs. 155.1 billion (assuming a pro-rated borrowing throughout the financial year of Kshs. 219 billion budgeted for the full financial year). Interest rates have been on downward trend week on week since the start of February due to (i) reduced pressure on government borrowing; and (ii) high liquidity in the market. The government will continue borrowing locally to bridge the external financing deficits to date and the expected shortfall in collection by KRA. With Interest rates coming down, we advise investors to lock in their funds in short to medium-term papers, tenors of between six months and one year, as the rates are higher on a risk-adjusted basis.

Equities

During the week, the market was on a downward trend with NASI, NSE 20 and NSE 25 falling by 1.4%, 0.6% and 0.8% respectively. This was due to declines in large cap stocks including Safaricom, KCB, Equity and Bamburi, which lost 4.1%, 3.0%, 2.3%, and 2.0%, respectively, as a result of foreign investor trading who were net sellers during the week. On an YTD basis, NASI and NSE 20 are down 0.5%, 2.0%, respectively while NSE 25 is up 0.3%. Since the peak in February 2015, NASI and NSE 20 are down by 18.3% and 28.0%, respectively.

Equities turnover rose by 27% during the week to Kshs 3.3 bn from Kshs 2.6 bn last week. Foreign investors were net sellers, recording the highest weekly outflow in 2016 of Kshs 318 mn, however their participation rose to 80.7% from 60.1% last week. This can be attributed to profit taking by foreign investors who were net sellers in EABL, KCB, and Safaricom after the stocks realized price increases during the week.

The market is currently trading at a price to earnings (PE) ratio of 12.4x versus an historical average of 13.8x, and with a dividend yield of 4.2% versus an historical average of 3.3%.

The charts below indicate the historical PE and dividend yields of the market.

During the past one week, the following companies reported their FY?2015 results:

Equity Group Holdings (?Equity?) reported FY?2015 results

Equity reported their worst EPS growth since listing in 2005, representing the difficult operating environment in 2015. The adjusted EPS growth was 1.0%, compared to an average EPS growth of 70.7%, driven by higher operating expenses growth of 21.8% outpacing the 17.7% growth in operating revenues. Important to note is that on an aggregate PAT basis, y/y growth was 7.7%, after adjusting for their Kshs 1 bn disposal of HF Group. However, adjusted EPS growth for the same period is 1.0%, which factors into account their acquisition of Pro Credit that used shares as part of the purchase consideration, highlighting that the acquisition has been dilutive to shareholders of Equity.

Key points to note;

• Net interest income rose by 17.0% y/y to Kshs 34.1 bn, from Kshs 29.2 bn in FY?2014, despite the tough operating environment following volatility in interest rates, and leading to a 17.7% increase in operating revenue to Kshs 56.1 bn from Kshs 47.7 bn in FY?2014
• Operating expenses grew by 21.8% y/y to Kshs 32.1 bn from Kshs 29.2 bn in FY?2014. This was driven by a 53.0% increase in loan loss provisions to Kshs 2.4 bn, leading to a higher cost to income ratio of 52.9% from 52.0% in FY?2014 against an industry average of 48.7%,
• Deposits increased by 23.1% y/y to Kshs 302.2 bn from Kshs 245.4 bn while loans increased 26.0% y/y to Kshs 269.9 bn from Kshs 214.2 bn in FY?2014, leading to an increase in the loan to deposit ratio to 89.3% from 87.3% in FY?2014
• For the first time, the bank recorded a decline in staff costs by 4.5%. This was due to the Equitel platform that rendered a percentage of staff irrelevant, and due to natural attrition, 600 staff members left

Though the company?s performance disappointed, it offered a few bright spots such as (i) the reduction in staff costs due the Equitel platform is expected to continue, and (ii) the company?s plans to shelve regional expansion plans is prudent, given the challenges faced by Kenyan banks operating in South Sudan. For more details on Equity, please see our earnings note at Equity Bank FY'2015 Earnings Note

Diamond Trust Bank (?DTB?) reported FY?2015 results

DTB was the third bank after KCB Group and Equity to report EPS growth, which grew by 11.5% y/y to Kshs 24.4 from Kshs 21.9 in 2014 driven by a 20.1% growth in total operating income despite a 28.3% rise in operating expenses.

Key points to note;

• Net interest income rose by 18.8% y/y to Kshs 15.2 bn, from Kshs 12.8 bn in 2014, leading to operating revenue growth of 20.1% y/y to Kshs 19.9 bn from Kshs 16.6 bn in FY?2014
• This was lower than the rise in operating expenses which rose by 28.3% y/y to Kshs 10.3 bn from Kshs 8.1 bn in FY?2014, leading to a rise in the cost to income ratio to 52.0%, from 48.6% in FY?2014
• Deposits growth came in at 20.6% y/y to Kshs 194.1 bn from Kshs 161.0 bn, while loans grew at 29.0%, to Kshs 177.5 bn from 137.7 bn in FY?2014, leading to a loan to deposit ratio of 91.5% from 85.5% in 2014

Key to watch for DTB will be (i) their ability to mobilize deposits to buttress their increasing loan portfolio which grew at 29.0% as compared to deposit growth which was 20.6%, and (ii) the quality of their loan-book as the 150.7% increase in loan loss provisions may be an indication of high exposure to risky businesses. For more earnings details on DTB, please see our earnings note at DTB FY'2015 Earnings Note

Of the banks that have reported so far, we would classify their performance as resilient to the tough economic environment in 2015.

CIC Group reported FY?2015 results

FY?2015 EPS growth came in at 4.4% to Kshs 1.1 bn in 2015, compared to our estimates of 22.9% y/y growth, driven by a 4.8% decline in total income, which was outpaced by a 4.9% decline in total expenses, on account decline in earned premiums.

• Gross earned premiums declined 5.4% to Kshs 12.6% in 2015 from Kshs 13.4 bn in 2014 driven by i) a tough economic environment that led to low uptake of insurance, and ii) CIC?s strategy to streamline its medical business as well as its group life business which reportedly saw a number of large loss making accounts exit its portfolio, leading to a decline in their retention ratio to 84.9% in 2015 from 92.1% in 2014
• Investment income grew by 46.2% to Kshs 1.5 bn from Kshs 1.1 bn in 2014, with investment income contributing 11.1% for the total income in 2015 compared to 7.2% in 2014. The growth in investment income can be attributed to i) the increase in investment assets, which grew by 26.3% in 2015 to Kshs 13.6 bn from Kshs 10.8 bn in 2014, and ii) the favorably high interest income on bank deposits and commercial paper placements during the second and third quarters, higher than our projection of Kshs 1.3 bn
• Net claims and policyholder benefits declined 15.7% to Kshs 7.3 bn from Kshs 8.6 bn, driven by the top line decline in premiums leading to a decline in loss ratio to 67.9% % in 2015 from 70.2% in 2014. Total expenses declined 3.8% to Kshs 12.5% from Kshs 13.0 bn in 2014, translating to a combined ratio of 116.4% on account of growth in commissions and operating expenses
• Profit before tax declined 3.1% to Kshs 1.3 bn in 2015 from Kshs 1.4 bn in 2014, while profit after tax was up 4.4% to Kshs 1.14 bn, from Kshs 1.09 bn in 2014 on account of a slightly lower taxation charge due to booking of more life business. Earnings per share grew by 4.4% to Kshs 0.43 in 2015 from 0.42 in 2014 while dividend per share improved by 5% to Kshs 0.11 from Kshs 0.10 in 2014

For more earnings details on CIC group earnings, please see our earnings note at: CIC FY'2015 Earnings Note

Bamburi Cement reported FY?2015 results

Bamburi recorded an impressive EPS growth of 47.9% y/y to Kshs. 14.5 per share from Kshs. 9.8 in FY?2014, aided by revenue growth of 8.8% y/y to Kshs. 39.2 bn from Kshs. 36.0 bn and expense containment. The increase in turnover was mostly as a result of demand from mega-infrastructural projects in Kenya and Uganda. Notably, the company sold about Kshs. 1 bn worth of cement to the Standard Gauge Railway project. Of importance to note is that;

• Operating revenue grew 34.1% y/y to Kshs 12.5 bn from Kshs 9.3 bn in FY?2014, which was higher than the 29.0% growth in operating expenses to Kshs 5.3 bn. This led to an increase in the operating profit by 38.0% to Kshs 7.3 bn from 5.3 bn in FY?2014
• Other income grew 294.1% y/y to Kshs 997 mn, on account of investment income and foreign exchange gains

Going forward, we believe the future for the company is bright given that;

• On-going infrastructural developments in Kenya and regionally will increase the company?s turnover,
• The impressive GDP growth expectations in Kenya of 5.8% will enhance cement demand, and
• The company is expected to keep costs under control given its restructuring initiatives.

Below is our equities recommendations table;

We remain neutral on equities given the low earnings growth prospects for this year. The market is now purely a stock picker?s market, with few pockets of value.

Private Equity

Atkins, a listed British multinational, renowned for being a global leading design, engineering and project management consultancy, focused on real estate and infrastructure, announced the acquisition of East Africa's consulting engineering firm Howard Humphreys. The acquisition, which was made for an undisclosed amount, is a move aimed at supporting Atkins geographic expansion into the African continent. The acquisition comes as part of expansion to the Middle East & Africa (ME&A) business, which will be led by Paul Shepherd-Smith out of Nairobi.

Howard Humphreys East Africa Limited Group, which is a multidisciplinary consultancy based in Kenya and Tanzania, offers infrastructure support services and has been in operation in East Africa since 1931. Specifically, the company offers engineering consultancy and project management services in the transportation, water and real estate markets. Howard Humphreys has been involved in a number of major deals throughout the East African region including the new airport terminal at the Jomo Kenyatta International Airport and geothermal power projects with KenGen. The transaction highlights a number of key points, including:

1. The growing importance of East Africa as a major destination for global real estate, design, infrastructure, transportation and energy sector firms, due to the continent?s relatively underdeveloped infrastructure network,
2. The importance of collaboration in real estate, with Atkins providing global expertise, reach and knowledge, and combining it with the local presence and knowledge of Howard Humphreys, to provide world-class design and engineering services in East Africa, and,
3. The willingness of institutional players in the real estate and infrastructure in the region to offer world-class design and engineering standards for clients, which has ultimately informed the move of Atkins to the East African region,

Following the move, we expect to see (i) increased interest in the sectors as African economies focus on improving their infrastructure, and (ii) an increase in institutional and world-class designs and multi-disciplinary real estate practices being implemented across the region to improve the standard of real estate and engineering, ultimately creating jobs and growing the economy.

Actis has fully exited Emerging Markets Payments to Network International in a USD 340 mn deal, a transaction with an estimated IRR of 27% over 6 years. Actis established EMP in July 2010 as a ?buy and build? platform by bringing in an experienced management team to capitalise on increasing demand for payments infrastructure in Africa and the Middle East. EMP today has the broadest footprint of any payments business in the region. It delivers electronic payments services to over 130 banks, 35,000 retailers, governments and consumer finance institutions across 45 countries in the Middle East and Africa. EMP enables banks to issue and process debit, credit and prepaid cards; facilitates merchant acquiring; and provides retailer and e-government payment solutions. Electronic payments have grown rapidly in Africa, supported by financial institutions, which have remained innovative around payments. Diaspora remittances have also been a key driver of the demand for safer and reliable electronic payment systems.

Medu Capital, a South African PE firm focused on established small and medium sized owner-managed business has acquired 100% stake in Universal Paints and Elite Truck for USD 29.3 mn. Universal Paints manufactures and supplies decorative paints and coatings and leverages on eliminating the middlemen and high retails overheads. Elite Truck Hire offers a comprehensive range of forklift trucks on Full Maintenance Leasing and short term rental model. This deal was processed through Medu III fund that was closed in 2014 with a capital base of USD 66.2 mn and is in the lookout for portfolio companies with sound systems and strong management to invest in South Africa and the rest of Africa. SMEs remain the backbone of development across the African economies and we expect increase private equity capitalization to continue in SMEs with prudent and solid processes.

AfricInvest through its Fund III has bought a significant stake in Silafrica Plastics and Packaging International; the leading Plastics manufacturing group in East Africa with presence in Tanzania, Kenya, Ethiopia Uganda and India. AfricInvest III was closed in 2014 at Euro 200 mn and provides capital to SMEs in Sub Saharan Africa focused in manufacturing, agribusiness, financial services, energy healthcare education and consumer goods. This partnership will allow Silafrica to leverage on AfricInvest?s infrastructure and footprint in Africa taking advantage of the firm?s long experience and expensive network to grow and execute its regional expansion strategy to 10 African countries.

Private equity investment in Africa remains robust, as evidenced by the increase in the number of deals and deal volumes into the region, and the closing of various fund raising activities by funds focused on investing in Africa. We remain bullish on PE as an asset class in Sub Saharan Africa given (i) the abundance of global capital looking for investment opportunities in Africa, (ii) attractive valuations in private markets, and (iii) better economic growth projections compared to global markets.

Real Estate

In a bid to attract foreign direct investment, Kenya is preparing to roll out a Special Economic Zone in Dongo Kundu, Mombasa and later in Kisumu and Lamu. The Mombasa SEZ (300 ? 500 acres? site) will target to boost exports through a free-trade zone within the facility as well as create jobs as it forecasts a population of 27,000 workers within the SEZ. The Kisumu facility is aimed at growing export trade within the East Africa Community and the greater lake region.

According to World Bank report on Special Economic Zones 2015, most SEZs fail to meet their objectives because of:

• Inadequate unique facilities that differentiate them from ordinary national environment.
• Poor infrastructure
• Lack of high quality services

According to the report, Africa is ranked bottom in the list of successful large scale developments such as SEZs and Master-planned communities. However, Kenya, Lesotho and Madagascar have shown some success in SEZs initiatives. Kenya, for instance, has begun the expansion and modernisation of the port of Mombasa and the planned construction of the standard gauge railway and the LAPSET project. These projects will benefit the free-trade zone but more efforts are needed in developing infrastructure in and around the SEZs.

To further promote the development of the SEZ, the government ought to closely monitor and facilitate the progress of the development of the SEZ since it is one area that if properly managed, promises great potential in the growth of the country?s economy via job creation, promoting developments in certain regions and attracting foreign investors.

The government has already tabled a Special Economic Zones Bill that seeks to provide the regulatory framework within which the licensed special economic zone enterprises, developers and operators will operate. The Bill proposes numerous tax incentives for the SEZs. These incentives include exemption from all existing taxes and duties payable under the Customs and Excise Act, Income Tax Act, East African Community Customs Management Act and Value Added Tax Act on all special economic zone transactions. In addition, these groups will have other exemptions such as stamp duty, advertisement and license fees levied by respective county governments, among others. The development of the SEZs falls under the Economic Pillar of the Kenya Vision 2030 and is a flagship project of the Ministry of East African Affairs, Commerce and Tourism.

According to the Knight Frank on cities global ranking report the luxury home prices in Nairobi rose:

Prices of high end homes in Kenya rose by 2.9% in 2015 from 1.4% in 2014 according to the Wealth Report 2016 by Knight Frank whereby Nairobi ranked 33 on property appreciation in the list of 100 cities surveyed globally. According to the property manager, this was attributed to;

• Luxury homes in the capital being more attractive to high net-worth individuals as other investment classes such as equities underperformed.
• Demand still exceeded supply for the luxury homes despite an increase in ?new-build.?

According to the report, 2014 saw a high supply of luxury properties in Nairobi together with the insecurity levels in the country led to price stagnation that led to a decline from 4.9% in 2013 to 1.4% in 2014.

In Africa, Nairobi followed closely behind Johannesburg ranked 26 while Cape Town Ranked 13. The report sets the residential prime rents for Nairobi at USD 4,720/month and prime yields as 6%, considering a 4-bedroom executive house in a prime location such as Karen, and USD 4,500/month and 5.5% respectively for South Africa. This shows that Kenya is still attractive in terms of investment in the luxury homes sector.

Kenya?s attractiveness as an investment destination especially for luxury properties is largely driven by:

1. A burgeoning middle and upper middle class hungry for Western-style goods. This has seen an increase in demand for more sophisticated real estate products that is evident from the development in retail sector through high end malls like Garden City mall and the upcoming Two Rivers mall.
2. Kenya as an investment hub with many foreign investors coming into the market and they require high end living spaces thus the residential sector has not been left out as more and higher end homes are being built to satisfy the growing demand for the same.
3. Attractive returns, below we have a summary of some returns in high end Nairobi, investment in this luxury homes have seen good returns with the following returns for some areas in Nairobi:

The trend is expected to persist as highlighted in the Cytonn 2016 market outlook and more developers are expected to take advantage of the lucrative returns from this investment.

Focus of the Week: Corporate Governance in Kenya

This week the Capital Markets Authority published the ?Code of Corporate Governance Practices? for public listed companies in Kenya, which were Gazetted on 4th March, 2016. The new Corporate Governance Code replaces the Guidelines on Corporate Governance, and listed companies will have a transition period of one year from the date of gazettement to come into compliance.

The new code of governance is based on ?apply or explain? principle, a paradigm shift from the ?comply or explain? approach of their previous guidelines, which have been in place since 2002. The ?comply or explain? approach lets individual companies to decide whether to follow set codes or not but the ?apply or explain? approach requires companies to actually follow the set out corporate governance codes.

Corporate governance is founded on the pillars that businesses have to practice accountability to stakeholders, fairness, have transparency in business activities and exhibit independence in decision making of the board. The benefits of good corporate governance are numerous as (i) it protects the interest of the investing public, (ii) improves access to funding at better costs, (iii) reduces risks of corporate crisis, (iv) improves firm valuation and share price performance, and (v) generally improves the performance of the entire firm and enhances sustainability.

The rules could not have come at a better time given the recent corporate malpractices that have been very costly to the public investors, for example:

1. CMC: The directors of the company were accused of maintaining a secret overseas slush fund account in the island of Jersey that received commissions related to the company?s operations, totalling Kshs 1.2 bn between 1977 and 2013, costing shareholders the said amount
2. Imperial Bank: The bank?s management is alleged to have been committing fraud over a period of 13 years between 2002 and 2015, and could have lost approximately Kshs. 34 bn. Including the potential Kshs. 2 bn bond issued just before it went under receivership, the potential losses to depositors and investors could well be over Kshs. 36 bn
3. Uchumi: The bank?s management is alleged to have caused the financial collapse of the retailer primarily due to insider dealings and conflicts of interest. The potential loss to investors from the market peak in 2013 at a share price of Kshs 23 to the current Kshs 5.4 is Kshs 4.7 bn.
4. Mumias: The miller is alleged to have collapsed due to poor management. The potential loss to investors from the market peak in 2006 at a share price of Kshs 19 to the current Kshs 1.6 is Kshs 26.7 bn.
5. Kenya Airways: The airline is alleged to have run into seriously financial solvency issues due to poor financial management and an unsustainable expansion strategy. The potential loss to investors from the market peak in 2006 at a share price of Kshs 124 to the current Kshs 4.5 is Kshs 179.3 bn.
6. Transcentury: The investment firm is in dire financial straits given unsustainable debt levels and questionable investment decisions into such like RVR. The potential loss to investors from the market peak in 2013 at a share price of Kshs 36 to the current Kshs 5.6 is Kshs 8.5 bn.

For a market with about 60 listed companies to have significant issues with at least 6 companies equates to about 10% of listed companies with corporate governance issues. That is a worryingly high statistic that should call into question our regulatory frameworks and their effectiveness. Collectively, investors in just these six companies have lost at least Kshs. 256.4 bn from their peak. The move to attend to corporate governance is crucial to the sustainability of our capital markets. Investors will not provide capital to a market where they believe that the rules are rigged against them. However, we are sceptical that the new code will have a material impact in enhancing the levels of corporate governance in the market unless we collectively address 4 areas:

1. First and foremost, is integrity and ethical behaviour of all market participants. Most of the corporate malpractices in Kenya are not due to poor judgement or mere underperformance by boards and management. They can be traced to ethical issues and conflicts of interest where the board and management made decisions that are selfishly focussed on benefitting themselves rather than prudently running the company. Specifically, boards and management should never do business with their company, such as supplying and tenders. And top management should never engage in any business that competes with their company and should always declare all other businesses they are engaged in while occupying the position of executive management.
2. Regulatory independence coupled by firm but fair enforcement. There is a market perception that some market participants are not playing by the rules given their connections with regulators. We have heard allegations of Imperial Bank management having compromised regulatory staff and regulators in some instances are also market participants. Regulators are the referees in the public investments game, we cannot have a vibrant financial market without an independent, firm, fair and transparent regulatory framework.
3. Investors have to take governance seriously and factor it as part of their investment decision process. Investors have to ask themselves questions such as, is the board competent? Is the board and management diversified? Is there a strong management team around the CEO? What is the track record of the board and management? What is the tenure of the CEO ? are they changing too quickly, on the other hand, have they staying too long? For example, the tenure of the Imperial Bank CEO, for 22 years, and the lack of diversity on Trancentury?s board, could have raised red flags that should have invited investors to further scrutiny.
4. Board oversight and competency: Boards need to ask themselves whether they truly understand what is going on in the company and practice healthy scepticism of what management is telling them. In the case of Imperial, the board itself claims that they were not aware of the malpractices in the company. In the case of Kenya Airways, one wonders whether the board truly understood the implications of the aggressive expansion strategy that management was pursuing. We think that each board member needs to seriously ask themselves this question: ?Do I really understand what is going on in this company for me to be able to effectively play an oversight or I am just seated here for the recognition and perks??

In addition to the above four areas, where we think there is urgent need for address, we would also benefit from the traditional areas of governance such as:

• Good Board Practices: This would entail clearly defined roles, director remuneration procedures that are in line with the performance of the company, appropriate composition of board in terms of age, gender, ethnicity, global market experience and non-executive mix
• Effective Control Environment: A company needs to have risk management frameworks in place, disaster recovery systems, independent audit committee, media management policies and business continuity procedures which speak to how well the company is prepared for any eventualities
• Transparency Disclosures: The importance of companies disclosing both financial and non-financial information pertaining to leadership provides shareholders with tangible evidence to gauge how well their investment is being put into use as well as hold management accountable. This should also follow in line with up to date fillings, compliance with international standards and web-based disclosures
• Shareholder Rights: Being the recipient of all decisions that are made, companies should be diligent in how they treat their shareholders by ensuring clearly defined dividend policies, having well organized meeting structures and ensuring minority shareholders are represented in the overall decision making process
• Board Commitment: Boards are only as good as how much the leadership is invested in the success of the company. This come to play not only in the management having shareholding to improve their motivation to see the company succeed but also in how they place the company to be a corporate governance leader and the resources they allocate to implement corporate governance initiatives

We have a long way to go in terms of corporate governance but the frameworks that are being put in place are a good starting point to establish ourselves as a regional leader in corporate governance and its role in company performance. Kenya can borrow from a leaf from South Africa that have gone the extra mile and created a corporate governance index to track companies on their behaviour aside from good financials since 2004 with 82 companies currently being evaluated under the index.

Good corporate governance is essential to well-functioning and vibrant financial markets, and vibrant financial markets are essential to funding economic growth, which in turn creates jobs and raises the standards of living for Kenyans. Consequently, good corporate governance is a national imperative and we have a choice: we either focus on it and get right for the benefit of all Kenyans, or give it lip service for the benefit of a few unscrupulous players.