CREDIT RATING,BANKS,BONDS and SEPTEMBER


September 2008 was a good month.At least on the legislative and regulatory front.Two interesting developments that serve to deepen our financial markets occurred.

1.Credit rating regulations Gazetted by the Government.
Banks and other financial institutions can now share information on your payment(defaulting habits).Hopefully it will move to all businesses including your landlord.Any body with access to your credit information will be able to judge how honest you are on your promise to "send the check by Friday".
If it works like other countries it should make it easier for persons with good credit histories to get loans at good terms from their banks.Businesses with good history will find it easier to get supplier credit.
The flip side is that a bad credit rating will make it difficult to even rent a good house-(if ur prospective landlord sees that your score is bad, he may not want your tenancy).

2.Banks allowed to lend to each other using their securities as collateral
This may confuse those who don't deal with banks, how can a bank keep cash but run out of liquidity?Banks are like any business enterprise sometimes they need more cash than they keep at hand.When this happens, they have two ways of raising cash:-

A. Borrow money from the Central Bank (CBK)through REPOs(Repurchase agreements).These transactions involve the Commercial bank using its Treasury bonds and bills as security to borrow from the Central Bank

B.Borrow money from each other via the Interbank market
The new rules add a C option.

C.The new interbank master repurchase agreements.The transactions here are similar to REPOs the difference being that instead of having CBK and a bank transacting, we have a commercial bank to commercial bank transaction the borrowing bank gives securities to the lending bank as collateral for the lending.

Too bad the papers got it wrong and thought that everyone could trade bonds without going to the NSE.CMA came out with a clarification that this wasn't ain't so.

BUDGET 2008

I must confess i was pleasantly surprised, i expected capital gains Tax, more taxes on second hand vehicles etc.First it was smaller than i expected at about Ksh 720 billion(was expecting a Ksh 850 billion plus budget). Here are the specifics:

THE GOOD
-Stronger Regulation for the Capital Markets.There are now restrictions on ownership of stockbrokers,investment banks and fund managers.By the way Banks,Insurance companies and similar corporate entities are exempt from these restrictions.
Let us hope that the new rules will keep us from a repeat of the Francis Thuo,Nyaga stockbrokers debacles.
The new ownership requirement will increase the number of politically correct persons(read new ODM personalities) with stakes in the Capital markets.i.e. has anyone noticed who owns the stock brokerage firms?

-No new taxes on personal or corporate incomes.What can i say? More taxes= less disposable income. -Senior citizens over 65 years of age exempt from taxes on their pensions.

NOT GOOD
-New capital requirements for banks. I thought Ksh 1 billion in core capital over 2 years was a joke.
I approximate over 60% of the banks are multiples over this Ksh 1 billion core capital amount.For example if Housing Finance successfully completes its rights issue,the core capital will be over Ksh 2 billion.Barclays has over Ksh 5 billion. The requirement is unlikely to spur mergers and acquisitions.

-No Value Added Tax decrease
VAT acts as a drag on consumption.Lower VAT and consumption might get a kicker with all the added benefits e.g. higher demand in the economy.

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APPLE 3G IPhone
Apparently,Orange/Telkom Kenya have the rights to sell it in Kenya.
http://www.apple.com/iphone/countries/ke/

STOCKBROKERS,BANKERS...DINOSAURS & EVOLUTION

The dinosaurs were wiped out by a meteorite? Then mammals took over then the hominids..homo erectus, Neanderthal man then us(Homo Sapiens).Twenty years ago the Banking sector had 2 large foreign owned banks(Barclays and Standard Chartered)The other two heavies were Government owned(KCB and NBK).The rest of the banks and Building Societies were family owned i.e. owned by a businessman who lent to his pals/family and kinsmen.

Then the Banking crises of the 1980s and 1990s came along, and a number of the smaller banks folded. The surviving banks were bought by better entrepreneurs, merged and recapitalised.Out of these ashes arose Banks such as EQUITY(formerly Equity Building Society)

Fast forward to 2008.most of the banks are hardly family controlled. The few family owned and controlled banks are small and decreasing by the year through acquisitions.

There's another industry that is structurally in the same position Banking was 20 years ago.-STOCK BROKERAGE.

Most of the brokers are family/individually owned, the sector doesn't have many controls. The firms’ capital bases are small.

My take is that in the next 3 years most of these firms will be taken over by bigger players (read banks) and soon stock brokerage will be an extension of the banking business .e.g. CFC Bank +CFC financial Services, NIC Bank and solid Stocks.

In 3 years there will probably be more brokers licensed i.e. once NSE is demutualised.However,the business will probably be controlled by a few players who will be owned by banks.