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The Unwinnable War: How the Myth of an ‘Institutional’ Solution Has Hobbled the Fight Against Graft and Wasted Time and Resources

The political vernacular of corruption has lost its lustre, especially with the millennial generation, who today perceive corruption not as the abuse of public office for private gain but the abuse itself lays in the existence of the public office.

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The Unwinnable War: How the Myth of an ‘Institutional’ Solution Has Hobbled the Fight Against Graft and Wasted Time and Resources
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What is clear is that in Kenya’s case, the public policy reform/technocratic approach to fighting corruption has become utterly irrelevant in the current political context. The Presidential ‘Summit’ on Governance and Corruption in November 2016 as former anti-graft Czar John Githongo opined was the final nail in the coffin of the ‘technical fix’ to corruption when President Uhuru Kenyatta expressed his helplessness, ripped into his anti-corruption officials and their approach, and basically reduced the event to a public relations exercise. Kenyans have done all the anti-corruption benchmarking, created all the anti-graft institutions, committees, working groups, task forces, units; drafted all the frameworks and policy papers; taken all the advice possible from multilaterals, bilaterals, NGOs, the private sector and others including churches; enacted all the laws and their subsidiaries; held all the conferences, summits, workshops and get-togethers possible. Fundamentally, what started in 1956 with a series of legal and institutional reforms aimed at improving governance and fighting corruption was a phase that ended with Presidential Summit on Governance and Corruption in November 2016. But the history of corruption didn’t begin here.

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In 1888, the Imperial British East Africa Company (IBEACo) claimed Kenya as one of its territories. That arrangement continued until 1895 when the territory reverted to the British as the East African Protectorate encompassing areas deemed “waste and unoccupied” that did not have a settled form of government. In the early 1900s, Europeans began to stream into the country at the invitation of the colonial government and were allocated the most fertile land upcountry in areas where for generations Africans had farmed, grazed animals, and practised their customs freely. The consequence was that the indigenous people were driven to low-density areas unsuitable for agriculture with low rainfall, poor soil, and absence of pasture. Those who didn’t find a place to settle became squatters in white farms or worked as labourers for Asian merchants. The expropriation of African land by Europeans was done fraudulently and represented one of the first acts of land grabbing and looting by the colonial regime in Kenya. They just grabbed African farms without much effort to hide their activities. Until then, the African lands were secured by the Protectorate.

Regulations of 1897 forbade any alienation of land regularly used by Africans unless the colonial administration was satisfied the land was no longer regularly used and that Africans would not be adversely affected. That changed with the Crown Lands Ordinance of 1902 which gave the government jurisdiction over all lands subject to the right of occupation by Africans. From that time, African ownership of land was not recognized; only occupation and use of it were permitted.

The Unwinnable War: How the Myth of an 'Institutional' Solution Has Hobbled the Fight Against Graft and Wasted Time and Resources

Dawa ya Ufisadi

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In 1915, another Crown Land Ordinance was passed giving whites 999- year leases. It also transferred all lands formerly occupied by Africans to the control of the governor, and barred European landowners from employing non-white managers or supervisors to be in-charge of their holdings. The Ordinance also created African reserves to be located away from white settlements. As the whites entrenched themselves, more land laws were passed to govern different parts of the country making the Land Law in Kenya one of the most complicated land systems in the world. After World War II, the British government heightened the process of settling former servicemen by grabbing more land. Overall, 1% of the white population occupied 16,500 square miles of land.

At that time, crown or public land comprised 76.97% of Kenya. It included everything from forests to lakes and rivers. However, 70% of it was in the dry Northern Frontier Province, inhabited mainly by Somali ethnic groups. Of the total land area, only 1.9% was put to agricultural use at the time and almost all of it by white settlers. Thus, while each of the majority Africans occupied one or two acres on average, whites were sitting on 160 acres each per person.

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In 1935, Archdeacon Eric Burns, a British member of the Kenya Legislative Council (LegCo), complained that chiefs were forcing widows exempted from taxes into paying them a bribe so that the widows could retain their exemptions; and that animals sold in distress for non-payment of tax were undervalued and purchased by the chiefs and their henchmen. The evil of corruption and bribery got worse when colonialists enacted the Chief’s Act in 1937 giving the officials a wider latitude of powers, including maintaining law and order, collecting taxes to help sustain the luxurious lifestyles of whites, overseeing agricultural activities in their areas, and mediating disputes. To meet their financial needs, chiefs habitually confiscated livestock from tax defaulters to swell their herds, and accumulated land that really belonged to other people.” It was routine for chiefs to raid a village and demand surrender of personal property under threats of arrest. They collected hut and poll taxes and retained part of the money. The more levy they collected the more money went into the Exchequer and into their pockets. During colonial times, chiefs commanded respect and trepidation from locals in equal measures. Chiefs exerted themselves to please the authorities, often taking actions that turned out to be abuse of peoples’ rights. They sometimes beat and tortured innocent villagers to demonstrate their commitment to duty and loyalty to their masters. As the government’s “eyes” on the ground, chiefs frequently held barazas to explain colonial plans and policies, and were spokespeople and translators for white administration officials.

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The biggest known case of public corruption in Colonial Kenya involved the construction of the Mbotela and Ofafa housing estates on the east part of Nairobi in the 1950s. According to Joe Khamisi in his seminal work Kenya: Looters and Grabbers: 54 Years of Corruption and Plunder by the Elite, the project was intended to ease accommodation problems created by mass movements of people from the rural areas in search of jobs in the city, as well as the return of African soldiers from World War II. Thirteen thousand bed spaces per year were scheduled to be built over a period of five years at a cost of GBP.2 million (KES.273 million), which was to come as a grant from the Colonial Development Corporation (CDC). In those years, construction work was dominated by big European and Asian owned firms though many small “one-job-at-a-time operations” also existed. Those nondescript companies were prepared to take any job even though they didn’t have proper equipment and relied on cheap unskilled labor. Soon after tendering for the housing project was done and contracts awarded, news went around alleging corrupt practices in the selection process. The Criminal Investigation Department (CID) was called in to investigate. When news reached London, the British government appointed Sir Alan Rose a well-known lawyer to head a three-man commission with a brief to “examine accusations of corruption and malpractices in every aspect of the affairs of the Nairobi City Council.

A long list of contraventions of building specifications was provided, including “shallow excavation of footings, under-strength concreting in floors and lintels, substandard joinery, the use of cheaper, weaker materials throughout, and generally poor standards of workmanship” – all of which had apparently been approved by council officers in exchange for kickbacks. One of several officials implicated in the debacle was the city engineer Harold Whipp. Before the council made the decision to sack him, Whipp committed suicide and his body was found on a railway line. The Commission also unearthed several other cases of misconduct in the council including some in the fire brigade and the city market. The Mayor, Israel Somen, and his deputy, Dobbs Johnson, were cited for corrupt practices. The two survived the scandal and Somen was, after independence, appointed by Tel Aviv as the Israel ambassador to Kenya. The Rose Commission concluded that bribery and corruption were “by no means uncommon” among city office holders at ‘all levels and in all departments’; that the scale of cash inducements involved to secure services or preference from the council was often significant; and that such behavior was accepted as the norm and widely tolerated. So, it wasn’t just African home guards and chiefs who engaged in bribery and extortion in colonial Kenya.

Europeans were as guilty of corruption and malpractice in colonial Nairobi as anyone else, and Africans at the bottom of the colonial racial hierarchy were most often its victim. To stymie the growing trend of corruption in government, the LegCo (Legislative Council) enacted the Prevention of Corruption Act (Cap 65) in 1956, setting out jail terms for any public servant who solicited, accepted or obtained money unlawfully in exchange for service. It also provided for forfeiture of awards of gifts offered in a corrupt manner.” It was the Roe vs.Wade legislation as pertaining to fighting corruption in Kenya.

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On 12 December 1963, the Union Jack was lowered for the last time on Kenya soil, Kenya obtained ‘independence’ from the British. Under its first president, Jomo Kenyatta promulgated its first constitution which laid bare the hopes, dreams and promises of the Kenyan people. The government promised every part of the country will be controlled by the indigenous people of the area. Too, it promised it would eradicate poverty, disease and ignorance and also fight corruption.

However, that arrangement lasted for less than a year as Kenyatta abolished the region-based independence constitution in 1964 and introduced a unitary system of government which gave the presidency executive powers. Corruption took centre stage. An estimated 25,000 people were settled in the month of January 1964 alone. The pace in which the process was implemented implied there was no intention to vet and accord deserving cases their rights, but rather persons had already been predetermined or identified by the authorities.” The bottom line was: corruption was at play. One of the first things Kenyatta did after becoming Prime Minister, was to order a Rolls Royce car from the London’s Motor Show, for his use without any state budgetary provisions or (even) personal intent to pay. In doing so, Kenyatta became the first Kenyan official to violate procurement procedures which required that the Central Tender Board (CTB) call for multiple quotations from suppliers. It was a colonial process which did not change until the 1970s. Kenyatta also ignored the advice of Finance Minister James Gichuru who told him Kenya was short of capital and therefore bankrupt and could not afford the expensive vehicle.

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Having heard the complaints of senior officials in his administration about their inability to do private business because of government restrictions, Kenyatta 1 regime decided to do something. In 1971, Kenyatta appointed a body called the “Public Service Structure and Remuneration Commission” to recommend reforms in the public service on a system established by the colonial government. Known as the Ndegwa Commission, after its Chairman Duncan Ndegwa, the Commission recommended sweeping changes in moral and professional conduct of civil servants. It suggested increases in civil service salaries; the appointment of an ombudsman to oversee integrity in government; and slashing the number of parastatals. Furthermore, it permitted civil servants to engage in private businesses.

The Ndegwa report broke the colonial rule which was observed up to around 1970 that public workers should not engage in businesses. In the meantime, civil servants began immediately to engage in businesses. Soon, the civil service was submerged in corruption from top to bottom. Officers demanded bribes and sold tips and confidential government information to the highest bidders. Service delivery was impacted as many civil servants were often away tending to their private businesses. The Ndegwa allowed people to use their public offices to loot public resources with very little or no accountability.

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When Moi came to power many Kenyans hoped corruption would end. Because Kenya’s second president was a staunch Christian; and as a man with a strong rural upbringing, he was less entangled in the twisted urban lifestyles of intrigues, corruption, and conspiracy. He demonstrated that commitment by lashing at corruption and those involved in it wherever he went in the country, even as his family and cronies were amassing wealth. At one time, he showed up in Parliament to personally lead a debate on a legislation intended to deal with the menace. In 1982, Moi formed a working committee to draft a national code of conduct to deal with various issues including inequitable distribution of resources, misappropriation of public funds, and corruption. In announcing its formation, he accused some of his officials of greed and selfishness and promised tough action. He said his government would no longer tolerate graft and those caught would be punished severely. The working committee, chaired by a prominent businessman, B. M. Gecaga, submitted its report in October 1983, but that was the last time anyone heard of it. The whole charade appeared to be a public relations stint to hoodwink Kenyans into believing he was serious about corruption. It was a show of empty bravado.

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In 1993, the Government established the Police Anti-Corruption Squad in the police force to spearhead the fight against corruption in the Criminal Investigation Department. It was abandoned in 1995. The Prevention of Corruption Act (Cap 65) was amended in 1997 and would lead to the creation of the Kenya Anti-Corruption Authority (KACA), the first government anti-corruption organ established by law to fight corruption. The first Director of the Kenya Anti-Corruption Authority, John Harun Mwau, was appointed in December, 1997. KACA was disbanded in the year 2000 after it was declared unconstitutional by the High Court. This decision was on the basis, among others, that the powers of KACA to prosecute went against Section 26 of the then Constitution which had then preserved powers of prosecution on the Attorney General. After the disbandment of KACA, the Anti-Corruption Police Unit was formed as an administrative organ to continue the fight against corruption.

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In July 1998, Parliament appointed a Select Committee on anti-corruption under the Chairmanship of MP Musikari Kombo and gave it the mandate to study and investigate the causes, nature, extent and impact of corruption in Kenya; identify the key perpetrators and beneficiaries of corruption; recommend immediate and effective measures to be taken against such individuals involved in corruption, recover public property corruptly appropriated by them; and enact a Bill to provide stiff penalties for corruption related offences. The motion led to the enactment of the Anti Corruption and Economic Crimes Bill (2000) which established the Kenya Anti-Corruption Commission (KACC) with responsibilities to investigate corrupt cases and institute civil proceedings for recovery of corruptly obtained assets; and the formation of the Kenya anti-corruption advisory board to be responsible for appointing commissioners, and advise the commission on the performance of its functions. Nothing came out of those efforts until Moi handed over the government to Kibaki in December 2002.

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Kibaki’s victory in the 2002 general elections came as a big sigh of relief that four decades of KANU’s misrule had come to an end. Kenyans dreamed of a new beginning away from corruption, misadministration, and human injustices. Kibaki vowed to deal firmly with corruption which Moi had failed to clamp down. Kibaki said that corruption would cease to be a way of life in Kenya. Soon after being sworn-in, Kibaki moved to create institutions to deal with the challenge. He established the Kenya Anti-Corruption Commission (KACC) and appointed John Githongo as PS in his office to deal with matters of ethics in the public sector. Within a few months, he got Parliament to enact the public officer ethics legislation to compel all public servants to declare their wealth. The legislation tightened protocols to discourage favoritism, nepotism and administrative malpractices in government. From all initial indications, Kenyans were convinced Kibaki was the man to steer the country away from rampant sleaze which had dominated the two previous administrations. KACC was born out of the Anti-Corruption and Economic Crimes Act (ACECA) and the Public Officers Ethics Act of 2003 which became fully operational on 2 May 2003. The Act also established the Kenya Anti- Corruption Advisory Board (KACAB), a body which recommends to Parliament persons to be appointed as director and assistant directors, and advises the commission on the exercise of its powers and performance of its functions. However, while the anti-corruption push, led from the front by President Mwai Kibaki, started with a bang it faltered within eight months. Through a series of circulars, directives, committees, commissions and endless meetings, the fight against corruption was bureaucratised, effectively reduced to an annual laundry list by the anti-corruption authority of what they mostly hadn’t achieved, and the odd court appearance by suspects wearing broad smiles and expensive suits.

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In August 2010, a new constitution was promulgated in Kenya, which made far-reaching changes on governance, leadership, integrity in the anti-corruption regime. Article 79 of the Constitution required Parliament to enact legislation to establish an independent body to ensure compliance with and enforcement of Chapter Six of the Constitution. Pursuant to this Article, Parliament enacted the Ethics and Anti Corruption Commission Act, No. 22 of 2011 which came into effect on 5th September 2011. The Act amended the Anti-Corruption and Economic Crimes Act (ACECA) by repealing the provisions establishing Kenya Anti Corruption Commission and its Advisory Board, while retaining all other provisions relating to corruption offences and economic crimes, their investigation and prosecution.

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After billions of dollars have been spent in the war on graft, today, corruption is undergoing a moral and political paralysis. Largely due to the politicization of corruption by the Kenyan political class in their battles for 2022, and more fundamentally because the standard post-colonial logic that “all would be fine” if it were not for the corruption of some persons and their ability to mobilise their own ethnic groups in pursuit of the public purse has been falsified. The political vernacular of corruption has lost its luster, especially with the millennial generation, who today perceive corruption not as the abuse of public office for private gain but the abuse itself lays in the existence of the public office. Indeed, the very idea and roots of the Kenyan state is that of “corruption” and of the continuous abuse of its citizens.

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The author is an analyst based in Nairobi, Kenya.

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The Drivers of Inflation During the COVID-19 Pandemic

The drivers of inflation during the COVID-19 pandemic period resulted from demand-pull inflation, cost-push inflation and money supply.

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The Drivers of Inflation During the COVID-19 Pandemic
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Jane Muthoni can still put together a tasty ‘ugali-madondo’ dish, a local specialty of Makongeni composed of maize flour and beans in a savory stew.

Trouble is, the dish and other tasty delicacies cost a lot more to make now than they did back in 2015 when she started the business, thanks to the hidden economic forces.

To operate her popular cafe, known by locals as a “kibanda”, Muthoni says she has to pay three times as much for charcoal, and 30 percent more for kerosene, her primary cooking fuels. On top of that, the price of food ingredients is also up – maize flour is up more than 12 percent.

While not all items in the Kenyan economy are experiencing this price inflation, the rising costs are putting extra pressure on businesses that are already struggling with losses related to the health impact of the COVID-19 pandemic.

Inflation generally refers to the upward price movement of goods and services in an economy. It represents the overall loss of purchase power of money. The more prices soar upwards, the less each Kenya shilling is worth.

The Kenya National Bureau of Statistics (KNBS) measures inflation using the Consumer Price Index (CPI). CPI is measured by a weighted average cost of a basket of selected goods and services such as food, housing, health, transport and so on. The inflation rate is typically the average change in the CPI over time, say year to year.

Muthoni, like many other Kenyans, does not necessarily understand why the prices of the items change over time.

This article assesses three drivers of inflation during the COVID-19 pandemic.

1. Demand-Pull Inflation

When the market demand for goods and services, such as flour, beans, charcoal, transport and others that Muthoni needs to run her çafe, outgrows the market supply, it causes demand-pull inflation.

It starts with an increase in demand by consumers, and sellers will react to that demand by increasing their supply. This leads to pressure on the scarce supplies making sellers raise their prices. This is one of the scenarios that result in inflation.

A marginal increase in inflation is observed between March and April in the graph above. This can be attributed to the demand-pull inflation as Kenyans were driven to panic buying and stocking of essential supplies such as food in anticipation of what would happen following the confirmation of the first COVID-19 patient in the country. The growth in aggregate demand resulted in a reduced availability of these goods causing higher prices hence the slight increase in the inflation rate.

Muthoni grappled with this increased cost on food supplies for her cafe which raised her expenses – cutting into her profit margins.

Another reason for demand-pull inflation could have been the depreciation of the Kenya shilling which in turn would increase import prices and reduce prices of exports. This meant fewer people had capacity to import while exporters would earn more. Since Kenya relies heavily on imports, this resulted in a growth of the total demand of goods and services in the economy

To mitigate the effects of the COVID-19 pandemic to the Kenyan economy, the Government approved tax reduction and relief measures that were effected from the 25th April 2020.

This meant that taxpayers had more disposable income. It would be expected that the tax reduction would have raised demand, which would drive the price of goods and services upwards.

However, the reverse is observed on the chart above as the inflation rate steadily decreased from May onwards. This can be explained by the fact that some Kenyans lost jobs (estimated at 1.7 million by the KNBS), some received pay-cuts whereas others, in informal employment, were not eligible.

2. Cost-Push Inflation

When supply costs of goods and services rise due to increasing cost of production or raw materials, and demand remains the same, prices will rise. This will cause cost-push inflation.

Cost-push inflation can be attributed to the expectation of inflation where people foresee prices for goods or services rising. The marginal increase in inflation observed between March and April can be attributed to the uncertainty of the effect of the COVID-19 pandemic.

This could have affected Muthoni’s business as the increased cost of food supplies was transferred from the farmers to producers, from wholesalers to retailers and finally borne by customers like her.

The depreciation of a currency rate can also cause cost-push inflation as it leads to an increase in the prices of imported goods such as raw materials for production. In return, producers transfer this growth in prices to consumers, which results in inflation.

3. Money Supply

All the currency and other liquid assets in an economy is referred to as money supply. It includes both cash and deposits that can be used almost as easily as cash. When there is more money supply in circulation, it will increase market demand. This in turn can lead to more domestic (local) production or an increase in prices. If domestic production is fixed, then any increase in market demand of goods and services will cause a rise in prices leading to inflation.

In response to the COVID-19 pandemic, the Central Bank of Kenya (CBK) reduced the Central Bank Rate (CBR) to 7.25 percent from 8.25 percent and Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent to avert a severe economic and financial crisis. This resulted in more money supply, of Kshs 35.2 billion. This offered banks additional liquidity and funds to lend.

While this offered Muthoni a chance to secure a bank loan, she was not confident that her cash flows would sustain its repayment as her customers kept reducing by the day.

The chart above reveals that the increase in money supply did not cause an increase in inflation. This could be attributed to growth of domestic production at the same rate as money supply, implying that the money is absorbed in production.

It could also be attributed to low circulation of the money in the economy. When the average number of times that money is spent on goods and services is low despite an increase in money supply, the prices are likely to remain low as observed at the peak of the COVID-19 pandemic period.

Was the inflation rate uniform for all the basket items though?

The change in Basket Consumer Price Index was different across various categories.

The main driver for the decline in the inflation rate is consistent decrease in food and non-alcoholic beverages prices from May onwards. This can be linked to the reduction of VAT from 16 percent to 14 percent.

In contrast, the cost of transport increased sharply between June and July. This is attributed to an increase in demand for people travelling following the lifting of the cessation of movement into and out of the Nairobi Metropolitan area, Mombasa county and Mandera county on the 7th of July, 2020.

The cost of alcoholic beverages, tobacco and narcotics remained relatively stable until June when prices started to decline owing to reduced demand as a result of the suspension on the operation of bars.

Muthoni and colleagues dealing in restaurants and food businesses were allowed to remain open only for take away services. However, the demand for restaurants and hotels is seen to dip during the peak period of the COVID-19 pandemic, but things seem to be looking up from the month of August as prices for their services have gone up by close to 3 percent.

Since schools and learning institutions have been closed since March, the prices for education services have barely changed.

The drivers of inflation during the COVID-19 pandemic period resulted from demand-pull inflation, cost-push inflation and money supply. Despite the almost consistent decline in the inflation rates, the change in the Consumer Price Index did not depict a similar trend for all the goods and services.

Additional contribution by Purity Mukami.

This article was first published by Africa Uncensored’s Piga Firimbi

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Kenya Transactions in FinCEN Files Raise Suspicions Around Coffee and Ivory Trade

Twenty-four Kenyan financial institutions were named in the reports as either beneficiaries’ banks or banks through which companies and individuals made suspicious payments from countries that include the United Arab Emirates, Nigeria, the United Kingdom, British Virgin Islands and China.

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At least 53 Kenyan companies and individuals appear in a leak of banking records submitted to the US Department of Treasury as suspicious financial activity, according to an analysis of leaked bank documents by Africa Uncensored.

The documents, submitted by some of the world’s largest banks to the US Department of Treasury’s Financial Crimes Enforcement Network, also known as FinCEN, were obtained by BuzzFeed NewsBuzzFeed News shared the documents with the International Consortium of Investigative Journalists (ICIJ) which coordinated 110 media partners around the world.

The size of the leak, 2,100 suspicious activity reports filed by U.S. banks, or SARs, is unprecedented.  While the documents are not evidence of wrongdoing, they provide a unique, bird’s-eye view of global illicit money flows often obtained through corruption and other crimes.

What is a SAR?
Twenty-four Kenyan financial institutions were named in the reports as either beneficiaries’ banks or banks through which companies and individuals made suspicious payments from countries that include the United Arab Emirates, Nigeria, the United Kingdom, British Virgin Islands and China.

“Banks are at the heart of the finance industry. Both legitimate and illegitimate finance moves through financial institutions. Big money is not carried in suitcases but through very respectable banks and other international financial institutions”, says Alvin Musioma, executive director of Tax Justice Network Africa.

Additional reporting by Africa Uncensored also linked shareholders of Commercial Bank of Africa — now named NCBA Group — which is co-owned by Kenya’s first family, to a company that received millions of US dollars in potentially suspicious payments for coffee and DVD players.

The Coffee Case

The New York branch of Standard Chartered, which acted as an intermediary bank, flagged payments sent to a company called SMS Ltd which the bank identified as having addresses in Kenya, Afghanistan, Uzbekistan, Russia and Bulgaria.

In the reports, the bank described SMS Ltd as being “in [the] pharmaceutical and medical products” industry. However, the bank noted, the companies sending the payments were in completely different lines of businesses, including commodities trading, vegetable oil production, and coffee exports.

Of the $14 million that SMS Ltd received between 2005 and 2013, $3.3 million was paid by Kenyan entities. More than $2 million of that was from two coffee Kenyan dealers, East African Gourmet Coffees Ltd and Servicoff Ltd. In fact, the companies are connected to each other and share company officers with companies linked to the Kenyatta family.

According to company registration documents, East African Gourmet Coffees’ directors include an obscure company with no online presence, New Start Nominee Limited, and two individuals, Kibet Torut and Peter Kimathi Kinyua, who also owns Servicoff Ltd.

One of the shareholders of Servicoff Ltd is  Ropat Nominees Ltd, the second-largest shareholder of NCBA Group, co-owned by President Kenyatta’s family via their company Enke Investments Limited.

The two Ropat Nominees’ directors co-own other companies, including one with John Stuart Armitage, who appears in numerous companies owned by Kenya’s first family. The company, Southbrook Holdings, was recently at the centre of a contentious land sale deal involving the president’s mother.

Contacted by journalists, Peter Kimathi Kinyua said that Servicoff Ltd’s payments to SMS Ltd (registered in Kenya as Sustainable Management Services Limited) have been for the purchase of coffee. He declined to comment on the involvement of Ropat Nominees Ltd except to confirm that the company is part of the nominee shareholders.

“We normally deal with SMS – Sustainable Management Services, a coffee marketing agent at Nairobi Coffee Exchange,” said Kibet Torut while denying knowledge of SMS Ltd and the transactions quoted from the suspicious activity report, in an email response.

Kinyua was appointed by President Uhuru Kenyatta as board chairman for Kenya Forest Service in 2018.

Both Kinyua and Kibet Torut denied having any business ties to the president.

According to their website, Servicoff Ltd, has been growing, processing roasting and blending coffee since 1969. The company shares an email domain name with East African Gourmet Coffees Ltd, the other coffee dealer named in the bank’s report.

Import records confirm that Servicoff has been shipping Washed Kenya Arabica AA coffee since 2007, mainly to the U.S.

The bank report also noted that SMS Ltd had received $1.3 million from Louis Dreyfus Commodities Kenya, listed as a commodity broker in the SAR, the local branch of a global trade firm headquartered in Switzerland that deals in the coffee business too. Africa Uncensored has identified that one of the directors behind the Nairobi branch of Louis Dreyfus is Alexander Mareka Dietz, who is also a director in a company with Udi Mareka Gecaga, a one-time brother-in-law to President Kenyatta.

Reporters were unable to reach Dietz, and automated replies to emails sent to the company address indicate that only approved senders are able to email the company.

Company records obtained by Africa Uncensored reveal that Sustainable Management Services (SMS) Limited is wholly owned by East Africa MM Co. LLC, which is registered in the US state of Delaware, a recognised haven for shell companies due to its reputation for corporate secrecy and tax breaks.

On a US coffee seller’s website, SMS Ltd markets Kenya AA coffee that is handpicked by many small-holding farmers in central Kenya.

According to the Kenya Biogas program website, the company is “one of the partners working with coffee farmers through targeted capacity building on climate change through projects.”

A snapshot of their website in 2016 reveals that SMS Ltd is a group company of Ecom Agro-Industrial Corporation Limited, which is registered in Switzerland with the Esteve family its ultimate beneficial owner. Ecom’s website lists an office at Tatu City coffee park in Ruiru, Kenya where SMS Ltd is located, according to its Facebook page. [3] The Esteve family also runs ECOM Coffee, a leading global coffee miller and coffee trader.

Screenshot of ECOM’s website

Screenshot of ECOM’s website

Screenshot of Sustainable Management Services Ltd’s Facebook page

Screenshot of Sustainable Management Services Ltd’s Facebook page

However, according to the FinCEN files, of the 201 transactions SMS Ltd received totalling over $14 million, more than half came from a Dubai-based vegetable oils production company for the purchase of television and DVD player.

When asked by journalists to comment on why a Kenyan company with a Delaware-registered shareholder markets coffee from Kenyan farmers to Kenyan companies exporting to the US, Musioma, the Tax Justice Network Africa executive director, had this to say:

“The fact that we are talking of companies being registered in tax havens and coming in, speaks of the lax laws we have when it comes to beneficial ownership. You might find that there is a conflict of interest here emanating from the directors of these companies being the ones that are involved in those transactions”.

Reporters were unable to reach SMS Ltd. Emails to the parent company in Switzerland went unanswered.

Victoria Commercial Bank and Middle East Bank (MEB) Kenya Ltd did not respond to questions concerning these transactions, some of which were processed by the banks.

Standard Chartered Bank, whose New York branch filed the suspicious activity report, did not respond in time for publication.

“No More Bullshit”

In another set of transactions in a separate suspicious activity report reviewed by Africa Uncensored, a would-be fashionista named Joyce Oweya Anyumba — a 33-year-old with addresses in Buruburu, Nairobi, and Mombasa — held an account with the Barclays Bank of Kenya from 2015.

Her industry included interior design, curio and African wear, according to Barclays’ report.

However, between July 2015 and October 2016, the account sent and received about 63 wire transfers totalling to $197,094.51. Anyumba received funds from banks in Qatar, the US, Australia, China, Germany and Sweden; she also wired a total of $1234.45 in small payments to individuals in the US, Australia, Canada, Sweden, China and Singapore that the bank could not verify.

The transactions were flagged by the bank because of unidentified sources of funds, unclear economic purposes of the transactions, and potentially being third-party payments.

The justifications for the payments included descriptions such as “bill settlement”, “construction of house” and “consultation fees”, according to the bank’s report.

Other payment details included “government first payment”, “gift finalization of matters discussed”, and “supplier invoice payment to be forwarded”.

One sender from Australia made 13 transfers worth almost $12,000 to Anyumba within a year. The payment details included the mysterious notes: “supplier invoice the money better come back” and “supplier invoice make good on your promise no ivor no more bullshit.” The bank noted in its report: “ivor probably meaning ivory.”

Anyumba denied knowledge of these transactions in an email.

“Am sorry sir, I don’t know what you’re talking about,” said Anyumba when we asked her to confirm the above transactions. She did not reply to our follow up emails on her age, address and whether she is in the business of selling clothes and interior design materials.

There is no legal trade in ivory in Kenya, according to Dr Richard Thomas, the head of communications for TRAFFIC, a UK-based wildlife trade monitoring organisation. “It doesn’t come as any surprise to hear you say there’s essentially no record of [the parties]”, Thomas told reporters.

“Wildlife is like any other commodity that’s traded: there’s buyers and sellers and money changes hands. International commercial ivory trade is banned under CITES, but the trafficking of it takes place, run by largely Asia-based organised criminal syndicates. One effective strategy to targeting such networks is through following the money”, said Thomas.

Other senders of money to Anyumba include an American man with a history of shoplifting and bankruptcy, according to the bank’s suspicious activity report.

The account was expected to have an annual turnover of about 16 million Kenya shillings ($160,000), according to Barclays, but the customer received significant transactions whose real economic purposes could not be identified.

“Barclays Kenya has filed a SAR on Anyumba with their local regulator and is in the process of exiting the relationship,” the report noted.

The Kenya branch of Barclays Bank — now known as ABSA Bank Kenya PLC — had not answered our questions regarding the specifics of the transactions by the time of publication.

Musioma listed some general concerns of suspicious trade through Kenya because the country serves as a hub for drug smuggling and illicit trade in all kinds of goods, including ivory and smuggled minerals.

“All these monies are not carried in suitcases or wheelbarrows. The banking sector is at the centre of it. And I don’t think that both the Central Bank and regulators are doing enough to stretch banks in terms of punitive measures,”  said Musioma.

Many of the transactions flagged as suspicious by banks in the FinCEN Files involve recipients and originators from Kenya and other high-risk jurisdictions, including Cyprus, Mauritius, Moldova, Latvia, Afghanistan, Russia and Turkey.

Musioma likened banks to providers of “getaway cars” in crime and corruption in the country — the so-called intermediaries in terms of them providing the oil to enable corruption. “So, the fight against corruption, illicit financial flows and money laundering and all these other crimes can never be won without bringing in the central role banks play”.

Much more could be done to address the role of Kenyan banks in money laundering and other financial crimes, according to Musioma. For example, increasing the punishment for banks who break regulations designed to prevent illicit flows, improve due diligence in the banks’ compliance procedures, and address the issue of the revolving door.“ We have seen people moving in from the banking sector to become regulators and that will create a conflict of interest in the banking industry,” he said.

With Kenya working on being a regional financial centre, through the Nairobi International Finance Centre (NIFC) the regulation and enforcement of the financial sector must be tightened, the tax expert concluded.

Additional reporting by Juliet Atellah, data journalist at The Elephant.

John-Allan Namu, Martha Mendoza of AP and Kira Zalan of OCCRP contributed to this article.

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COVID-19: Why It Might Get Difficult to Access Bank Loans

Local banks are seeing a growing percentage of their borrowers falling behind or ceasing making payments on their loans. This is making it increasingly difficult for these lenders to issue new loans at a time when struggling businesses need all the help they can get.

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COVID-19: Why It Might Get Difficult to Access Bank Loans
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Small businesses account for the vast majority of employment and job growth in the Kenyan economy. But these firms have been disproportionately impacted by the COVID-19 pandemic and are now facing a credit crunch.

Local banks are seeing a growing percentage of loans fall into the “non-performing” category – meaning that borrowers have fallen behind or ceased making payments.

This is making it increasingly difficult for these lenders to issue new loans at a time when struggling businesses need all the help they can get.

According to the KNBS Economic Survey, the informal sector provided approximately 83% of total employment in the country and created 91% of the new jobs last year.

The Capital Markets Authority (CMA) estimates that 86% of the total demand for the Small and Medium Enterprises’ (SMEs) funds is obtained from bank financing.

As such, most banks in Kenya have tailored loan products targeting these SMEs.

The demand highlighted above led to the launch of an unsecured loan, Stawi, by the Central Bank of Kenya (CBK) in collaboration with five other banks, targeting SMEs. However COVID-19 pandemic has posed challenges to these efforts.

The measures put in place to contain the spread of the pandemic such as restricted movement and curfews have impaired the operations of SMEs. This has, in turn, negatively impacted revenue streams for many. This poses a challenge to banks who have heavily  lent to these businesses. When the affected SMEs cannot repay their loans, it   impacts the bank’s loan portfolio whose quality is dictated by the creditworthiness of the borrowers.

This article focuses on examining the loan quality of local banks during this pandemic period by analyzing their non-performing loans. The loan portfolio quality is an extremely important component of a bank’s profile because loans are considered an asset out of which a bank produces the bulk of its profits.

A bank that is able to maintain satisfactory quality will make sufficient profits to generate capital for expansion. However, not all of a bank’s customers will pay back what they borrowed. Some will make repayments for a period of time and then default on the full payment of interest and principal.  In a nutshell, Non-Performing Loans (NPL) represent loans in which the interest or principal is more than 90 days overdue.

We analyse the banks’ loan portfolio quality between the first quarter of 2019 and the second quarter of 2020 for three publicly listed banks that are offering the Stawi loan product, namely: KCB, Co-operative Bank (Co-op) and Diamond Trust Bank (DTB).

Non-Performing Loans (NPL) Ratio

The loan portfolio quality of banks is measured by their NPL ratio -the amount of non-performing loans as a proportion of the total loans issued to customers;  popularly known as the banks’ loan book.

The ratio reveals the extent to which a bank has lent money to borrowers who are not paying it back.

COVID-19: Why It Might Get Difficult to Access Bank Loans
Both KCB and Co-operative Bank experienced an increased NPL ratio between the first and second quarters of 2020. This indicates a deteriorating loan portfolio quality within the period that SMEs’ revenue generation streams have been strained due to the measures put in place to contain the COVID 19 pandemic.

Indeed, KCB moved from an NPL ratio of 7 % to an NPL ratio of 10% during the pandemic; meaning they were losing 3 more shillings for every 100 shillings they issued as loans to defaulting borrowers.

COVID-19: Why It Might Get Difficult to Access Bank LoansA look at the rate of growth of the loan portfolio in the chart above reveals that the three banks experienced a sharp dip in the amount in loans they advanced to their respective customers. This shows that banks shied away from issuing more loans to their customers within the period the pandemic peaked.

“Borrowers rushed to seek moratoriums on their loan repayment. For banks, this is a loss of interest income, while it’s crucial so as to avoid these loans [from] falling into the NPL category which would reduce profits through provisions,” CPA Alex Muikamba, a financial expert affirms.

Interest Income versus Non-Performing Loans

Since margins on bank loans are usually low, the complete loss of a single non-performing loan can wipe out the profits generated from dozens of performing loans. We now compare the interest income from the loans with the amount of Non-Performing loans.

COVID-19: Why It Might Get Difficult to Access Bank Loans

COVID-19: Why It Might Get Difficult to Access Bank Loans

COVID-19: Why It Might Get Difficult to Access Bank Loans
It is observed that the total non-performing loans exceeded the interest income from loans and advances in most quarters for the three banks.

When loans are classified as non-performing, banks are compelled to stop accruing interest on those assets. This implies that their net interest income will fall as their funding costs remain unchanged.

Loan-Loss Provisions

Banks usually set aside an allowance for uncollected loans from customers to cover for any losses that may be occasioned by the Non-Performing loans.  This allowance is referred to as the loan-loss provisioning.

During the peak period of the pandemic in the second quarter of 2020, banks are seen to have increased their loan-loss provisioning in response to the declining loan portfolio so as to remedy the situation before it gets out of hand. The KCB increased their loan loss provisioning to a greater extent as compared to the other two banks that were analyzed. This is because of the higher increase in its non-performing loans as observed in the sharp rise of its NPL ratio.

COVID-19: Why It Might Get Difficult to Access Bank LoansThese increased provisioning costs will be charged against operating income and will fall through to the bottom line, reducing net income attributable to shareholders.

As uncertainty surrounds the time it will take for the economy to recover from the effects of the pandemic, so is the recovery of affected SMEs borrowers.

What happens to the Non-Performing Loans though?

Muikamba suggests that to mitigate NPLs, banks will have to restructure the loans to make it easier for borrowers to repay by extending the loan terms and hence reducing the instalment.

In a circular on the measures to mitigate the adverse impact of COVID-19 on loans and advances, the CBK recommended loan restructuring where a bank may negotiate with the borrower to work out revised terms to enable the borrower to make payment under more relaxed terms. This relief, however, was granted only to those borrowers whose loans were performing as at 2nd March 2020. For borrowers who were already struggling to make their repayments, they would have to contend with foreclosure which involves the recovery of any collateral used to secure the loan.

For unsecured loans, banks would be obliged to write-off the loans by removing them from their balance sheet.

In the extreme event where write-offs exceed existing loan-loss reserves and available profits from other sources, shareholders’ equity will have to be written down.

This would in turn affect capital levels which could necessitate new funding to ensure the banks meet the regulatory minimum capital requirements. The banks could also strengthen their capital levels by reducing loan growth so as to shrink its loan portfolio. In such a scenario, it would mean that you would have a difficult time accessing a bank loan.


Additional contribution by Purity Mukami. This article was first published by Africa Uncensored’s Piga Firimbi.

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