To Crypto or Not To Crypto?

👋 Welcome to the Baobab Weekly by Mwango Capital, a newsletter that brings you a succinct summary of key capital markets and business news items from East Africa.
This week, we cover the new discussion paper by the CBK on crypto, the new CEO at WPPScanGroup and debt issues in Kenya. 

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To Crypto or Not To Crypto?

Big step: The Central Bank of Kenya published a discussion paper on Central Bank Digital Currencies (CBDCs). This significant step in seeking public participation in digital currencies has been seen as a sign that there are changing winds at the Central Bank of Kenya given that the governor, Dr. Patrick Njoroge has on several occasions reiterated the bank’s anti-crypto stance. To the bank’s credit, throughout this period there have been reports that various stakeholder meetings and interactions with members of the public and practitioners in the space have been happening.

What are CBDCs? CBDCs are a digital version of cash issued by the central banks. CBDCs broadly cover government-issued digital legal tender but with universal acceptability in mind. In the age of 4IR and blockchain, most CBDCs generally tend to be implementations of common blockchain frameworks to variants of government-issued currency creating stores of values mapped to fiat and similar in practice to stable coins.

Around Africa: Last year the new Tanzanian president, Samia Suluhu urged the Tanzanian Central Bank to look into cryptocurrencies. Backpedalling from a total ban on cryptocurrencies in Nigeria, the Nigerian Central Bank introduced a CBDC dubbed the e-Naira in Oct 2021. This follows initiatives by other central banks around the world including:-

Call for Comments: CBK notes that there are two use cases of CBDCs in Kenya, retail payments and cross-border payments. They are calling for public participation via comments no later than May 20th, 2022 via email or web. Coincidentally, this is the same deadline the Federal Reserve has on the same topic and activity 🤔

CBK’s call for comments

Federal Reserve’s call for comments

M&A in the Kenyan Microfinance Space

Two deals in the space of one month have jolted into life the Microfinance space in Kenya. 

First, the National Treasury exempted digital lender Branch International from Sec 19 of the Microfinance Act for a period of 4 years to end-2025 in its acquisition of Century Microfinance Bank paving the way for a formal announcement from the Central Bank of this acquisition. Branch intends to acquire an 85% stake, for which it had to seek exemption since Sec 19 bars 25%+ individual holding. Century has an asset base of KES 350M while Branch has an asset base of KES 1.1B.  

The move is significant as this is the first time a digital lender seeks to acquire a traditional microfinance institution in Kenya. We reached out to the Co-Founder/CEO Matt Flannery for comment on the acquisition and this is what he had to say: 

Becoming a bank has been our vision from the beginning. That’s why we named it Branch.  We want to offer all citizens the level of service once reserved for the rich. We are rolling out this strategy all over Africa and we hope to complete the transition in several countries this year.  

Later, the CBK announced a 73% acquisition of Key Microfinance by LOLC Mauritius Holdings Limited after a Dec 2021 approval under Sec 19(4) of the Microfinance Act by the National Treasury. Key has a market share of less than 1% and has been in operation for more than a decade.

Last year, Uwezo Microfinance Bank was acquired by Salaam African Bank and Choice Microfinance was acquired by Wakanda Network.

Prudential Financial Completes ICEA Acquisition

Done Deal: Prudential Financial, an American Fortune Global 500 and Fortune 500 company, said that it has completed the acquisition of a minority stake in ICEA Lion through a separately managed fund called  LeapFrog Strategic Africa Investments (LSAI). This is part of the company’s eye to expand its presence in emerging markets and makes it the second such acquisition for the LSAI fund after investing in the Enterprise Group Limited in Ghana in 2017. 

From the company’s latest financial results:  

“Meanwhile, on the emerging markets front, we closed on an investment in ICEA LION Holdings, a highly respected financial services market leader in Kenya with operations in Tanzania and Uganda” – Charles Frederick Lowrey, Chairman, CEO & President of Prudential Financial.

LSAI:  LSAI is a USD 350 Million separate managed fund that was formed as an investment partnership in 2016 between LeapFrog Investments and Prudential Financial. The aim is to invest in high-quality life insurance companies in Africa. Prudential is a global financial services provider through providing products in the insurance and investment management space while LeapFro, which was founded in 2007, invests in exceptional businesses in Africa and Asia. The deal was announced in 2020 and was to see LSAI acquire a 24% shareholding in ICEA LION Holdings subject to various regulatory approvals and other conditions precedent, which seem to have been fulfilled. 

WPP ScanGroup Gets New CEO

New Sheriff in Town: Patricia Ithau was announced as the new WPP Scangroup CEO. Markets welcomed the move as its shares on the NSE edged 3.70% higher in intraday trade on the day of the announcement. This is a sign of fresh times for a company that has had a tough past year.

Rough Patch: WPP Scangroup’s challenges started with the suspension of its CEO and CFO on February 19 2021 for unspecified reasons. The ensuing investigations pushed the firm to postpone the release of its financial results for the year ended December 31 2020 to August 31, 2021. In August 2021, the firm said that nothing substantial was uncovered in the probe. 

FY 2020: The financial results showed an increase in net profit from KES 431.9M in FY 2019 to KES 469.2M in FY 2020 as a result of Scangroup’s disposal of its subsidiary Kantar Africa at KES 2.2B. This helped offset losses and register a 462.9M net profit in what would otherwise be a KES 1.7B loss from continuing operations. No dividends were declared for FY 2020. There was a KES 8 dividend in FY 2019 though. 

Profit Warning: Patricia has her work cut out for her as the company has recently issued a profit warning for the financial year ended 31st December 2021. 

Diversity: Other companies with women CEOs are: Limuru Tea, Eveready, DTB, KenGen, BOC, BK Group, and EABL.

Eveready Results Out

One of three: Eveready, one of three NSE companies – others being Car & General and Sasini – that have their FY ending on September 30; reported results for the year ended 30th September 2021. Eveready is a leading provider of portable power solutions in Kenya, operating in automotive, household, and lighting segments.

Results summary: This is how the company performed:

  • Net sales dropped 32.8% YoY.
  • Loss for the year was reduced by 49%. The company’s loss for FY 2020 was KES 69M, and in FY 2021, the company made a KES 35M loss.
  • Cash flows at the end of the year were reduced by 57% YoY.
  • The company is not paying any dividends this year..

Missed deadlines: The company had missed the CMA reporting deadline of 31 January 2022 due to what the firm called “unavoidable circumstances”. 

History: While sales have reduced 52.8% from 2019 to 2021, losses have reduced 88% which could be a sign of restructuring with a path to profitability. Between 2013 and 2021, the firm has turned a profit twice – in 2013, and in 2017. 

Kenya Among The Fragile Five

Debt-laden: Standard Bank Group issued a report this week that named Kenya among the “fragile five” in terms of debt of 18 countries. These are countries that face debt risks over the next two years. Starting with Kenya, the country faces debt-service costs that make up more than 33% of forex reserves and 43% of tax revenues and has a high concentration of commercial loans (28.8% of total debt in 2020-21).

The other 4: The other countries in the Fragile Five are:  

  • Ghana: Commercial lenders own at least 50% of its debt and the spread of the Ghana-US Treasuries of over 1,000bps shows a country in debt distress. (Interesting how Standard bank says Kenya would be in the same bracket as Ghana save for the IMF program last year)
  • Angola: 77.1% of Angola’s debt is held by commercial lenders. Standard Group points to weak investments in the oil sector and an ending IMF program as key red flags.  
  • Ethiopia: Foreign exchange shortages, the ongoing civil war, and short-term debt service take up significant foreign-exchange reserves.
  • Zambia: The country defaulted on its debt in the pandemic era in 2020 as commercial loans stand at 78.1%. There is a $1.4B IMF facility that came to the rescue which is tied to progress on the country’s debt restructuring under the Common Framework.

Uganda the silver lining: Uganda’s outlook is bright as the economy is set to recover strongly after the lifting of restrictions. It is forecasted to grow 4.5% in 2022 and 6.1% in 2023.

What Else Happened This Week?

🌍 $9B Africa Airlines Losses:: The African Airlines Association, in a report, noted that 2020 and 2021 losses of African airlines hit $10.21B and $8.6B on COVID restrictions. The losses are equivalent to 58.8% and 49.8% of 2019 revenues. [Africa Airlines Performance Update]

As a result of these uncoordinated measures, air passenger traffic from January to December was only 42.3% compared to the same period in 2019.  Capacity reached 52.7%. In January 2022, the capacity is expected to inch up by 6.3% to 59% while air passenger traffic will see a marginal increase of 0.3 from the previous month.

💸 Money Laundering in Tanzania: Proposed amendments on the Money Laundering Act tabled by Finance and Planning Minister Dr. Mwigulu Nchembato in the National Assembly seek to grant bail for people charged with money laundering. They are now inviting members of the public to issue comments on the proposals. In Tanzania, people can stay in jail for four or five years over money laundering as the offense does not have bail. [The East African].

“That is what complaints from most citizens are about. Someone could stay behind bars for four or five years over money laundering charges, adversely impacting his/her dependents. The amendment should also differentiate between theft and money laundering because some citizens have adversely suffered due failure to differentiate the two.”

🟢 Hunter becomes the hunted: Markets regulator CMA got the nod through a Court of Appeal ruling to investigate auditor Ernst & Young over Uchumi books. At the crux of the matter are transactions totaling KES 1.9B. CMA summons to E&Y executives in 2016 to shed light on 2014 and 2015 accounts were not honored. KPMG’s forensic audit for 2010 to 2014 Financial Years showed misleading information in the accounts. 

🍔The global brand of KFC, owned by Yum China Holdings, reported their full-year results and they seem unaffected by the #BoycottKFC. There was no mention of potato shortages or the issue of Kenya.  

🌍 African Markets:

Sentiments were mainly positive on the African equity markets this week. With NSX OI Namibia’s overall Index  edging up 3.9 basis points WoW the highest for the week ended 11th February. Namibia remains the most attractive market for investors returning 14.9% on a USD, Year to Date basis followed closely by Nigeria at 9.2%. The Ugandan Stock Exchange shed 0.9% of total investor value, the highest drop on the continent this week.

East Africa: East African markets were bearish for the week with average performance at -0.1%. Top performer was the Nairobi Bourse registering a 0.6% in investor wealth.

North Africa:  North African markets performance was fairly positive with the exception of the Egyptian markets which ended the week at -0.5% .

South of Africa: South African markets rallied this week registering an average performance of 1.3%. All markets in the South of Africa closed the week in the green with the best performer being Namibia followed closely by South Africa.

West Africa:  BRVM’s Composite Index, a regional stock index serving West African Economic and Monetary Union (WAEMU) countries: Côte d’Ivoire, Mali, Senegal, Togo, Burkina Faso et and Niger returned 2.06% Week on Week the best performer in West Africa. The Average performance WoW for West African markets closed at 0.7% .

📊 Charts of the Week:

Surging Oil Prices: Oil prices are surging [WTI +59%, Brent +54% over the last 1 year] as geopolitical tensions rise and economies try to get past the pandemic. 

COVID-19 Vaccination in Africa: Only 11% of people in Africa have been fully vaccinated, with 5.3% partially vaccinated. 61.7% of the world population has received at least one dose of a COVID-19 vaccine and 10.34B doses have been administered globally. [Our World in Data]

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