Kenya’s Investor Protection Laws and Enforcement Needs a Review

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A few weeks ago, while watching Jeff Koinange Live (JKL), COTU Secretary General Francis Atwoli made an allegation that would qualify for a criminal investigation in any serious country. Atwoli claimed that his beef with City Lawyer Ahmed Nassir was a result of the latter’s claim of legal fees exceeding Ksh. 100 hundred million from the National Bank of Kenya (NBK), and out of mercy and sympathy, Atwoli authorized a Ksh. 50 million payment instead of Ksh. 25 million.

These were investor funds dished out with abandon, and as we talk, the bank has been acquired after a series of loss-making years. NBK was making losses at a time when other well-managed banks were recording increasing revenues, evidence that there was looting going on.

NBK is not an exception to banks that had been abused by people entrusted to manage them. Chase Bank, Imperial Bank, and many others were mismanaged to the end, with investors crying all the way from the bank. These banks hold depositors’ funds and hold billions of investor funds. These are Kenyans who rely on these resources to keep stimulating and growing the economy. But the trend of freezing investors and other stakeholders extends beyond the banking sector.

The now under administration Nakumatt Holdings went down with over Ksh. 35 billion owed to Kenyans, including employees, bondholders, commercial banks, and creditors. The country’s weak laws failed to offer sufficient scrutiny to protect creditors, suppliers, employees, and other interest parties. Family-owned Tusky’s Supermarket seems to be heading the same direction. While some may assume that the people who will lose most are the owners, the weak laws and enforcement mechanism may have created room for the same owners to defraud other business stakeholders like creditors, bondholders, and suppliers.

Arbitrarily, if one billion in the hands of small investors can create a thousand jobs, then one trillion will create a million jobs. That means every billion that is frozen from the public means loss of a thousand jobs.

A smaller farmer in Nyandarua supplies his milk on credit to a local processor that supplies on credit to Nakumatt or Tuskys, when these entities collapse and fail to honor payments to the local dairy processor, the processor passes the losses to the local farmer. That means the collapse of Tuskys in Nairobi will affect a farmer in Nyahururu. Prior to its collapse, Nakumatt issued bonds worth Ksh. 5 billion. These are bonds that were purchased by small local investors: teachers, lawyers, engineers, and many Kenyans who had no privilege of foreseeing the danger. The collapse of the firm means that Kenyans lost their money. Exploiting the weak investor protection laws, now almost everyone is running some shady businesses whose exit plan is to freeze Kenyans. It has happened with the many Real Estate firms that most recently were permanent features in the media. There have been other pyramid schemes that milked the ignorance of the people. While people tend to place blame in gullible Kenyans, they aren’t entirely correct.

Just like Atwoli’s claim that expressed level of abandon in public firms, the same run at every level. The stock market is full of firms that are run opaquely, and mostly in violation of laws and regulations that govern public firms. The result is millions of Kenyans losing money, amounting to billions to a handful of view individuals. Investors losing money is more than them being careless. I have noted that projects like Banda Homes mark every due diligence box. That means the most careful investor would do everything and reach the conclusion that the investment is worth it. In a country where morality and ethics are afterthoughts, such genuine projects turn ghost projects overnight. Directors can collect money and suspend projects halfway and proceed to live lavishly on investor expense. With the weak laws, most of those directors are hardly executed.

The effect of conning investors is huge in the economy. The combined losses from Goldenscape to Imperial Bank, NBK, Chase Bank, and others are worth billions. These are resources that can stimulate the economy, but the careless regime leaves a few people to con others and transfer the loot to offshore accounts. Arbitrarily, if one billion in the hands of small investors can create a thousand jobs, then one trillion will create a million jobs. That means every billion that is frozen from the public means loss of a thousand jobs.

The problem with white-collar crime is that they are made to look like they have fewer victims. For instance, the collapse of Nakumatt was seen as a loss to the renowned Indian owners, but few understand that normal investor lost billions, thousands of suppliers who lost money and possibly passed these losses up to village level, and thousands of employees lost not just their jobs, but also salaries that had accrued for months. A proper country moves to protect all these stakeholders.

I was frustrated the other day when the Competition Authority fined Carrefour less than a million after they were found guilty of abusing their powers to force suppliers to offer unfair trade terms. The same model was employed by Nakumatt to demand huge credit items from suppliers, only to fleece them later.

As a country, we need to raise consciousness about investor protection. We need new laws with punitive punishments for people who defraud innocent persons. More importantly, the country needs a thorough enforcement mechanism to control excesses like the one Atwoli was mentioning. It is such huge unjustified pay-outs that led to the collapse of NBK at a time when rivals were making profits. Before you think that a person who has been conned at Banda Homes is stupid, remember that directors are serious firms like big banks can engage in malpractices, and the next thing the thousands of shareholders will lose their investments, millions of depositors will risk losing their money, and thousands will lose their jobs. Tough laws to safeguard the interest of all stakeholders are required, particularly against directors who are coming out as the major culprits. As things stand, Kenyans can lose their investments anywhere with the least possibility of redress.

The views expressed here are those of the author and do not necessarily reflect the position of Nairobi Cool or Gram Media. 

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Philemon AroniMasita Atinda Recent comment authors
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Masita Atinda
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Masita Atinda

This. “In a country where morality and ethics is an afterthought…”
Such white collar con-Rackets have sunk lots of upstarts, people’s lives and livelihoods. Painful.

Philemon Aroni
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Philemon Aroni

The problem in Kenya, and indeed the whole world, is not weak laws! Rather, the problem is a well choreographed and hidden network of conflict of interest. With such well camouflaged conflict of interest networks there is no law that can stand! A good law is nothing where the Executive of the Country’s governance, or its agents or family members, are the hidden owners of the Banks, Supermarkets, and other money minting arrangements that do business with the public. Such business arrangements are designed and structured to syphon out finds right from inception. They are timed to come into the… Read more »