Kenya is keen to become more of a key player in the commodity financing market, but there are many obstacles to overcome, writes Shannon Manders.
Kenya has not been privy to celebrated structured commodity deals such as Ghana’s Cocobod and Angola’s Sonangol, mainly because of the stiff competition among banks in the market. As a result, the margins of these transactions have eroded over the years.
“The pricing is very competitive,” says Kennedy Shimekha, head, trade finance at Barclays Bank of Kenya. “Most of the commodity financing transactions are a little too expensive to put into place when you look at costs associated with third party service providers that banks require to enhance the credit profile of these deals and at the same mitigate the transactional risks,” he says.
A lack of skill could also be the reason for Kenya’s deal shortage. “Banks don’t have the knowledge to structure deals,” says a trade financier based in Kenya. “Banks don’t want to take the risks – especially Kenyan banks. There is a lot of business out there, but there is no appetite.”
Banks are far more careful than they have ever been – particularly when it comes to oil.”
Confidence in the market was jolted as a result of the 2009 Triton oil scam, which hit not only the oil company but also the structured and commodity finance business at large. The scandal involved the unauthorised leasing of oil by the Kenya Pipeline Company (KPC) without informing financiers.
“Banks are far more careful than they have ever been – particularly when it comes to oil,” says Paras Shah, partner at law firm Hamilton Harrison & Mathews. “To some extent, for a little while, banks stopped financing oil.”
However, Shah notes that the whole structure of financing the product into Kenya was looked at and has since been tightened up in terms of collateral management. As a result, the firm is currently working on a “fair amount” of oil trade financing deals, all of which are in excess of US$100mn and involve large local banks such as Standard Chartered. Other banks, including BNP Paribas and FirstRand, and traditional oil financiers such as Glencore, are also participating.
We are losing a lot of work, and the country is losing a lot of work.”
Humphrey Mwangi, senior underwriter at the African Trade Insurance Agency (ATI) in Nairobi believes that there is still much conservatism – especially among the local banks.
“The only evidence you need for that is to look at the balance sheets of banks, and see how much money they’re putting into government securities,” he says. “Banks are looking at safety rather than getting into risky transactions. Having said that, there are international banks coming into the country and stealing the thunder from the local banks.”
Kariuki Mwangi, head of trade finance at Commercial Bank of Africa (CBA) and Barclays’ Shimekha both list poor legislation as another reason for the country’s undeveloped structured commodity finance market.
Shah at HHM agrees that the issues regarding this type of financing is mainly related to cost. For one, the stamp duty involved in taking security is fairly high – although it has been reduced in this year’s budget.
Secondly, law firms’ legal fees are set by the government and as such are exorbitantly high for such transactions. “They could be between 0.6 and 1% of the total size of the deal,” explains Shah.
“We are losing a lot of work, and the country is losing a lot of work,” says Shah. “There would be a huge amount more structured finance in this country were it not for those prohibitive fees.”
In addition to these issues is the fact that the enforcement procedures for securities – particularly the judiciary – can be “excruciatingly slow”, says Shah. But although lenders may be wary of this, he admits that it does not prohibit deals from happening.
Nevertheless, Shah predicts an upward trend for structured financing in Kenya. “The future looks positive – particularly on the agricultural commodities and on the oil side.”
While investment into commodity financing may be slow on the uptake, Kenya’s infrastructure spend is increasing, with more and more foreign financiers keen to invest in the country’s projects.
Kenya has been improving and expanding its infrastructure with the aim to attracting and retaining investors who often complain that its dilapidated facilities increase the cost of doing business. It is hoped that this initiative will also boost the country’s ability to finance commodities.
With the Chinese we are seeing a whole new ball game.”
China in particular has increased its activity with the East African country, with major contracts being undertaken by Chinese companies – mainly in road, railway and port infrastructure, energy and oil exploration.
“With the Chinese we are seeing a whole new ball game,” says Shimekha at Barclays Bank of Kenya, who notes that Chinese investors are little concerned with a country’s political environment.
“The Africa-China flows present a great opportunity for a country like Kenya. And it’s coming at a time when the country is making positive leaps in its political and economic climate. That, coupled with the flows of the other Asia Pacific countries like India and Japan will certainly enable Kenya to stride towards achieving its Vision 2030 objectives, which seek to transform Kenya into a rapidly industrialising middle-income nation by the year 2030.”
There’s a huge amount of growth that for the next few years is going to come from within the region.”
The Kenyan government increased government spending in 2010/11 in its bid to improve infrastructure and sustain its economic recovery.
Kenya’s finance minister Uhuru Kenyatta announced a 15% increase over 2009/10 budgets, with the allocation for infrastructure increased by 20%.
“There’s a huge amount of growth that for the next few years is going to come from within the region,” says Michael Wachira, director, treasury and trade finance at Equity Bank in Nairobi.
“The heavy investment in infrastructure, especially in roads and energy projects, significantly improves the efficiencies and costs of intra-regional trade. Only a few years ago it might have been much easier to move goods from Europe to Mombasa than from Kigali to Mombasa, but now all that is changing.”
In September last year, Kenya invited bids for the first phase of construction of a new port in Lamu – part of a proposed US$22bn development plan to connect the country to Southern Sudan and Ethiopia and decongest the port of Mombasa. The project is set to include an oil pipeline, roads, railways and airports in major towns along the way, bringing with it many opportunities for trade finance.
According to the country’s most recent budget statement, close to US$1bn will be spent on roads alone in order to increase trade and reduce transport costs for local enterprises. A total of US$423mn will be spent on power infrastructure, of which US$144mn is allocated for geothermal projects.
In January, China Exim and the French development agency, Agence Francaise de Developpement (AFD) pledged to lend Kenya US$163mn to purchase five drilling rigs to tap the country’s steam reserves. By 2030, the country aims to have generating capacity of 5,000 MW of geothermal electricity, which will ease dependency on its main hydroelectric providers.
The Kenya Electricity Generating Company, (KenGen) plans to increase the country’s geothermal power production capacity by an additional 210MW to be installed at the Olkaria geothermal field. According to Kariuki Mwangi, head of trade finance at CBA, bids have been invited for the US$400mn that will be raised to finance Olkaria IV, a new geothermal power station. “It is widely believed that there will be oversubscription by local and international banking and financial institutions,” says Mwangi. GTR