China’s foray into Africa is changing the way local trade finance banks operate. Reporting from Nairobi, Sanne Wass investigates how the Chinese engagement in Kenya is impacting the country’s financiers.
It was a big moment in Kenya’s history when, one year ago, passengers were welcomed on to the Madaraka Express for the first time. The country’s new US$3.6bn standard-gauge railway (SGR) project, three years in the making, now allows people to travel from Nairobi to Mombasa in just four-and-a-half hours – quite an improvement from the nine hours by bus or 12 hours it took on the previous railway.
Being Kenya’s largest infrastructure project since its independence, the SGR is described as a game-changer that will boost commercial activity and trade in the region. But it carries a broader symbolic value: built and financed by the Chinese, the railway forms part of China’s Belt and Road Initiative of massive global infrastructure projects. As such, the 470km line and its nine modern stations are an obvious representation of China’s growing ambition to assert its power on the African continent.
The SGR is just one of many Chinese-funded projects in Kenya. According to a statement from the Kenyan government in June, since December 2015 the East African country has received no less than 13 grant projects worth US$102mn, four preferential loans projects worth US$292mn, 14 commercial projects worth US$8.545bn and other investment projects amounting US$564mn, from China.
There are no signs that this trend will abate. As this article is being written, a delegation of China’s ruling political party is in Kenya for what has been billed a mission to deepen mutual co-operation and bilateral relations. On the delegation are the chairs of China Exim Bank and the China Communications Construction Company, who, according to media reports, are in the country to hear further investment proposals.
During the visit, Kenyan President Uhuru Kenyatta announced he will establish consulates in Guangzhou and Shanghai to “facilitate the growing interaction between our peoples”, adding that Kenya is “satisfied with the tremendous progress achieved” in the bilateral co-operation between the two countries over the past decade.
Good or bad debt?
For the most part, Chinese activity is welcomed in Kenya as a necessity for the nation’s economic growth. It is also deemed good for the trade finance business of the dozens of banks in the country. Theo Osogo, director of business development at Sidian Bank, for one, says the bank has benefitted hugely from Chinese investments.
“I’m now issuing performance bonds and guarantees for Chinese companies. Those are clients I never had before,” he says. “In fact, as we speak, I’m looking for a Chinese speaking national to employ.”
That’s not an unusual statement in the Kenya of today. Various banking sources tell GTR that most Kenyan banks now have Chinese relationship managers, or have even created full Chinese centres.
“It’s getting more common that Kenyan banks have a dedicated desk run by Chinese staff that are fully focused on bringing the Chinese business onboard,” explains Janet Mulu, trade finance manager at Ecobank in Kenya, adding that the bank’s Nairobi office currently has two Chinese staff members. “This ensures that the banks are able to compete, as everyone wants a slice of the pie.”
But there are also concerns attached to the growing levels of Chinese money and products flowing into Kenya, with critics arguing that China has only contributed to burdening Kenyans (as well as its African neighbours) with more debt. As of June 2017, China controlled no less than 66% of Kenya’s total Sh722.6bn (US$7.2bn) bilateral debt, according to the Kenya National Bureau of Statistics in its 2018 economic survey.
At Sh478.6bn (US$4.75bn), this is more than a seven-fold increase from China’s Sh63bn (US$625mn) debt to Kenya in 2013. One of the key drivers of this surge has been the construction of the SGR, and the number is expected to mount even further in 2018 as the project enters its second phase – extending the railway from Nairobi to Naivasha, which will be financed by China Exim Bank.
“Many African leaders have been endeared to China by the latter’s deep pockets, most of whom have grown wary of lectures from their traditional donors from the West. China’s cash comes with no strings attached,” wrote Dominic Omondi in an op-ed headlined “Poor strategy dug Kenya into Chinese trade hole” in Kenya’s Standard newspaper in May.
He further argued that China has “stretched Kenya’s hospitality”, “taking advantage of the country’s open-door policy to flood the market with all manner of goods”, while adding that “no sector is safe from the ‘Sino-invasion’” – anything from Chinese construction machinery and building materials to used clothing, onions, tilapia, tooth picks and toilet paper are now flooding the East African nation.
The numbers speak for themselves: in 2017, Kenya imported goods worth US$7.38bn from China, while it only exported US$114.5mn-worth of goods to the Asian country, according to estimations by Coriolis Technologies, a trade data firm.
Changing trade finance
For Kenyan trade finance bankers, too, China’s unconventional approach to business – one which doesn’t always align with the way traditional banks have set up their trade finance departments – has not gone unnoticed. One concern is that local banks, regardless of their investment in Chinese employees and departments, are not gaining as much advantage from Chinese commercial activity as had been hoped.
“The Chinese don’t have trade instruments, they do open account,” says a trade finance banker from one of the country’s tier-one banks. “We hardly do letters of credit for Chinese transactions.”
The comment is echoed by Timothy Mulongo, trade finance business development manager at Co-operative Bank of Kenya. “The main challenges we are having as banks is that there is a shift towards open account trade – we see more and more of that, especially with counterparties from Asia. We see a lot of advanced payments, which is a major risk for our customers.”
Even when trade does involve trade finance instruments, Mulongo says Kenyan banks are sometimes cut out of the deal altogether by local Chinese branches, a trend he says is “a major cause of concern”.
“We see a lot of the Chinese banks setting up locally, so instead of marketing their products from offshore, they would set up a local office and build customer relationships from there,” he says. “What that means is that there are less and less opportunities for local banks to do business. It becomes more or less like local trade: Kenyan banks would not even have an opportunity
Challenges of this nature are discussed at the Trade Finance Association of Kenya, a local professional body launched last year. Through monthly meetings, the aim is to create a place for Kenya’s 44 financial institutions to discuss professional challenges, harmonise practices and take a united position on common issues.
George Kiluva, head of trade finance at Commercial Bank of Africa and among the initiators of the association, points to “the dominance of the Chinese business in the region” as one concern raised in particular.
One issue, he explains, is that local public-sector construction agencies in certain instances have started to accept performance guarantees on local projects directly from China, rather than locally. “That is our business being exported. The Chinese banks are taking away a lot of our banking business, because we expect to issue these guarantees locally. We’ve continuously looked at how to lobby against this,” he says.
While Kenyan banks started to encounter the problem last year, Kiluva says it is now becoming “entrenched”.
“Whenever there is a local project that Chinese firms are undertaking here in Kenya, we would get a counter-guarantee from a bank in China, and on the back of a that, we issue a guarantee,” adds Mulongo of Co-op Bank. “But Chinese counterparties are always looking at how to cut their costs. So we have seen that they send out a guarantee directly from a bank in China. It doesn’t make much sense, because you are accepting an instrument from a counterparty that you don’t know.”
The fact is that Kenyan authorities have gained a high level of comfort in Chinese contractors, after years of working together. “The Chinese say: ‘We’ve done so many projects in Kenya and nothing has gone wrong, you’ve not had the need to demand on the guarantees.’ So why bring in a local bank that will charge extra and make the cost high? You find local banks are losing the battle on that front,” says a trade finance banker who preferred not to be named.
Kenyan banks are simply unable to compete with the price of the guarantees issued out of China. According to Mulu at Ecobank, the average price for a performance guarantee by a Kenyan bank is about 2% per annum, whereas Chinese banks typically offer 0.8%-1%, and have even been known to go as low as 0.2%.
“It means guarantee business is run without involvement of the local banks. They do not play their intermediation role in the industry. And when the local banks are utilised, it is for advising only, not for local issuance or confirmation,” says Mulongo.
Innovating to stay relevant
As the rules of the game change, banks in Kenya are faced with the challenge – or some may say opportunity – to look at what other revenue streams they can leverage from Chinese commercial activity, such as within collection and payments or through supply chain finance programmes and invoice discounting. As such, the sentiment among the banks spoken to for this article is generally one of optimism.
“Kenyan trade finance is really changing,” says Mulongo. “We’ve seen less and less letters of credit and other traditional trade finance products, so we need to shift focus to other trade finance solutions, and we have to be innovative to grow our books. If banks can come up with innovative solutions where we finance the customers’ supply chains, then that will help scale up trade finance in a very big way.”
He adds that Co-op Bank itself initiated a supply chain finance programme to tap into the growing open account trade in 2016, which it is now working to expand with new technology. Distributor finance and purchase order financing are among other solutions that the bank is looking at.
Osogo at Sidian Bank also emphasises the Chinese involvement in Kenya as an opportunity, but only for those who are “positioning themselves to benefit”.
“I welcome competition, because it makes you think outside the box and come up with different ideas on how to structure these products. Competition has come, and those who are surviving are the ones who are structuring things differently, and that’s the direction we are taking,” he says. To make itself more competitive, Osogo says the bank has reduced the time it takes to issue various instruments: clients can now receive a performance guarantee in less than 48 hours, and a bid bond in one hour.
Kenyan trade finance is undoubtedly going through a time of change, and there seems to be no way back. Especially now that the government’s so-called ‘Big Four’ agenda is being brought to life, it is opening a new space for banks – both Kenyan and Chinese – to grow their business.
The plan was introduced in 2017 and saw President Kenyatta identifying manufacturing, food security, healthcare and affordable housing as the key focus areas for Kenya’s economic policies.
“The direction we see the future going is within the four pillars of development, where the government has made it very clear it wants to focus,” says Kevin Kahuthu, senior trade finance manager at Credit Bank. “The moment the government gives some concessions, we expect a lot of business activity and investment to go there. We expect exemptions on taxes or subsidies in any of these areas. It has already started.”
He adds that, as an example, the Kenyan government is looking to establish a bank dedicated to financing housing projects where commercial banks don’t have the appetite.
The Big Four is an ambitious plan, and will not be cheap. Chinese enterprises have already pledged to provide support to fast track the goals outlined. Meanwhile, Kenyan banks will be pushed even further to think outside the box.