NSSF A HOME GROWN CASE STUDY FOR FINANCIAL LITERACY

On Thursday National Social Security Fund (NSSF) released its financial results for the year that ended in June.

As a saver with the fund for more than 20 years, this is an event I look forward to every year.

NSSF has continued on its winning ways. The Fund continues to grow from strength to strength and once again seemed to shrug off the effects of the covid-19 pandemic to register more growth.

Comprehensive income jumped 25 percent to sh1.84trillion from sh1.47trillion the previous year. This improved performance came despite a drop in interest rate in fixed income products, which dominate NSSF’s portfolio. Income grew in all the asset classes, notably more than doubling in real estate portfolio to sh23.5b in 2020/21 from sh11.1b on the back of sales of housing units at their development in Mbuya where a three-bedroom unit were going for sh650m.

The seemingly contradiction is explained by the fact that member contributions grew eight percent to sh1.37trillion from sh1.27trillion in 2019/20.

All this and more adds up to the continued growth of the fund’s assets which now stand at sh15.5trillion a 17 percent increase from the previous year’s sh13.3trillion.

All these numbers are a bit intimidating if not mindboggling but NSSF’s history in growing the fund and ensuring good returns, holds powerful lessons for our own personal financial health.

Not in order of importance these are the lessons from NSSF

1.       Start where you are

As reported above the size of NSSF’s asset base is sh15.5trillion. interestingly about ten years ago this figure was sh1.6trillion, if you had said that time that the fund would have grown almost tenfold by this time people would have laughed you out of town. The lesson here is to start where we are with what we have. We should not be discouraged that our ambitions are big but our income is small, we should start. The trick is to be consistent, which consistency will generate a momentum that will even shock you.

2.       The two ways to spend money

There are only two ways to spend money – eating/consuming it and investing it. The richer among us have slanted their spending towards investment and away from consumption. Investing comes with the promise of more income in the future – you are making your money work for you, while consumption holds no promise of future income. NSSF continues to control its consumption, this year the cost of administration was recorded as a 1.06 percent of assets from 1.19 percent the previous year.  This figure has been falling annually for the last decade or so, which means NSSF spending is shifting consistently towards investment – 98.04 percent and away from consumption – salaries, stationary, fuel, rent etc.

 

3.       The eighth wonder of the world

Renown physicist Albert Einstein said that compound interest is the eighth wonder of the world. Compounding applies to anything that builds on previous progress, but in this case we are talking about the consistent profits the fund makes which it then reinvests. As mentioned earlier the fund has grown tenfold over the last decade which comes to an annual compounded growth of about 25 percent. Simply put if you took 10 shillings and grew it by 25 percent annually and retained the profit and grew the initial principal plus profit another 25 percent year after year for ten years it would become 100 shillings. Similarly, sh1,000 would become sh10,000; sh10,000 would become sh100,000; a million would be come sh10m and sh10m would become sh100m and so on and so forth. It helps that the savers are contributing about sh125b a month but most of the gains come from interest on interest.

For compound interest to work the key ingredient is time. Good returns are ideal but more importantly time.

Assuming NSSF only managed half the growth rate it has over the last ten years it would grow to about sh50trillion by 2031 which would be about half the GDP of Uganda at current prices.

 

4.       If you want to go far

They say if you want to travel fast go alone, but if you want to travel far go with someone. The biggest achievement of NSSF is it has created a vehicle for the aggregation of our savings. People’s contributions range from a few thousand shillings to a few millions of shillings on the higher end. Each of the members working individually would not be able to achieve what NSSF has achieved for them. By aggregating all our resources NSSF has leveraged the larger economies of scale to improve our bargaining power in the market. NSSF can get better rates and is privy to the juiciest deals.

In our own lives it would be a good idea to mirror this by saving and investing in groups to go far.

5.       We underestimate what we can achieve in ten years

Someone once said that we overestimate what we can achieve in a year and underestimate what we achieve in ten years. Thanks to the history of our country our default mode seems to be that we want improvements now, we are not wired to wait for a year or five, 10 or 20 to reap the fruits of our labour. As a result, we fail to take advantage of the exponential gains that come with long term endevour.

But there is another benefit of having a long term perspective. You do not get distracted by the squirrels that cross your path when you are on the hunt for the elephant.

NSSF in 2015 set themselves the goal to be a sh20trillion fund. Despite the covid pandemic they are set to hit, even exceed that target. Without a strategy NSSF emboldened by its mounting war chest would be seduced by every deal that crosses their part and very well killing their chance of good returns.

 

 

THE DEMOCRATISATION OF CAPITAL

Last week the Uganda Securities Exchange (USE) partnered with mobile company MTN to allow mobile phone owners register to buy and sell shares on the exchange.

To trade on the USE one needs to have a Securities Central Depository (SCD) account, this is basically an electronic record of your share holding, trading history allows you trade shares. So under the new partnership one will be able to open an SCD account from their phone. With an SCD account working through a broker people will be able to participate in the USE.

It was a logical progression. First, the banks allowed us to transact off our phones. Then the mobile phone companies allowed us to  transfer, save and borrow off our phones. And now we will be trading off our phones.

With MTN’s more than 10 million subscriber base if only one percent or 100,000 new SCD accounts are created, they may  very well cure the USE of its shortage of liquidity.

There has not been much activity on the USE because there are a few companies listed, 14 in all and most of the shares are held by institutional investors who are more inclined to buy and hold. This latest development coupled with the impending listing of MTN on the USE may improve matters considerably in years to come.

This is important for the wider economy and the for the individual shareholders.

"A major difference between the rich and the rest,  is that the rich more than the poor, have their money work for them. My favourite American Warren Buffett has been quoted as saying something to the effect that if you can not get your money to work for you, you will work until your death....

Democratising shareholding is effectively giving more and more people a chance to jump onto the wealth accumulation ladder.

Shareholders benefit from the annual dividends paid out by the companies and the appreciation in share price if the company is profitable.

Over the last three decades the economy of Uganda has grown more than sevenfold but the everyday Ugandan complains that he is not seeing these gains in his pocket.

This is not surprising as most of the benefits of this growth have ben enjoyed by the owners of capital, the company owners. As the economy has grown the companies have grown with it and therefore too how much the owners of these companies can keep for themselves.

It is not unusual from companies to make profit margins of 20 percent, way above the average inflation rate of five percent we have seen over he last decade.

Meanwhile the everyday man if he is employed has maybe seen single digit annual growth in their paychecks if at all, which has barely kept ahead of inflation. But companies have also cut back on their staffing by automating over the years, which has seen whole departments wiped out in some industries. Such restructurings have made them more profitable.

You can see how the economy’s growth favours the company owners over the workers, never mind the jobless ones.

Going by the above, a chance to play in the company ownership game should be jumped at for anybody who wants to benefit more from the economy’s fortunes.

To illustrate, when Stabic bank listed on the USE in 2007 a share sold at sh70 along he way the slit the share into ten, so that the IPO price in hindsight would be sh7. On Friday a share in Stanbic was trading at sh26 an almost four fold increase in value during the period. This might not seem like much but it represents an almost annual ten percent compound growth in share price. The way to think about is who would give you ten percent return a year for your money? Even at the banks to enjoy such rates you would need to put down a few millions.  Not to mention that Stanbic shareholders have also enjoyed an annual dividend that probably represented half the money they spent buying the share at IPO.

No doubt, to benefit from the stock exchange is a long term play. If you want to bag a windfall  in a month or a year the stock exchange is not for you. But then again no sustainable fortune was built in a month or even a year. And then you have to ask yourself, if all the richest people , genuinely rich people, became so by owning companies, building them over years, why would you reject an opportunity to own an already well run company, saving

  yourself the pain and heartbreak of building your own company from scratch?

Author Thomas Piketty in his book “Capital in the 21^st Century” made the point that as long as the returns on capital remain higher than inflation, the gap between the rich and the rest will continue to widen.  Inflation is a rough proxy for the rate of salary increments. So in an economy like ours where inflation hovers around five percent how do you keep up with company owners who are enjoying at least 20 percent return on capital?

The trick is to join them. And the more people who can the better for them of course but for the economy as a whole.

AFGHANISTAN AND THE FOLLY OF FOREIGN INTERVENTIONS

It has been almost a month since the US government made good on their intention to cut their losses in Afghanistan and flee the central Asian hellhole.

It will be 20 years tomorrow since terrorists – Mostly from Saudi Arabia, flew into the Twin Towers in the New York and the Pentagon to trigger the “War on Terrorism”. At the time the Talban were in control of Afghanistan and suspected of aiding Osama Bin Laden, the mastermind of the 9/11 attacks.

US President George Bush wasted no time in not only setting the cross hairs on Kabul and cobbling together a coalition of nations to invade Afghanistan, topple the government there and bring Bin Laden to justice. At least that is what he told the world. A claim, which came under question when he decided to throw Saddam Hussein’s Iraq in the mix under the pretext that he had weapons of mass destruction.

Bush declared victory in Iraq but not Afghanistan, his successor Barack Obama got Bin Laden and it was left to Donald Trump to negotiate an exit plan and current president Joe Biden to execute that plan.

Thankfully the US has not tried to claim victory in Afghanistan. It would be a pyrrhic victory if they did – it cost 170,000 lives and $2trillion dollars. While the US has emerged smelling more of manure than roses, a few billionaires have built their fortunes upon the rabble of Afghanistan...

It was always going to be a clumsy close to this chapter of US history. This had been their longest war the US has fought , the duration meaning they had put down some semi-permanent roots that could not be uprooted at a moment’s notice. As a result, they have had to evacuate many of their collaborators and support them for the foreseeable future at great cost to the blissfully ignorant US taxpayer.

Whichever way you look at it, this a misadventure, like Vietnam, the US will be anxious to put behind them as soon as possible.

Analysts have in past weeks mulled over why the US had to beat a hasty and messy retreat from Afghanistan, even if it was to great embarrassment to themselves.

Some thought in the current depressed global economy it is an expense they can barely afford – they spent $300m daily to execute the war; some think that it was a distraction from trying to contain China, which over the last two decades has grown to be the second largest economy after the US and threatening to overtake it within the decade; the more charitable ones think the US has seen the error of its way and this signals an end to their meddling ways abroad.

That last one should be dismissed out of hand, if only because the US has the world’s largest military industrial complex that has to be kept sated – the US’ defence budget is larger than the combined budgets of the next 11 biggest defence spending countries.

I think the first reason that the war was too expensive, falls on its face in the light of the huge military industrial complex’s needs.

There will always be money for war especially if it supports local industry. Bullets don’t rot on the shelf, they need to be used to be replaced....

Which leaves us with the China question. Before our very eyes China has risen from the ashes of Mao Tse Tsung’s cultural revolution to challenge US in economic might and world influence. After the collapse of the USSR in the 1980s and 1990s the US became the unchallenged super power, running rough shod over everybody else with their liberal economy and multi-party democracy prescriptions for all the world’s ills.

Now China has inserted itself into the vacuum, which came as a surprise, not because the US never saw it coming than out of arrogance, the thought that the Chinese would never amount to much.

Bombing Afghanistan into the stone age, while a lucrative distraction had to be put on hold to contain China, which is flexing its muscles – literally and figuratively in everywhere from the South China Sea to Africa and Europe.

I tend to believe this last theory more. After the better part of a century playing big brother in the world, the US would not know how to or countenance playing second to a resurgent China.

So in coming years look out for more economic wars with China – Trump was just the beginning; proxy wars – the US does not go to war with a country it can’t win against and invariably a new world order – fundamentalist terrorism will fade into the background, with the US and China playing the elephants and the rest of us serving as the hapless grass.

WHO IS KILLING LOCAL UGANDA BANKS?

In August the Bank of Uganda (BOU) announced that it would be raising the capital requirements of the financial institutions under its supervision, kicking up a lot of noise from the usual suspects.

BOU has tabled a six-fold increase in paid up capital for commercial banks to sh150b from the current sh25b, while microfinance, deposit taking institutions (MDI) will see their requirements jumping to sh10b from sh500m.

The central bank argues that these changes are long overdue, would strengthen the financial sector, allowing it to be more innovative and be able to finance more of our own development agenda.

The critics pointed out that these requirements would effectively shut out local businessmen from entering the sector, banging in the last nail in the coffin for foreign dominance of the sector. Their argument seems to be that foreign banks are not sensitive to local business and the repatriation of their massive profits is helping fund their home countries to the detriment of Uganda.

They are right to some extent, foreign banks by their definition have their owners abroad, which investors want to see a return on their investment and understandably prefer to be paid where they are – at home.

And true, it is very possible local businessmen will be shut out of the industry, not because they cannot raise the required sh150b but because they cannot work together to raise these amounts and run the banks properly...

Their concerns that foreign banks may not be sensitive to the local environment is debatable. What is true though is that targets for the management of these banks are set abroad and local managers will do everything in their power to meet their targets to win the juicy Christmas bonuses. That may very well mean sidestepping all risky projects and loading up on the less risky government paper. This argument also seems to suggest, wrongly I think, that local owners would be more willing to take risks on local businessmen at the expense of their bottom line. If this is true maybe that is why our banks cannot stand the test of time?

And on the issue of loading up on treasury bills and bonds the scope for this is increasingly narrowing. In the last treasury bond auction held in August government offered to sh200b and sh300b in three year and 15-year treasury bonds respectively. These were oversubscribed more than twice in each case, meaning that while the investors – many of whom are banks, had money to invest the BOU could only take about half of what they offered.

So while everybody with half a brain should be in bonds, with their double digit returns, that lucrative investment avenue is narrowing by the day. Which means bank managers will have to either report lower profits and kiss goodbye their huge Christmas bonuses or be more innovative in the products they offer their clients.

"An increase in capital requirements means banks will see the government paper as less of an option to show an adequate return on equity for their shareholders here or abroad...

Related to that, existing requirements that banks can not lend more than a quarter of their capital to one individual puts a cap on how much our banks can support local projects. At the current sh25b paid up capital the most a business man can borrow from such a bank would be under sh7b – not enough to build a mall, leave alone a mega factory that would create jobs.

Interestingly, it is worth noting that such products like salary loans only came into play at the end of the 1990s when the government raised bank paid up capital from sh30m to sh1b and then sh4b.

Banks make money by lending and the more money they have in capital the more they need to shovel out the door. It follows therefore that apart from thinking up new products to sell to the product they may very well be forced to lower lending rates, what everybody has been dying to see.

Logically the only people who would have a problem with this new arrangement would be the bank owners who don’t want to invest more in Uganda (they were reaping a lot more than they sowed and would like to keep that going without more risk to themselves) and the bank managers who would have to earn their keep – be more efficient and think harder, in order to keep looking brilliant at their local bar....

For the owners who don’t want to inject more they have the option of merging operations with other banks or selling off their golden goose altogether. Not a bad thing, especially if some of our local businessmen can pony up the money to buy them out.

Beyond the possibility of better service and lower lending rates, there is a real possibility that some of the owners may finally be resigned to sourcing their money on the stock exchange, essentially sell shares to the rest of us to raise the required amounts, allowing us in on this business that seems to make money effortlessly 24/7.

On the issue of the cementing foreign domination, that has been on for a while and now and may very well continue. If we have surrendered our industry to foreigners, we have only ourselves to blame. Would you rather maintain a weak banking industry, which cannot support local production because you are jealously guarding it from foreigners or invite foreign capital in and get better service? 

"Jealously guarding the industry from foreign money will only benefit the few local businessmen who will be able to raise the small capital requirements, shut out other competitors because of their connections in high places and reap massively from charging extortionate lending rates...

They say that nationalism is the last resort of the scoundrel. Do we for instance believe that our businessmen will charge us less to borrow and pay us more on our savings? Recent evidence of local banks does not suggest that and I don’t see what would change now.

But if we got our richest 100 Ugandans together, would they fail to raise the sh150b new requirement and the additional working capital to start a bank? If that is true, then BOU is in danger of building such huge banks here as not to find business.

But it is also not true that we do not have local industry players. Post Bank has a nationwide network and sh76b in capital; Housing Finance Bank has sh61b in paid up capital. If you merged these two government institutions and slapped on Pride Microfinance Ltd – paid up capital of sh25b, we would have an institution big enough to not only meet the new requirements but compete favourably in the industry.

 

 

MAKING SENSE OF THE MASAKA ATTACKS

Over the last few weeks news out of Masaka is of gangs running around unimpeded, attacking villagers with iron bars and pangas.

The brazenness of the attackers is such that at times they warn their victims ahead of time that they were coming and make good on their promise.

The events have moved from isolated incidents to a regular occurrence in the last month or so bringing into question what is going on.

In the last week the political and security leadership have come out publicly to address the issue. So far more than 20 have died and many others injured, while at the same time ten suspects have been charged in court.

"The chilling thing about the attackers is that they are not stealing anything during their attacks, although in one incident they sat down to help themselves to the food in the kitchen. This means they are not ordinary criminals....

Their intent is seemingly to sow fear in the area, to what end? It has been suggested that they are doing this to raise doubts about government’s capacity to keep people safe. These are the hallmarks of terrorism.

It reminds me of the Lord’s Resistance Army (LRA) which run rampage in northern Uganda for two decades. Led by Joseph Kony, they claimed that they wanted to overthrow the government and rule the country by the ten commandments, but by their actions -- lopping off lips, hacking off limbs, abducting children and killing villagers altogether, did not suggest they were interested in winning the hearts and minds of the population in the area.

They effectively terrorized the region until Sudan, under pressure from the US’ “war on terror” allowed Uganda to enter South Sudan and dismantle their rare bases.

With LRA there was evidence of a unified command, which is different from Masaka gangs, who seem to be small groups hitting different places simultaneously and stretching the security infrastructure to the point of ineffectiveness.

It may be early days but unlike the LRA, the Stockholm Syndrome – where the captives begin to sympathise with their captors, doesn’t seem to have set in yet. But for how long?

You have to feel for the everyday person in the affected areas. They are caught between their attackers, who seem to attack at will and leisure on one side and the government on the other which seems to be slow to move on this new threat.

If government does not clamp down quickly on the attacks, the hapless villagers will begin to negotiate with their assaulters to the detriment of any security operations.  Tier reality is much different from us reading our news off our smart phones, this a real existential threat and will develop coping mechanisms that may seem unpalatable to onlookers.

Looking at either side of this “conflict” you have to wonder on one hand who these assailants are who are preying on vulnerable people and not for monetary gain or political capital? They coordination of their action suggests there is some central command, what kind of people would lead such a group to terrorise local populations? Is it possible that the leaders are not from the region, therefore their lack of empathy for the villagers?

On the other side of the pendulum clearly there has been a laxity of security. No surprises there if only because we know how the police are so under resourced. One can imagine the large areas that are under one police stations jurisdiction in the Masaka area and the station may not even have one patrol vehicle. And these inadequacies cascade down to the investigation and the intelligence capabilities.

The truth is that on the whole Ugandans are law abiding citizens and therefore a semblance of peace/security can be achieved with little resourcing of the police. But this will not always be the case. With growing populations, environmental degradation and increased urbanization crime will follow as night follows day and the government will be caught flat footed as it has been in these latest incidents.

The Masaka incidents point to the fact that we need to beef up our civilian policing capacity if only in preparation for an uptick in insecurity deriving from the above change in our circumstances.