NATIONALISM, THE LAST RESORT OF THE SCOUNDREL

Two weeks ago the commercial court made a controversial ruling in a case between Kampala businessman Ham Kiggundu and Diamond Trust Bank (DTB).

The highlight was the court ruling that  a DTB loan to the businessmen that was executed by the parent Kenya bank was illegal as DTB-Kenya was not registered to do  business in Uganda.

The court went on to reverse the payments the bank had made to itself from Kiggundu’s accounts when they claimed he defaulted on the loan.

Interestingly Kiggundu claimed he had repaid the loan. Anybody who has ever taken out a loan with a bank knows its unlikely, next to impossible, that you can repay their loan and the system does not register the payments. So who is fooling who?

It is

a detail that was lost in the larger picture of what the ruling meant for the industry and economy.

Kiggundu has been telling anyone who can listen how this is a conspiracy against the local businessman by foreign banks and will have dire repercussions  for our economy.

It reminded me of the bank closures at the turn of the century, which mostly put paid to locally owned banks.

In all cases the banks had sunk under the weight of growing bad loans, to businessmen who didn’t think they needed to repay their loans. In addition a lot of red ink in the bank books were due to loans to related parties – directors and affiliated companies, that had  gone bad.

In one case, the bank even illegally sold shares to the public and lost all the new owners money.

In those cases too the local bankers claimed it was a ploy by the foreign interests to stifle the growth of the local banking industry  and the local business community by extension.

They say nationalism is the last resort of the scoundrel.

"Whenever people start making none business arguments to justify their incompetence or theft – the best way to rob a bank is to own one, they say, a red flag is raised in my mind....

Banks aggregate savers’ deposits and lend these funds to borrowers.

Following the closures in the late 1990s and early 2000s the laws were amended to increase the minimum capital from less than a billion shillings to now sh25billion or less than $10m. 

This was in light of the growth in credit, the higher the capital the more the bank can lend without putting savers deposits at risk.

Also the banking regulations are such that no bank cannot commit more than 25 percent of its loan book to one borrower.

In the context of the Kigundu case where his needs were for $11m ( sh40b) you can see how few of our banks – foreign owned or otherwise, could handle him.

In addition no one single individual can own more than 25 percent of the bank, a safeguard against insider lending and other malpractices.

"The net effect of this ofcourse is that locally owned banks have fallen by the wayside – Ugandan businessmen seem incapable of coming together to meet these requirements....

The argument has been made that the requirements for locally owned banks should be eased, but that will only mean they wouldn’t be able to lend to the Kigundu’s of this world anyway.

There are structural issues in the financial sector, not least of all that it is dominated by commercial banks, who by their nature are not suited to lending to start ups, small business, agriculture and to long term projects.

Banks need to be better capitalised too. The sh25b minimum capital requirement may have been adequate 10 years ago but is now woefully inadequate. 

The Kigundu case inadvertently is saying that in order not to borrow from abroad our banks have to better capitalised, further knocking out the locally owned bank.

And what is it about foreign owned versus locally owned banked?

"Are we saying that local banks don’t deserve to make profit or is it that  with local banks we will be abled invoke non-business criteria  – family  and tribal ties, old boys network to get cheaper credit which we will dodge and duck not to repay?

See how that worked for Uganda Commercial Bank (UCB), Cooperative Bank and Greenland Bank to name the obvious ones.

The legal minds have been deciphering the case and Diamond Trust Bank will appeal the ruling.

That being said the case has raised interesting issues that will be handled in subsequent bank reforms – upping the capitalisation of banks, deepening the financial sector beyond commercial banking  among others.

On our side of the counter let us also work towards developing a culture of loan repayment. When you borrow not only from the bank reorient your mind to pay back the loan. We will save a lot of drama that way.

Oh! I see another conspiracy. When you default on a loan these days the  Credit Reference Bureau blacklists you making it difficult to borrow again or if you do, it would have to be at a higher rate.

IT’S DÉJÀ VU ALL OVER AGAIN

The event of the last few weeks took me back 20 years and a reminder that there is nothing new under the sun.

At the turn of the century we were gearing up for the second presidential race since 1986.

In 1996 President Yoweri Museveni won 74.2 percent of the vote beating Paul Ssemogerere into second with Kibirige Mayanja coming a distant third.

"It was not clear that Ssemogerere was going to run again, which raised the specter of an election where Museveni competed against himself. The NRM is rabidly averse to such a scenario. They don’t want 98 percent wins in the polls....

At around that time Nasser Sebagala – may his soul rest in peace, was back from the US where he had been convicted for passing forged checks. Before the conviction he had just become the mayor of Kampala but on his return he made it clear he was going to run for the highest office in the land. The Kampala elite smiled into their beers.

But a curious thing begun to happen. When Ssemogerere would try to have a rally it was preempted by security, but Sebagala aka Seya was running around the country holding rallies, drawing crowds and seemingly gaining momentum.

In trying to make sense of this I asked around. “We want a race. Ssemogerere is no competition so we need someone else to bring some excitement to the polls, but we know we will win them anyway” an insider told me.

In the back of my head, I thought my friend was reading too many Robert Ludlums.

I had to rethink this a few weeks later because Colonel Kizza Besigye threw his hat in the ring. To confirm my friend’s statement Sebagala’s campaign went out like a light, but not before questions were raised about his academic credentials, which had not been a problem until then.

Sebagala failed to get nominated to run for the presidency and he quickly fell in with the Besigye campaign. He of course, found time to win back his mayoral seat.

"I will be forgiven with this background in mind to look at the Robert Kyagulanyi aka Bobi Wine campaign with a jaundiced eye....

The National Unit Platform (NUP) tell the public they are a young a party – barely months old, and recent flops in the special interest group elections are down to their newness. And then without missing a beat they claim they will be the ones to run the NRM out of town, when they don’t have a presence in half the country. 

These are facts for all to see not least of all the government and its security agencies.

So then how do you explain the constant “harassment” of NUP/People Power? The narrative being sold is that the government/NRM is quaking in its boots at the growing popularity of the Reds.

Hillarious. 

There are no miracles in politics. There are no spontaneous movements that upset governments at the polls or overthrow them all together.

"Below the surface of successful movements is huge organisational structure working furiously but quietly – not unlike the duck paddling furiously under water while remaining calm above the surface

. This doesn’t need to be in offices and wheezing around in big four wheel drive cars. In today’s increasingly connected world the phone has taken over from other analogue technologies.

The Ayatollah Khomeini  returned from 15 years exile to a hero’s welcome in Iran, shutting down the largest cities in the country. Two weeks prior to his return the ruling Shah had fled into exile himself, overwhelmed by the resistance to his CIA backed rule. This groundswell of support was far from spontaneous. Khomeini’s supporters  distributed tapes of the Ayatollah drumming support for an overthrow of the Shah for years prior. The voice of the Ayatollah could not be stopped or resisted.

The point is there is a lot of work for NUP to do if it is to be in with a shout of even getting more than 22 percent of the vote in the next election.

Twenty two percent is the urban population according to the latest census.

Urban populations are known from being disproportionately loud for their size, wherever they are. And in countries, even on the continent where entrenched parties have been shown the door, it has been in countries that are more urbanised populations.

Uganda’s mostly rural population is where the action is now – the rate of urbanisation is changing that, and the one with the network to reach all of them  -- boots (literally or figuratively) on the ground, will win.

"NUP are romantic, rabble rousers, rebels with a cause nevertheless, but they will quickly learn that its dangerous to read your own press clippings....

Said another way, in the words of the 1990s band Snap, “Don’t believe the hype, It’s a sequel."

THE SEEDS OF OUR FINANCIAL DESTRUCTION

The call was as if from the blue. Even I was surprised I still had his number saved in my phone book.

He dispensed with the greetings quickly. I was transported back almost 20 years as he spoke.

He said he had been reading what I write and then he sighed. I knew the sound. The sound of an elder who sees the young man groping in the dark. Tempted to show him the way, but wisdom dictates that he should make his way alone.

We should meet at his house – it was still the same one in a leafy Kampala surburb, Saturday for lunch at 1. It was not  a request. He hadn’t changed.

I was ushered into the living room by Idah, his house keeper from 20 years ago. He will be with you shortly, she said as she directed me to the sofa and asked what I would have, while I waited.

He had lost the bounce in his step, there was sag in his shoulders and a stoop in his posture. But otherwise he seemed to have aged very well.

Let’s call him Sam. He used to be one of the richest men in this town. At least that’s what we thought.

He parlayed a Luwum street shop into a thriving Import Export business --- XXXXX Impex. Bringing everything from clothing to cars to perfumes, wines and spirits.

"He was making money hand over fist and made sure everybody knew it – flashy cars, high living and legendary nights out at Ange Noire and Club Obligato...

I got to know him, in a matter of speaking, during the spate of bank closures in the late 1990s. 

It turns out he was leveraged to the hilt and the collapse of Greenland Bank all but buried him. Or not, as it turns out. He had stepped out of oblivion and was right there in front of me as if it was just yesterday, when he was the toast of the town.

Why did he want to see me? He would not be hurried.

We talked politics … he thought we were going to the dogs. We talked the economy … he was confident that the resilience of the people will pull us through in spite of ourselves. We talked society … he wondered where  all these ‘fakes” (socialites) pop up  from.

The indication that we were getting down to business came when he declared something to the effect that the more things change the more things remain the same.

Lunch was done, the drinks had started flowing.

“Why do you think I have gone quiet?” I couldn’t say, you run broke. He spared me the blushes by answering his own question – with a question. “Do you think I was rich?” That was an easy one, “Yes. You had money”.

“Even me I thought so.” I didn’t know what to respond.

“I was good at giving the impression I had money.”

The described to me a life of timing his shows of lavish expenditure when everyone was looking – at the night club, the cars he hired every so often to give the impression he was changing cars frequently, the beautiful women he bribed to hang on his arm...

“For what?” For that he said he had to go back to the beginning.

He was born outside Kampala. His father abandoned his mother, him and his three sisters. They scraped and scratched to make a living. He managed to do book keeping after his O-level and went into business.  

Money came to him quickly and his bookkeeping skills gave him an edge over his contemporaries, especially when taxes became an issue.

By the 1990s he was flush with cash. He had plots around Kampala, about 50 rental units and millions in the bank. His business was throwing off millions of shillings a week.

"He was young. He was indestructible. It was inconceivable he would fall back into destitution...

He spoke too soon.

The collapse of the banks hurt his cashflow – a lot of money got stuck in the banks. And when the receivers started collecting on loans, it was adding salt to injury.

He laughs when remembers all the ticks they tried to save their businesses, the businessmen of that generation – loan sharks, forged checks, black dollars, the courts,  but wapi!

He shakes his head. 

There is nothing to show for the millions he blew on high living, with money that was not his, buying things he didn’t need, trying to impress people who didn’t care.

"He had a rural approach to urban excitement, he says. He can laugh now but then when his world came crashing down all around him, suicide crossed his mind....

If he were to do it all over again he would be more ambitious. More ambitious for his business, “why couldn’t he have had a string of shops?Or built dozensm ore rental units?” and not to show the world that the lito village boy had made it good, who cared?”.

That way he thinks he may have weathered the bank closure storm and still be in business today.

He is not destitute, he still had a taste for Black Label, but he thinks he would be richer than God by now – he made the sign of the cross after this assertion. 

“So you see, the more things change the more things stay the same.”

THE POTENTIAL POWER OF NSSF

The problem of Africa is poverty. We are poor because we are incapable, unwilling or unable to aggregate our resources be it capital, land, human resource or markets.

We are reminded of what we are potentially capable of by NSSF.

Today the Fund has its annual members’ meeting, which will be held online.

Everybody is waiting with bated breath for what the Fund will pay its members for their savings. Last year NSSF shelled out 11 percent interest but Fund boss Richard Byarugaba said for the firs time in a decade we will not receive a double digit interest rate. 

While the Fund earned more this year than last, the fall in the value of its equity positions, triggered by  the faltering economy due to the Covid – 19 pandemic, means the Fund may only just meet its pledge to pay at least two percentage points above the 10 average inflation rate. The ten year average inflation rate is 6.2%.

"Given the regularity with which the Fund has surpassed this target in past years maybe we need to raise the bar a bit more...

but this is a discussion for another day.

But  back to the issue of solving the poverty issue of our times and how NSSF plays a role in it.

Ten years ago NSSF had sh1.6trillion under management but has now grown eightfold to sh13trillion. That is roughly a 23 percent annual growth rate .

Part of that growth is the increased contributions of the Fund’s members -- before the lockdown we were averaging about shs120b in contributions monthly and also the increasing efficiency of its operations.

But the bigger part of the growth is the compounding effect of the returns  on its portfolio.

There is every reason why the Fund should continue to grow at that rate into the future or at least the next ten years.

The new NSSF law winding itself through parliament will among other things open up to all workers, regardless of whether their employer has more than five employees or not. Secondly voluntary savers – mostly from the informal sector will be allowed in. Already voluntary savings from existing members are topping sh5b a month.

Assuming they maintain the growth rate, because of these new entrants and barring any accidents to the Fund – Its been a while since they had a scandal, we can expect the Fund’s size to jump beyond the sh100trillion mark in 2030.

An amazing achievement by any standards. Which brings us nicely around to how NSSF can be a force for fighting poverty with its growing financial muscle.

"You do not fight poverty by dishing out money. Free money is nice to receive but tends to leave you deeper in the hole you were in....

You fight poverty by creating an enabling environment for people to carry out economic activity.

Already NSSF contributes massively to anti-inflationary activities carried out by the central bank. It is the biggest single holder of government paper of any individual. It holds 40 percent of government bonds.

"Some people may huff at this but without NSSF’s ability to mobilise funds, keeping inflation under double digits like we have done for the last 28 years – except for the bleep in 2011, would have been a harder feat to accomplish....

Most of our money we do not even keep in banks and therefore hard to aggregate.

We take it for granted because for most of us we have never seen high inflation that was a reality before 1990.

NSSF’s power to influence the rate of price increases is an underrated part of its contribution to the economy and the alleviation of poverty.

On a more basic level they are lining up to overtake National Housing Construction Corporation (NHCC) as the biggest real estate developer  in the country. 

Work is already underway on the Lubowa project’s 2,740 unit and on Thursday Byarugaba said a contractor is already on site in Temangalo to kick start work on the the first phase – 600 units, of the 5000 unit project.

The amendment to the NSSF law will also allow for a creation of housing, medical and education products. Which makes sense because if they are going to be selling hundreds of units in coming years who better to take advantage of this than its own savers.

The education product will be designed to help members upgrade their skills and hopefully become more productive. Increasing productivity is a way to raise incomes.

This is not a story about NSSF. This is a story about what happens when we aggregate our resources. If in 1985, at its inception you had said NSSF would be the biggest financial institution three decades down the road you would have been laughed out of this town....

This is a story too about how we underestimate the power of our small sums and what they can achieve and what they promise when they are brought together.

The biggest pension fund in the world is Japan’s  Government Pension Investment Fund (GPIF), which has $1.42 trillion under management.

To put this in perspective this is almost 30 percent of  Japan’s GDP. Government pensions in Japan.

NRM CHAOS, HOW DID IT GET TO THIS?

In recent weeks the ruling National Resistance Movement (NRM) went to the country to choose its flag bearers for next years local and general elections.

It was a massive undertaking that covered almost 70,000 villages, saw hundreds present themselves to represent the NRM and thousands more turn up to vote.

Unfortunately, maybe unsurprisingly, violence, intimidation and other underhanded manoeuvres were reported, to leave enough people with a bad taste in the mouth. More on that later.

When the NRA/M marched into Kampala in January 1986, the totality of its membership was probably not more than 20,000, 34 years later it is a mass party with representation in every nick and cranny of this country.

Its detractors have argued that the party used state resources to set up the Resistance Council (RC) system, in the 20 years while the country was under the Movement system, which they then commandeered with the return to multiparty democracy in 2006.

The NRM on their part argue that they didn’t hijack the existing local government structures, but it is not their fault that most of the people manning those posts were sympathisers of the Movement anyway. A hard argument to counter.

Truth also is that that network is not very active through out the year and is activated during polls. Which means

"it comes as a surprise to most when the NRM comes out to play, even during these Covid times...

. Which is a bit of a relief to NRM planners because the cost of sustaining that network year-after-year would be astronomical. 

The NRM insist that they are a mass party. Judged against their rivals this not a hard claim to sustain. Despite the challenges that come with this and the financial constraints of it, the NRM insists on universal sufferage in choosing its flag bearers. Other parties prefer a collegiate system where delegates decide for the masses. The attraction for this is its cheaper and less messier.

Which brings us back to why the chaos in the NRM primaries. The NRM insist that overall the process went on much better than was depicted by the few incidents that hit the headlines.

But you know what they say,

when perception comes up against fact, perception wins all the time....

But even if we are to take them at their word, the little of the chaos we saw was chilling in its viciousness and worrying if it became more widespread. And the question persisted, “What is it about politics that makes it a do or die exercise?”

I think it is a case of the NRM being a victim of its own success. A victim, because this kind of chaos can get out of hand, engulf and bring down the NRM.

The success is that they have been able to build this amorphous organisation, literally from scratch. The challenge for the NRM is how does it manage this organisation to not only retain power but continue to be a political force regardless of whether the current champions are around or not.

"The internal frictions, represented by the chaos, need to be managed, brought to a reasonable conclusion so that the NRM remains a coherent force ready to take on all comers in the coming elections....

The life-or-death nature of the NRM primaries, unlikely to be replicated by any other party, is down to two major factors.

To begin with in many constituencies, becoming the NRM flag bearer almost guarantees onward election into parliament. As a result candidates invest a lot of money to get on the NRM ticket, rumour has it as much as sh500m, so a loss is the same as seeing your hard earned cash going up in flames. There are few Ugandans who would shrug off a sh500m loss.

To aggravate the situation, the way candidates raise this money through debt – often secured against family property, raises the stakes. A loss can mean a straight line drop into abject poverty...

Secondly and more worrying is that for many candidates, politics is the fall back position after they have become unemployable or have failed in business. The promise of a big salary and the leverage to extract money from the state – real or imagined, that comes with being an MP is a big attraction for these types. 

This combination makes for a combustible mix that understandably leads to the violence we see around.

Maybe the redeeming factor of the NRM primaries was that voting was by lining up, reducing the scope for vote rigging and other shenanigans. It was testament to the desperation of the time that some nevertheless tried to rig the vote anyway.

Looking to the future,  the NRM will do well to invest in dispute resolution within its ranks as a long term strategy to  retain party coherence. It is unlikely that the thirst for the NRM ticket will reduce in the next 10 years so somebody needs to be thinking about this seriously and systematically.

 

WHY YOUR RATE OF SAVINGS IS IMPORTANT

In the last week I had a back to the past moment – actually three. We had three full days without power, unheard of in the last ten years or so.

In classic case of turning lemons into lemonades a friend sent me this book, “The psychology of money” by Morgan Housel.

A long time ago I wondered, why don’t the rich tell the rest of us how to make money, some easy to use formula and we get on with it? Either they are hiding something or this making money thing is not for all of us. I wasn’t entirely wrong on both counts.

"Apart from thieves and flukers – lottery winners, the process of making money requires a certain kind of orientation of the mind....

It is less productive for someone who has made money through honest effort, to try and bring others up to speed on the process. Besides they know that a lot of what they know,  can not be taught but one has to experience it before they can appreciate let alone understand it.

It is not for everybody because not everybody can achieve the mental reorientation that many of these money makers have achieved in order to make money. Because, have no doubt, money making is not necessarily an inherent skill, it is a learnt skill that takes years of practice.

The book is worth its weight in gold with lessons flowing off every page. But the two that struck home for me were one, that making money and keeping money are different skills. Learning to make the money is easier than learning to keep it. Which explains why we have had so many people coming, flashing their money around and disappearing as quickly as they came. 

At this point the author made his own distinction between being rich and being wealthy. That richness shows and often entails a high spending lifestyle demonstrated by the clothes, cars, houses and instagram documented holidays. Wealth on the other hand is quiet, can even be invisible to the undiscerning eye and is normally demonstrated in bank balances and accumulation of income earning assets.

"To use an analogy being rich is like coins which make a lot of commotion when they drop disproportionate to what they can buy, who has ever heard a sh50,000 note fall?...

The author also made the point that there are thousands of ways of making money but only one way of keeping it – exercising frugality and paranoia. So you have to respect the people who make money and continue to grow it but can also make the mental shift to keep most of what they made. That’s what leads to inter generational wealth.

I hear them already, what’s the point of making money if you can’t enjoy it, they ask shaking their heads. We need to get away from the subsistence mentality that we eat all we make, there is a place for ensuring that the basics are catered for generations to come. Its a hard thing to wrap our minds around for a pre-industrial society like ourselves but the sooner we get with the program the better for us and our progeny.

“It is ingrained in us that to have money to spend money that we don’t get to see the restraint it takes to actually be wealthy,” the author wrote.

The second idea I took away from the book is that a person, community’s or country’s chances of achieving wealth is strongly related to their rate of saving. He makes the point that there are low income earners who become wealthy but not all high income earners can do the same.

And even more interesting is that while it is easier to save towards a goal, we need to save for savings sake. The logic is simple. Saving allows you to accumulate capital for future investment. We wonder how the Asians thrive. We have worked out that they probably have cheaper pools of capital, we haven’t made the connection between their frugal living and this cheaper capital. Now imagine when a whole society saves diligently and pool their resources together, to supporting each others business?

Saving is practice in delayed gratification. This is important in helping in the second part of wealth creation which is keeping more of the money you make. If you can save you can restrain your baser instincts, which would otherwise prompt you into a life of high living and arrivalism....

And as a  parting thought,  “Saving money is the gap between our ego and your income, and wealth is what you don’t see.”

FORGET THE MONEY, FOCUS

There is a book – “The Startup J-Curve” by Howard Love,  that is recommended reading for every businessman or anyone going into business.

In the book the author likens the path from start up to success using a J-Curve.

On start up most businesses go into “The valley of death” – the downward swoop of the j-curve, where revenues if any, are eaten by start up costs and is where most businesses flounder and die. One reason many business die here is because before their business model has ben shown to work, they are off investing in other things which prove a constant drain on much needed resources giving the initial enterprise a chance to survive.

When the business hits break even – on the other end of the curve opposite the beginning of the J, it is assumed the business model is workable and the businessman starts more than covering his costs, he is profitable and cash starts to flow. It is critical as a business that you recognise this point to prevent you from making questionable investment decisions before it.

I imagine the relief of surviving the valley of death and the excitement of the money flowing in does a lot of damage to businessmen’s brain. Because it is at this point that they start showing off or investing in questionable endeavours that soon lead to the company’s demise.

The other day I saw a financial services business, that is cash rich – high equity and little debt. They have now branched out of financial services into car washing, restaurant business and are actively looking further afield.

 A lot of money does that to people, even the brightest of us.

Compare and contrast this with another business which sold out a few years ago, making its owners millions of US dollars richer.

This business too went through its valley of death, when they came out the other side they didn’t try to be clever they invested in the same business, expanding their production at first before vertically integrating their own value chain –  animal breeding, pesticides, feeds and meat processing. They did not stray out of their circle of competence.

Billionaire investor

Warren Buffett advises that you need not only know your core competence but even more important, the limits of that competence.

So for instance if your business is stationary, when you emerge on the other side of the curve you may consider investing in paper making, printing or publishing. It would be full hardy for you to go into the taxi business or food processing, straying far away from your core business or competence.

This mistake is not unique to Ugandan businesses it’s the story behind failures of companies all overt he world.

A businessman friend of mine told me that in fact in some multinationals insist that their subsidiaries are financed by debt, because this instills internal discipline on the management. The banks want to be paid whatever the state of the business so businessmen are keen to control costs. 

But when there is too much equity and retained earnings financing the business, this is when the hair brained ideas start jumping out of the wood work.

The shopkeeper opens a garage or the farmer decides to go into commercial real estate or the telephone seller decides to try his hand at the coffee shop business.

Its what money does to us.

So to the financial services company it may be wise to shut down their car wash business and restaurant and expand into hire-purchase, asset leasing and even build up their capacity towards mortgage lending. These are all avenues of expansion that will not cost them much in the learning curve and have a better chance of at least retaining their shareholder’s value. 

But we know what it is too. We want to be seen to be making money, we want to look out the window and point at this or that business, this or that building or this or that car as proof that we are making money.

I saw a saying the other day that went, don’t tell other people your problems 80 percent of them don’t care and the other 20 percent are happy you have the problems. For money it can be paraphrased, 80 percent don’t care you are making money and the other 20 percent are resentful of your success. Progress in silence.

The moral of the lesson is that its not about looking like you are making money but making money. There is a big difference.