An unpopular budget gets more taxing by the day

If your personal budget isn't causing you pain, then the national one certainly is – Kenya's Finance Bill 2024 stirred up heated debate this week across a country that risks getting taxed into exhaustion. However, big banks still look to be having a good run (based on Q1 results) though growing NPL's continue to highlight the state of the economy. And with last week's big developments in tech, things are about to get very interesting in AI.

Here are the main stories in investing over the week:

• Finance Bill 2024 causing Kenyans unease
• 10-year bond tap sale undersubscribed
• Equity posts strong Q1 growth, NPLs rise

SPOTLIGHT

Infrastructure bonds could soon be taxed

The Treasury was in focus last week with the proposed Finance Bill 2024 (aka draft Budget) continuing to display the government's growing austerity measures.

What happened

According to the Finance Bill 2024, the government is proposing to impose a withholding tax on returns from infrastructure bonds with tenure of at least 3 years.  Local investors will pay 5% WHT on their interest while foreign investors will pay 15%.

Between the lines

A big incentive for investors in Kenya infrastructure bonds has been their tax-free status. The government's action could reduce investor appetite for these instruments or end up a zero-sum game as investors demand higher returns from GoK.

Should you care?

This news is material if you are an investor in bonds or any collective investment scheme. Stay close to see whether the proposal is adopted & consult your financial advisor in advance on possible impact based on your holdings.

HEADLINES

The week's big stories

• Finance Bill 2024 causing Kenyans unease. The Kenya Bankers Association (KBA) has urged the Government and the National Assembly to reconsider the proposed imposition of a 16% Value Added Tax (VAT) on financial transactions outlined in the Finance Bill, 2024. The Finance Bill 2024 proposes VAT on various financial services & will increase costs to customers. Sentiment: Negative.
• 10-year bond tap sale undersubscribed. The Central Bank of Kenya (CBK) took up Sh7.1bn from the tap sale of a 10-year paper, falling substantially short of its projection of raising Sh15bn. The bond was offering a return of 16.2273%. The tap sale brought total proceeds from the bond first auctioned in March to Sh34.7bn. Dicey for a CBK that's still trying to bring down rates.
• Equity posts strong Q1 growth, NPLs rise. Equity Group has reported a 25% increase in after tax profits to KSh 15.3bn for 1Q2024 on the back of a a 21% growth in non-funded income to Ksh 22.2bn and a 28.4% increase in net interest income to Ksh 27.8bn. Loan loss provisions surged by 74.5% year-on-year to Ksh 6.1bn due to a 50.0% increase in gross NPLs to Ksh 120.4bn. Strong performance but NPLs could influence loan growth.

INSIGHT

Explained by AI (and I): Collective Investment Schemes

Kenya's CMA has licensed 22 new fund managers since 2020. This has resulted in a rapid proliferation in Collective Investment Schemes (CIS's) in the period since. The most popular of these being the Money Market Fund or MMF. But what exactly is a collective investment scheme or mutual fund or unit trust?

Collective Investment Schemes (CIS), also known as mutual funds, pooled investment vehicles, or investment funds, are financial structures that pool money from multiple investors to invest in a diversified portfolio of assets such as stocks, bonds, real estate, or other securities. These CIS’s are managed by professional fund managers who make investment decisions on behalf of the investors.

Here's a breakdown of how CIS’s work and their benefits:

1. Pooling resources: Investors buy shares or units in a CIS, which combines their money into a large pool. This pooled capital allows the scheme to invest in a broader range of assets than an individual investor could not typically afford on their own.
2. Diversification: By investing in a variety of assets, CIS reduce the risk of significant losses. If one investment performs poorly, the impact on the overall portfolio is minimized because other investments may perform better.
3. Professional management: Professional management by fund managers aims to maximize returns and manage risks more effectively than individual investors might on their own.
4. Accessibility: CIS’s make it easier for small investors to access a diversified portfolio. They allow individuals to invest in a wide range of assets with relatively small amounts of money.
5. Liquidity: Investors in many CIS’s can typically buy or sell their shares at the fund's net asset value (NAV) at the end of each trading day, making it easy to access their money when needed.
6. Cost efficiency: Pooling resources in a CIS can lead to lower transaction costs and management fees compared to investing individually. The economies of scale achieved by managing a large pool of funds help reduce overall expenses for investors.

Some types of CIS’s you may come across are: Mutual Funds, Exchange-Traded Funds (ETFs), Unit Trusts or Closed-End Funds. CIS’s are a great entry point for new investors and remain a staple for even seasoned investors.

PAUSE

ROUNDUP

Other news

• CIC Group registers record profits. The company posted a net profit of Sh1.44bn for the year ended Dec 2023. The company’s performance was attributed to business realignment in general business, group life business and investment portfolio over 2023. CIC has maintained a Sh0.13 dividend per share. Shareholders take note to review restated 2022 financials.
• Asset management welcomes new entrant. The Capital Markets Authority (CMA) has approved the registration of Arvocap Unit Trust Scheme. The CMA has licensed 22 new fund managers since 2020, demonstrating interest from the market in collective investment schemes. Positive to see growth in players – should translate to wider product suite.
• Less cash held in M-PESA but revenue grows. Deposits in Safaricom’s M-PESA fell by Sh10.6bn to 263.3bn in the 6 months ending March 2024, signaling more withdrawals to cash & other platforms, including banks, in the review period. M-PESA revenue growth still strong.

One liners

• Coop Bank targets expansion after Q1 profit soars to Sh6.58bn [The Standard]
• Easing inflation, sturdy shilling drive new car sales [The Star]
• Inside Gen Z world of sophisticated investments [Business Today]
• Network restored after undersea cable cuts, says Safaricom [The Standard]

REGION

What in the East Africa?

[UG] Non-performing loans - Banks reduce lending: According to the Bank of Uganda (BoU), private sector credit has been growing at a lower than projected target, below levels seen 10 years ago. In 1Q2024, private sector credit grew at 6.7%, way below BoU’s target of 13%. [Story]

[UG] Banks' profitability boosted by gov't securities says BoU: The 15.9% increase in net profitability of the Ugandan banking sector to Sh1.5trn in FY2023 was primarily driven by a 13.8% increase in interest income and a 14.4% rise in fee income, says BoU. [Story]

[TZ] Swissport Tanzania raises dividends as profits surge by 42 percent: The airport ground cargo handling company announced a dividend per share of Sh51.33 for the year ending December 2023. Increase in revenue was attributed to a 4% increase in cargo volume handled as well as revenue increase strategies. [Story]

[TZ] Tanzania’s NMB Bank Lists Sustainability Bond On LSE: NMB Bank PLC, Tanzania’s leading financial institution, has listed its maiden 3-year US$ 73 million Sustainability Bond on the International Securities Market (ISM) and Sustainable Bond Market (SBM) Platform at the London Stock Exchange (LSE).[Story]

[RW] Transport dominates Rwanda’s 4.5% inflation in April: Rwanda’s Consumer Price Index (CPI), the main gauge of inflation, increased by 4.5 per cent in April 2024 compared to the same month of 2023, with transport sector topping the underlying factors for the recorded increment as it contributed 2.7 percentage points to it – or more than a half. [Story]

[RW] Rwanda-based drinking water firm among Africa’s fastest growing companies: Jibu Inc., a food and beverages firm that specializes in producing and supplying affordable drinking water, has been ranked 123 out of among Africa's 125 fastest rising companies in 2024 by Financial Times. [Story]

CURIOUS

Two good not to share

One: AI AI AI! Last week was busy in Artificial Intelligence with good reason. A key take-away - AI models have now become 'multimodal' i.e. they can understand and analyze not just text but audio, imagery, and computer code, and create answers in the same mediums. Watch two AI's 'talk' in this GPT-4o launch demo by OpenAI...just when we thought things couldn't get more interesting.

Two: I came across this share-worthy quote & I hope it makes it one degree further if you agree:

"When I let go of what I am, I become what I might be. When I let go of what I have, I receive what I need."

– Tao Te Ching

That's all for today's edition. If you're an EPL fan, enjoy the nail-biting season ender and may the best team win. Don't forget to share this newsletter with friends before sharing gets taxed too.

Have the best week possible.

Yours truly.

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