Kenyatta, Moi-era barons risk auction of Sh31 billion

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Kenyatta, Moi-era barons risk auction of Sh31 billion


Kenya‘s first President Mzee Jomo Kenyatta (left) and his successor Daniel Toroitich arap Moi. FILE PHOTO | NATION MEDIA GROUP.

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  • The Kenya Development Corporation – the state body created by the merger of the Industrial and Commercial Development Corporation (ICDC), Tourism Finance Corporation (TFC) and Industrial Development Bank Capital Ltd – has launched bad debt recovery efforts that date back to going back to the 1960s.
  • KDC says it recruits debt collectors and auctioneers to pursue assets like land, cars and houses linked to the companies and their directors who were close to powerful people in previous regimes.
  • Government agencies have been notorious for lending to cronies of powerful politicians without sound assessments of borrowers’ ability to repay, particularly under the Moi regime.

The government has begun prosecuting debtors over state-backed business loans offered during previous Jomo Kenyatta, Daniel Arap Moi and Mwai Kibaki governments in hopes of raising $31 billion.

The Kenya Development Corporation – the state body created by the merger of the Industrial and Commercial Development Corporation (ICDC), Tourism Finance Corporation (TFC) and Industrial Development Bank Capital Ltd – has launched bad debt recovery efforts that date back to going back to the 1960s.

KDC says it recruits debt collectors and auctioneers to pursue assets like land, cars and houses linked to the companies and their directors who were close to powerful people in previous regimes.

Government agencies have been notorious for lending to cronies of powerful politicians without sound assessments of borrowers’ ability to repay, particularly under the Moi regime.

“Most of our projects that have failed have failed because of that [lack of] Character and independence,” said KDC interim general director Christopher Huka in an interview.

“As long as you mix credit with a certain lack of independence from the influences, which then destroys your objectivity because someone tells you to borrow there and you don’t follow due process, you will definitely fail.”

ICDC, whose existence dates back to before independence in 1954, was established primarily to provide affordable funding to Kenya’s industrialization dream and sectors with high potential for economic growth through debt and equity.

TFC was founded in 1965 to provide affordable long-term development finance and advisory services for investments in the tourism industry, while IDB Capital was founded in 1973 to help medium and large companies start and expand through competitive financing.

However, the three state-owned development finance institutions have been linked over the years to plundering public resources, in part through the influence of powerful forces within government circles.

Mr Huka said the main loan is Sh4.1 billion or 13.2 per cent of the total non-performing debt of Sh31 billion, with some non-performing loans more than three times the amount borrowed.

This violates the “in duplum” rule in banking, according to which lenders should stop charging interest on defaulted loans once they reach principal.

The continued accumulation of interest and penalties on bad loans into the late 1960s is indicative of possible negligence on the part of officials at the defunct development finance institutions that merged into KDC.

“Ideally, when the penalties and interest reach the principal you should stop (more fees) but it hasn’t been done. That’s part of the cleanup (of the balance sheet) that we’re doing,” said Mr. Huka. “It [clean-up] is our priority because we want to attract investors because the first thing they look at is your books.”

KDC said the debt recovery process involves segregating bad loans whose accrued interest and penalties have exceeded the amount borrowed, obtaining board and Treasury Department approvals for writing them off, and hiring collection agencies to recover the funds.

Bad loans from the 1960s through the 1990s – where there is a high probability that accumulated arrears have exceeded the principal amount – will form the first batch of bad debts, while loans from the 2000s will be included in a separate tranche.

KDC will also map collateral such as land used to secure bad loans that can be sold to recover the funds and identify assets held by companies and individuals that have defaulted.

Without forgetting

“When we write non-performing loans off our balance sheet, it doesn’t mean we forget about it. We will create an SPV [special purpose vehicle] with a team focused on collecting the same,” said Mr. Huka.

The company is evaluating offers from debt collectors who responded to its recent call. Three successful debt collection companies are hired.

KDC will also look for debt collectors who can buy up the bad loans and pursue debtors for payment, as well as hiring turnaround experts to try to bail out struggling and failing companies in which the defunct development financiers had acquired stakes.

“We have this three-pronged approach to deal with it. I believe it can be done. It’s just that we didn’t fully focus on it before,” Mr Huka said.

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