The Nairobi Solution: Ch.7

Erik and his team had arrived at 9 am for their regulatory review with the Central Bank of Kenya. They were seated in a large boardroom across from the regulatory team. This was Erik’s second meeting with Daniel Wainaina, head of Kenyan bank regulation.

Daniel was tall, good looking, liked fancy suits, and took his bank regulation seriously. Everything was by the book. Their initial meeting when Erik had first arrived in Nairobi had been a dressing down. Daniel was not happy about the outsized single loan exposure to East Africa Rail. He wanted this loan monitored very carefully. Daniel had also been upset with how Turkana was overdue on several filings. Also the bank needed to increase its liquidity with the Central Bank. It was a laundry list of problems, but Erik and his CFO, Lloyd, had been working through them.

Erik was hoping that in this meeting Daniel would appreciate the progress they had made, but right now it was hard to tell. Daniel was quiet with his head down, studiously reading whatever report was in front of him. No one was saying anything. Finally, Daniel finished reading. Took off his glasses and looked up at Erik and his team.

“This is still not an acceptable situation, but it’s better than before. The bank is current on its filings, the reserves with the CBK are back to more acceptable levels. The new equity from Belway Capital has restored the Tier 1 ratio back to the minimum level, and the bank’s risk processes are improving, but we still don’t want to see any new expansion of the balance sheet. If the bank’s next review goes well and the improvements continue, maybe at that point Turkana can engage again in new commercial lending. But, overall, we are pleased with the progress of the bank.”

This was Daniel’s way of saying ‘good job’. The review had gone well. Obviously, there was the small problem of the $12 million railway loan Erik had just promised Niko in Zimbabwe, but one thing at a time. Erik and Lloyd thanked Daniel for his time and all the hard work the regulatory team had put into their review and gratefully exited the building.

The Turkana management team proceeded to a nearby restaurant for a celebratory lunch. They decided getting Daniel Wanaina’s begrudging approval deserved some Tusker beer as well.

Two beers and a plate of chicken bones later Lloyd leaned over and said “Erik, I don’t want to ruin the celebration, but there’s something I wanted to flag to you.”

“Yes. Shoot. What is it?” Erik said wiping BBQ sauce off his mouth.

“You know Horizon?”

“Of course. Well kind of. They are the second biggest bank. The CEO is John Kinyua. Why?”

“Recently, they have started an aggressive deposit campaign in Turkana. They never used to be there, but for some reason now they have two branches and are paying 1% more than us on savings accounts. It’s getting a lot of buzz. My family is back there and everyone’s talking about it.”

“A full 1% more? That’s kind of aggressive. And you’re saying Horizon didn’t used to have branches in Turkana, but now they have 2?” Erik was still new to Kenya and didn’t know the lay of the land and competitive dynamics like Lloyd.

“Right. Most of the time the big banks never care about Turkana. It’s poor and there is no one to lend to, but Horizon started moving in recently. It’s not a problem yet, but if they keep getting traction, and we have to counter, it will eat into our deposit margins. Which is why I wanted to flag it.”

Erik was thinking. Why was Horizon making a move now? And why so aggressively? Was it because this John Kinyua saw Turkana had a new outside CEO and thought there was a weakness to exploit? But they were such small fish in the scheme of things. A guy like John Kinyua must have bigger strategic issues than trying to take market share in remote areas like Turkana. Erik sensed something else was at play, but wasn’t sure what.

“Lloyd, I think I’m going to see if I can have dinner with Mr. Kinyua. I’ll poke around a bit, see if he says anything. I might offer that he doesn’t need to be so aggressive. It probably goes nowhere, but let’s see. Rajiv always had good connections, but I don’t know anyone. It would be good for me to get to know these other bank CEO’s.”

“Like you said Kinyua probably won’t say anything, but give it a try. I’ll get his email for you. Ask him to meet you for dinner at INTI. It’s where they all go.”

John Kinyua had been surprisingly available and was free for dinner on Friday that same week. Erik was excited to meet him. Horizon Bank was a big underdog success story.

The biggest bank in Kenya had always been Kenya Commercial Bank (KCB). KCB was the government owned bank which automatically got all the government deposit accounts and payments business. KCB also got the big corporate loans. In contrast to KCB John Kinyua had started Horizon with a different market position and advertising.

Horizon was to be a bank for the individuals and small businesses. While KCB instituted high account balance minimums and fees to discourage small customers clogging up their branches, Horizon was the opposite. They courted these customers.

Horizon Bank was also highly innovative. The bank had created an agent system where small shop owners who sold Safaricom airtime minutes and processed Mpesa mobile money transactions could also make withdrawals and deposits for people with Horizon accounts. It was the same system behind the Safaricom mobile money, but applied to bank accounts. It meant small mobile money vendors with shops everywhere also became mini-Horizon bank branches. With strategies like this Horizon grew like a weed to become the second largest bank. Later Horizon was first to take advantage of mobile banking and their own mobile payments network. It would be interesting to meet such a dynamic bank CEO like John Kinyua even if it was because he was coming eat Turkana’s lunch.

On Friday Erik’s driver dropped him off outside INTI. INTI was a Japanese-Peruvian restaurant on the top floor of a building with views out over Nairobi. Erik was wearing a suit for the occasion as well as the new Paul Smith shoes Nicole had bought him. He took the elevator up to the 6^th floor. On the sixth floor the elevators opened up directly into the restaurant. There was a long bar down the left side of the room with tables in the middle. Then at the back of the room was a terrace looking out over the Nairobi skyline sparkling in the evening. It was pretty.

The hostess led him past the tables in the main room and out to a private table on the terrace. John was already there. When he saw Erik, he stood up from the table with a wide smile and a handshake.

“Erik! Nice to meet you! Welcome to Nairobi. I know you’ve been here a while, but you know what I mean. I’m glad you reached out.”

“Hello. Yes. I guess I’ve been here 9 months, but I still feel new. Thank you for your flexibility and being able to meet so soon.”

They made polite chit chat and John was really nice. He asked where Erik was living in Nairobi and gave him some suggestions of other neighbourhoods to consider. He gave him another route to the office with less traffic. They even discussed their mutual nemesis, Daniel Wanaiana. John had helpful pointers there as well. Erik really liked getting to know him, but eventually he had to get around to the main topic he wanted to ask.

“John, I really appreciate all of this good advice. Thank you. But may I ask you something about Horizon?”

“Yes. Go ahead.”

‘Lately, Horizon has been making a big push into Turkana County. You’ve never had a presence there, but now of all a sudden you’re paying 8% on savings accounts and opening new branches. May I ask what this is about? It seems rather sudden.”

“Well of course we are a big nationwide bank and are expanding everywhere, but you are right. Turkana has become of special interest to us and it’s not a coincidence. You see, I know Rajiv quite well and he naturally came to me looking for advice after you fired him. We had lots of chats together, and he even offered to sell us his family’s stake. During those exploratory conversations we learned a lot about your bank. We hadn’t realised the healthy deposit margins the bank was making in Turkana County. We concluded we didn’t want to buy a minority stake in the bank, but maybe the deposit market in Turkana County was more profitable than we realised. So we decided to make a push. You understand that business is business of course.”

Rajiv had tried to sell his stake to Horizon. That explained everything. He’d had a feeling that Dwight firing Rajiv was going to lead to some problems. Rajiv was too well connected.

“No. You’re right. Business is business. And it makes sense to expand into Turkana. I just don’t think you need to be quite so aggressive on your savings product. I’m sure you could pay 50bps less and still grow your market share. It might be better for both of us.”

“Thank you for the advice. And now can I give you some advice? Because I think I like you.”

Erik nodded.

“Turkana Trust has two fundamental problems. Maybe more, but 2 are obvious. First, it has a small but profitable deposit franchise in a remote county. However, you have an expensive branch network and aren’t using technology. This leaves you vulnerable to getting undercut by more efficient players using mobile banking. The second problem is that there are no good borrowers in Turkana so you have to come to Nairobi and compete with the bigger banks for the good borrowers. This means you always have to take on the riskier loans and price them lower than everyone else to win business. Take the rail loan for example. We wanted that loan too, and it would have been a better fit for a large bank like Horizon. But Rajiv was desperate to grow his family bank and so went out on the risk curve, undercut all the other banks on spread and got the business. But it’s a Pyrrhic victory. The loan is too big for the bank and, as you are probably finding out, is causing a lot of regulatory scrutiny. This is Africa. Delays and problems are guaranteed. When problems pop up, as they inevitably will, there is a high chance that one loan will bring down your bank. Sorry to be so negative, but I expect you will have a lot on your hands, and your time in Nairobi will be stressful.”

Boy did John Kinyua hit the nail on the head. There was a reason he was the best banker in Kenya.

Erik took a moment to finish what he was chewing.

“John, thank you for your advice. And thank you for your assessment of Turkana Trust. It’s right on the money. And yes when Belway Capital invested in the bank we knew the railway loan was a risk which needed to be managed, but for us it was a risk worth taking. We are managing the loan, and I’ll admit it has been difficult, but I’m happy to say the project is basically on track and coming along.”

“Well cheers to that!” John said raising his wine glass. “All of Kenya wants it to succeed. We are all cheering for you.”

John and Erik clinked their wine glasses and toasted to the future success of East Africa Rail. Erik looked out and admired the Nairobi skyline, which at night looked like any other modern city. For the first time since coming to Nairobi he felt like things might work out.