After more than seven years of reforms, the Treasury last year merged three government development finance institutions (DFIs) – Industrial and Commercial Development Corporation (ICDC), Tourism Finance Corporation (TFC) and Industrial Development Bank Capital Ltd – to form Kenya Development Group.
Christopher Huka, KDC’s interim general manager, spoke to Business Daily about why the new entity has prioritized recovering bad loans, some of which date back to the 1960s.
WHY WAS THE COMBINATION OF THESE THREE DFIS IMPORTANT?
The main goal of the merger was to create a single strong DFI that would support Kenya’s socio-economic growth. Our focus now is to catalyze Kenya’s socio-economic growth by aligning with national development priorities.
Most DFIs that were there before had lost this focus on national development like the Big Four Agenda, Vision 2030 and the SDGs (the UN Sustainable Development Goals).
The merger also gives us the possibility of co-financing with other banks, which was previously not used as much. We also want to be the key agency that will carry out government projects related to onward transmission because we have the capacity.
WHAT NEW STRUCTURES HAVE YOU CREATED TO ACHIEVE YOUR GOALS?
We have a new department called Resource Mobilization and Partnerships. Our goal is to open up all possibilities with this new directorate that have not been used before.
For example, a partnership with the PPP (Public-Private Partnership) Directorate in the Ministry of Finance to participate in PPP projects. This gives us our mandate, in contrast to the previous EFIs.
WHAT NEW OPPORTUNITIES ARE YOU LOOKING FOR?
There are areas that we didn’t use. We think, for example, of clean renewable energy, which is not yet fully exploited, and that is why we have set goals in this direction in this area.
The other area is post-harvest management, which I’m passionate about because we all see how much of our farm produce is wasted during bumper harvests. The other possibility is in the area of the blue economy, where we have a mass of water that hasn’t quite been tapped yet.
We also look at the livestock value chain, where we look at all the entrepreneurs within that chain. We look at improved market linkages from production improvement, veterinary services, hay production to animal products including leather. These were not previously included in the strategies of these DPIs.
AND HAVE YOU SET AN AMBITIOUS TARGET FOR YOUR LOAN BOOK GROWTH IN YOUR THREE-YEAR STRATEGIC PLAN TO 2024?
In our strategic plan we aim to expand our loan book from Sh4.5 billion to around Sh29 billion. We wanted to be ambitious. We didn’t want to have a conservative goal. Based on our assets, we said to project that kind of growth, we should sweat those assets.
There will definitely be challenges along the way. One of them is cleaning up the balance sheet. It will take a little while due to the processes we require.
OVER THE YEARS THE NON-FUNCTIONING DFIS HAVE ALLOWED THEMSELVES TO REPAY LOANS. HOW DO YOU HANDLE THIS CHALLENGE?
The bad book for the three organizations is in the Sh31 billion range. However, the principal amount is Sh4.1 billion. Penalties and interest have accrued over the years. For example, since independence, when ICDC was formed, it has made loans and set aside provisions for bad loans.
However, due to the process involved, it has never written off a single loan. What happens is that it keeps accumulating the penalties and the interest.
WHY HAVE PENALTIES AND INTEREST APPLIED TO THIS LEVEL?
There is a rule that we call the “in duplum” principle [where lenders should cease charging interest on defaulted loan once it surpasses the principal amount]which has not been applied.
There are cases where the loan has even tripled or even increased tenfold over the years. Most of these loans, as you see on the books, say 100 million shillings, was a 50,000 shilling loan in the 1960’s.
So it wasn’t right to just leave it like that. Ideally, when the penalties and interest reach the principal amount, you should stop (more fees), but it hasn’t been done.
That’s part of the cleanup (balance sheet) that we’re doing. It [the clean-up] is our priority because we want to attract investors and the first thing they look at is your books.
HOW WILL YOU REMOVE BAD CREDITS FROM YOUR BALANCE SHEET?
We need to take write-offs through the process of board and Treasury approval. We have divided the batches of these non-performing loans into groups. For example, we have the ones recorded in the 1960s, 1970s, 1980s and 1990s and the ones after that. The next step is to look for the collateral for each of these loans.
We want to see if the securities provided can be monetized because there are some cases where they can’t be monetized like the ancestral land you can’t even sell because it has been divided up over the years .
We are doing this cleanup by removing these amounts from our balance sheet and placing them under SPV [special purpose vehicle] that will only focus on the collections of that money.
WHAT HAPPENS TO THE BAD LOANS THEY WRITE OFF?
Writing bad loans off our balance sheet doesn’t mean we forget about them. We look for innovative ways to do this. We are examining the possibilities of recruiting organizations that carry out debt collections.
We have already spoken to three companies that are good at collecting. Second, there are organizations that buy the bad books and take care of them. Third, if it is a business, we assemble a team of experts within KDC to develop a turnaround strategy for those that can be salvaged.
I think, it [debt recovery] can be done. It’s just that we’ve never put our full focus on saying that a bad book of this magnitude needs to be covered here.
WHY INTRODUCE DEBT COLLECTION OF FACILITIES ADDING THAN HALF A CENTURY?
That’s our priority because we want to attract investors, and the first thing they look at is your books. So it’s best to clean up your books so you attract investors who want to work with you, either through project financing or an equity arrangement. This is a crucial growth strategy for us.
HAVE YOU STARTED SENDING REQUEST LETTERS TO DEFAULTER?
Last December, the company sent out more than 100 payment requests to customers who hadn’t turned up at our offices in the last four, five years for non-payment. We asked, “Are there guarantees?” The answer was “yes.” Then I said, “Have six or seven auctioneers ready.” To pay or not to pay, people came to the table.
When they came, we asked them to make repayment proposals based on their books. We found that they serve other facilities in other institutions but not KDC. Why? [Because there is] no pressure. They only care where the pressure is.
We have managed to get an average of three entrepreneurs daily to propose their repayment plan between Sh260,000 and Sh3.5 million per month before the notice period. For example, we reduced our distressed book from 78 percent to 71 percent in three months.
WHAT DO YOU CHANGE IN LENDING?
We change the mindset of borrowers and lenders who are our own people. We want to have the attitude that this is both a commercial and a government entity. It must make money for itself by serving the needs of the entrepreneur where banks and other financial institutions do not serve.
Yes, we connect them [credit] gap, but we need to be careful about how we manage our borrowing and lending. We checked our evaluation criteria. We now follow the five Cs: Character, Capacity, Collateral, Capital and Conditions.
Most of our projects that have failed have failed [lack of] character and independence. As long as you mix borrowing with a certain lack of independence from influence, which then destroys your objectivity because someone tells you that’s where you lend and you don’t follow due process, you will definitely fail.