SUFFESA Monthly Review - June_2014

Suffesa MONTHLYReview

June 2014 Edition

Kenya- EUs Relationship 40 years later

Table of contents04 Kenya- EU’s Relationship

40 years later

Information Power

Global Banking: The regulation question.

Settlement Process in the NSE Market

Investing in the Money Market: Yes or NO?

Focus on Quality

Recent Developments in the Kenyan Financial Markets

MAKE THAT CHANGE

BOOK REVIEW

JOKES CORNER

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Suffesa Monthly Review June 2014

Chairman’s Statement

It is a great pleasure to present the June issue of the SUFFESA Monthly Review after a long editorial break. The month of June 2014 is a momentous one for SUFFESA as it marks our third anniversary even as the School of Finance and Applied Economics ushers its first class into the job market during this year’s Strathmore University graduation. As we celebrate the achievements of the Class of 2014, we will be welcoming to the association the Class of 2018: a class that we are confident will bring great energy, creativity and passion to drive the future growth of our association.

As we see off the graduating class, it is clear that the work being done by the team at the School of Finance and Applied Economics is truly exceptional. Majority of the students have been able to secure employment opportunities. Organizations like McKinsey Consulting, British American Insurance, PineBridge Investment, I&M Bank and more have come calling and they have not been disappointed.

The world-class quality of research published by students from the school only serves to underscore the rigor of the learning taking place. Three of the students from the graduating class, two of whom were members of our association, have had their research reports accepted for publishing in the Africa Finance Journal.

This is no mean feat and it was the cause of great interest at the Durban Conference when, for the first time in the Conference’s history, undergraduate students had gained the audience of the greatest scholars on the African continent. These achievements came just after three members of our association, together with two from our sister association SASS, represented Strathmore University in the CFA Institute Research Challenge where they emerged first runners-up.

On behalf of the SUFFESA executive team, I take this opportunity to thank all our stakeholders, our esteemed members, faculty, guest speakers, contributing authors and the entire Strathmore fraternity for the support. We look forward to having an exciting year ahead. Plans are ready to undertake a Financial Literacy Training in partnership with The Standard Chartered Bank who have shown keen interest in joining us in fulfilling our mandate. It is such collaboration with industry that we endeavor to develop in our commitment to make an impact in society. We invite comments and suggestions on how we can better serve the needs of our members, build formidable partnerships and touch more lives .

The above and other features in this edition of the SUFFESA Monthly Review have been specially selected to meet the needs of our highly esteemed readers. Do enjoy your reading.

Yours truly,

Reuben Muhindi


Europe has been and still is one of Kenya’s largest trading partners. In 2012, Kenya’s trade with the EU accounted for 14.7% of its total trade with the world making it Kenya’s second largest trading partner. However, EU’s trade with Kenya only accounted for 0.1% of their total trade. This has made Kenya have a negative balance of trade with the EU. In 2012, the balance of trade between the two parties was €630million, which is approximately Ksh72.5billion. Looking at these statistics, one wonders whether the previous trade arrangements have had any impact on our trade with the EU and our economic performance. What is there to show for Kenya’s association and partnership with Europe for the last close to 40 years?

A brief history of the Kenya-EU partnershipKenya’s association and trade relations with the European Community majorly began in 1975 with the Georgetown Agreement which created the Africa Caribbean and Pacific Group of states (commonly known as the ACP Group) in which Kenya is a member. From 1975 to 2002, Kenya’s trade relations with the EU were under the framework of the successive Lomé conventions and the Cotonou Agreement.

Kenya- EU’s Relationship 40 years later

5th – 9th May marked the annual European Union week. It is commemorated through various activities organised by EU offices around the world. In Kenya, the EU delegation organized the EU-Kenya trade and investment forum and expo on 8th May. The highlight of the forum was a panel discussion that focused on how to catalyse the EU-Kenya partnership to increase trade between the two parties. As we discuss ways to improve trade between the two parties, we should consider the following interesting facts.

By Tito Tibi


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The objectives of the EPAs are the integration of ACP economies into the world economy, sustained economic development and reduction of poverty. This is to be done through deepening and accelerating existing economic integrations, removing barriers to trade in the region and creating larger markets, with the view of stimulating the necessary investments and productivity improvements that will drive development. Overall, the development dimension is meant to be the core of the EPA negotiations.

The Kenya Human Rights Commission in their publication ‘Trading Our Lives with Europe’, question the amount of development that will result from the EPAs. The report states: ‘the EAC-FEPA inhibits the right of the EAC partner states to freely pursue their economic, social and cultural development.’ They argue that the weakness of the ACP economies and institutions naturally predisposes them to unequal competition with the more industrialized EU members.

The Lome conventions granted non-reciprocal trade preference to ACP countries. Kenya and other ACP countries were given preferential market access for primary products, essentially agriculture and other agro-based products. Additionally, they were granted funds such as the European Development Funds among other forms of assistance towards trade and private sector development. However, the non-reciprocal trade preferences granted to the ACP countries were in contravention of the principle of Most Favoured Nation, one of the core principles of the World Trade Organisation (WTO) agreements.

The Cotonou Agreement envisioned the removal of non-reciprocal trade preferences, within the transition period of between September 2002 and 2007. The Economic Partnership Agreement (EPA) was to be negotiated between Europe and the ACP countries. The Framework Economic Partnership Agreement (FEPA) was set up as a stand-in to the conclusion of the full EPA as Kenya and the otherEast African Community (EAC) countries are still negotiating a comprehensive Economic Partnership Agreement.


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programs and arrangements are formulated to improve trade with the hope of increasing people’s incomes, nothing fruitful will result if the people are unable to produce the items to be traded in at least an efficient way. This should be the focus of the EU’s intervention into Kenya.

The reason we will continue fighting for the non-reciprocal trade preferences to be upheld; and for increases in the size of the European Development Fund and other forms of aid, is because we lack the capacity to produce goods and services efficiently and in quantities enough not only for domestic consumption but also for export.

The EAC will also be forced to accord the EU more favourable treatment if they become party to an economic integration agreement with any major trading country after the signature of the EAC-FEPA (This is in line with the principle of Most Favoured Nation). This will inhibit the EAC states from freely associating with other regions of the world in attempts to nurture their economic, social and cultural development.

Assessment

Why didn’t the non-reciprocal trade preferences within the first trade agreements achieve much in increasing the market share of ACP countries’ products and Kenya’s products in the EU? What will the result be of the currently negotiated EAC-EU EPAs? What should be changed not only to increase trade volumes between Kenya and the EU, but also to increase the impact of the EU’s economic support programs in poverty reduction and increased growth and development?

I believe that no matter how many


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Until Kenya with the help of its ‘friends’ fix this problem, little progress shall be made.

The best way for EU to help build Kenya’s capacity to produce is by helping it to increase its energy production, invest in skill development and increase of human capital within the country. Without enough energy, we cannot produce efficiently and in sufficient quantities. Already this is being seen through investments by European companies such as InnoWind, in wind and solar energy. Endogenous growth models show that it’s almost impossible to produce more and in greater efficiency if we do not have the technical skill to do so. I commend the EU for its partnerships with some local universities, including Strathmore University that has seen them provide capital especially machinery and equipment for training students in highly technical fields. My hope is that this trend shall continue in many other universities and higher institutions of learning. This shall see us, in the long run, being almost equal parties with the EU in trade agreements, with no need for special treatment towards one of the parties.

INFORMATION POWER By Daniel Kalya Ever since the whooping $16 billion whatsapp buyout by Facebook Inc., I have developed an interest in the social media stock valuation. The interest actually started with Facebook’s IPO. The dynamics of social media company valuations are different from those of ‘traditional companies’. There is revenue for both of them but a significant difference when it comes to costs. Social media companies’ main value driver is user growth which is complex to value. For instance, what is the value of having one million users (of the social media) to the company? I find the absence of no definite valuation structure quite fascinating.

However, how the Facebook IPO performed, I believe is something Mark Zuckeberg would not want to remember. Many Wall Street analysts referred to it as “Shambles.” Facebook’s stock prices plummeted for weeks immediately after the IPO. Three weeks after the May 2012 IPO,Facebook had lost $35 billion of its market value.

The sudden decline of the share prices is attributed to analysts’ actions; they reduced their revenue estimates for Facebook just before the IPO which of course had an effect on the market. Investors’ confidence in Facebook reduced and people started selling the stock they held leading to a price decline.

They went on a ‘damage-repair’ mode and their stock price rebounded to $32 which translates to a market capitalization of around $66 billion. Their acquisition of online messaging service company Whatsapp Inc.,signaled growth prospects which are likely to renew investors’ confidence in the future of the company.


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Enter Twitter

Twitter Inc. is the latest social media companyto be listed though it isnow succumbing. Atthe time of listing, Twitter’s IPO prospectus pointed out two metrics which are of particular importancein evaluating it.

One was it’s number of monthly active users and the other was timeline views. However, in February 2014, it told investors not to worry about the number of monthly active users because it was no longer an important measure of engagement.This statement came at a time when the number of their ‘timeline views’ was decreasing and the company’s rate of adding new members was decreasing.

All the fluctuations and trends in the stock prices of Facebook Inc. and Twitter Inc. are brought upon by changes in information and the information that is available to the public. This is consistent with the economic theory that stock prices are reflective of information that is in the market.

Comparing that with our local market though, I doubt whether our securities exchange is as sensitive as the NASDAQ or the Dow Jones. This shows that we still have a long way to go in terms of developing our market especially with regards to information availability. This is a challenge posed to the policy makers and market players.


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The statement did not go well with investors as it seemed contradictory. Consequently, it’s stock started plummeting making securities companies and brokers have a sell rating on the stock.

Ever since the collapse of Herstatt Bank in 1974, global banking regulation has always been top of the political and economic policy agenda.

Of course, the actions of regulators after the collapse have ended up defining the world of banking as we know it today: the formation of the Basel committee for banking supervision; the subsequent coining and definition of a new term: Herstatt Risk to denote cross country exchange rate risk among other developments.

The formation of the Basel Committee was expected to improve global regulation and supervision of banks, especially focusing on Globally Systematic Important Banks (GSIBs). What followed was the establishment of accords: Basel 1 and Basel 2 developed from the shortcomings of the former; and currently, Basel 3. Each subsequent accord provides stricter regulatory provisions.Enter 2007 and the global financial crisis starts, exposing the acute capital inadequacies of many GSIBs, particularly in their operations in the advanced economies of Europe and

the US, occasioned by participation of the banks in risky derivativeinstruments transactions.

What followed has been well documented: the collapse of several banks and other financial institutions, the largest of which – Lehmann Brothers – nearly brought the entire world economy to its knees.

The collapse highlighted some of the deficiencies of Basel 2 and most of these were considered and incorporated in the creation of Basel 3, which now promises a global system of more resilient banks and banking systems.

Typically, the Basel accords are meant to be guidelines for the prudent regulation of banks, the adoption of which is often at the discretion of individual national authorities. As such, studies done have found out that part of the problem making global regulation of banks more coordinated is the fact that most of the regulation is still at the national level.


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GLOBAL BANKING: THE REGULATION QUESTIONby Cyril Wandanje O.

foreign operations in the host countries case in point are the European regulators after the US decided to impose capital requirements foreign banks operate within their economy.

For the regulation of multinational banks, Basel of 2 had set out the regulatory responsibilities for their home country regulators and their host country regulators.

The aftermath of the financial crisis however saw host country regulators stepping up and imposing certain regulation on the operations of multinational banks within their economies, which would traditionally be under the mandate of the home country regulators, for example introducing guidelines of holding independent capital for the specific country’s operations.

This is an obvious setback to the Committee: an erosion of the measures put in place so far to promote global regulation coordination. In addition, there is an increased amount of misunderstanding and animosity among individual country regulators,especially from the side of home country regulators who feel that host country regulators should not impose regulation on their country’s banks


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American regulators had for a long time allowed the banks to operate with no capital trusting on their home regulators to ensure that their parent companies are adequately capitalized.

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The European banks however took advantage of the situation. Borrowed heavily in the US short term money market and repatriated these funds to their parent banks, in the process building up very huge liabilities. At the advent of the financial crisis, the short term market suddenly dried up, worsening the situation of such lenders.

The question therefore is: What can we do to enhance the global coordination of banks?An interesting approach is seen in Europe, where the EU is in the process of establishing a banking union such that all banks within member countries are regulated by a single regulator. In the arrangement, the individual national regulator becomes less significant. The disadvantages of such an arrangement might be that the regional regulator may focus too much on regional uniformity in regulation and neglect country-specific circumstances. This may translate into a weaker and generally less robust banking environment hence raising the incidences of bank failures.


On the implementation of the arrangement, the EU has an obvious advantage of being a Monetary Union and hence arrangements to establish uniform regulatory measures are clearly quite easier. It is yet to be seen which methods, if any, will be applied for the rest of the world.

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Under normal circumstances, investors invest in stocks in the NSE without acknowledging how the process of settlement takes place. Investors may include: yourself, your relatives and friends. Here are some questions we should ask ourselves as investors in the NSE: How many of us are keen to understand the settlement procedure in the NSE and how it works? Are we aware that we can actually study the market and place limit orders for ourselves? Do we know measures that have been taken to protect us from some of the risks that may occur in the exchange? An informed investor should be well aware of his/her investments and the nature of where he/she invests in. Hence, this article simply seeks to give a simplistic view of the settlement process on the NSE.

Settlement Process in the NSE Market- CDSC Limited The settlement cycle in the NSE currently takes place once in a day and the process takes T+3 days to be realized. T is the Trading day plus three days after the day of the order.

This is CDSC’s main business in the NSE. The exchange is literally a market; hence there are many buyers and sellers. Therefore brokerage firms tend to have large numbers of shareholder clients. It is through brokers that shareholders place their varying orders on a daily basis.

These include both limit orders1 and market orders2.

Brokers are able to carry out internal matching of their clients’ orders. However, by the end of the trading period, that is when the market closes at 3pm, there are buyers and sellers in the market whose purchase orders have not been matched. As a result, each broker will have a net amount of money that they will have to settle.

SETTLEMENT PROCESS IN THE NSE MARKET

1 This involves specifying purchase or sale at maximum buying prices or minimum selling prices. 2 This involves specifying sale or purchase at the best available price.

By Katumbi Mwanzia

The brokerage firms whose net amount is a positive, by the time the market closes at 3 pm, means that they have receivables while those that have a negative net amount have payables to make. The brokerage firms that have payables as their net amount are required to deposit these amounts in the settlement banks that assist in settling the dues. CDSC Ltd, therefore intervenes at the close of the market to facilitate this procedure is carried out. Below is a simple illustration to explain the settlement process, however, it is important to keep in mind that the market does not operate this simply due to reallocation process3.

Now consider two brokers: Broker A and Broker B. Where broker A has clients 1, 2, 3 while B has clients 4,5 and 6. All these clients have CDS accounts that are currently trading. Hence their shares are in electronic form rather than the outdated certificate forms.Let us say that Client 1 wants to purchase 1,000 Britam shares at Ksh.17.85 (as at 10th March 2014). Note that client 1 is from broker A. On the same day, client 4 from broker B wants to sell 1,000 shares of Britam at the Ksh.17.85.

Each client will therefore have to give instructions to their individual stock brokers to execute their interests. In this case I have assumed that client 1 has available funds with the broker that is enough to purchase the Britam shares at the price quoted. This amount that the broker holds on client 1’s behalf should also be inclusive of the commission which is currently a flat rate of 2.1%.

It is now the duty of the brokers to carry out the clients obligation. Hence, each of them individually captures their clients’ instructions in the NSE’s Automated Trading Systems (ATS). This information is then transferred to the CDSC’s Central Depository System (CDS).

CDSC Settlement sends a notification to both brokers informing each of their net position. In this case broker A has a net position of negative Ksh.17, 850 while broker B has a net position of positive Ksh.17, 850. Broker A will therefore deposit the Ksh.17, 850 in a settlement bank like Stanbic Bank. Thereafter, Stanbic Bank will go ahead to payout the receivables. This is a T+3 processes. On the third day, the changes made on each client’s CDS accounts will be reflected.

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3 This is the process where a client cancels or calls back any trade execution done by the broker.

The Guarantee Fund

The Guarantee Fund is an account managed by CDSC Ltd, however, it does not benefit the company parse. Every broker is mandated to contribute 0.01%4 of every trading transaction. This fund ensures that due settlement in the capital market is completed despite the position of the brokers authorized by CMA to trade.

This fund is appreciated in cases when a brokerage firm in net payable position is unable to fulfill its obligation. In such a scenario, the particular amount payable is withdrawn from the Guarantee Fund in order to facilitate efficiency in the settlement process. Afterwards, this particular brokerage firm is expected to repay the amount withdrawn from the Guarantee Fund plus a fine.

The 0.01% Guarantee Fund contribution is applicable for brokerage firms that carry out daily trades not more than Ksh.10 million.

However, if a brokerage firm trades more than Ksh.10 Million, it will be charged 20% on the extra amount above Ksh.10 Million which becomes payable to the Guarantee Fund. This particular regulation ensures that brokerage firms trade within their abilities.

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4 This is an amount that is derived from the 2.1% flat rate that the brokers charge for every trade.

Investing in the Money Market: Yes or NO? If you are a risk averse investor with a conservative amount of money with the intention of investing in the short term, your investment opportunities are quite extensive and diverse therefore a perfect fit is non-existent. However a proven investment vehicle is a money market fund.A money market fund involves investing in interest bearing assets such as fixed deposits, commercial paper, treasury bills, bills of exchange and treasury bonds to provide a steady growth of income and stability in the capital invested especially during times of volatile market performance.

The key benefits ofinvesting in such a fund include: 1. Low initial investment requirement of between Ksh 50,000 to Ksh 500, 000, according to the Capital Market authority. This therefore caters to a wide array of investors. 2. Liquidity and flexibility as an investor can easily withdraw funds on short notice without incurring penalties. 3. Historically proven that when rates start moving upward, money market fund yields quickly adhere to the same trend unlike those of bank savings accounts. 4. It offers an average net rate of return of 7%-8% p.a. which is clearly higher than any bank deposits for a minimum investment. 5. It presents an opportunity for delegated decision-making. A money fund is professionally managed therefore relieving an investor the burden of carrying out extensive research or bearing the consequences of a random portfolio selection. Fund managers constantly monitor the portfolio based on research information.


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By Charles Miano

Despite the fact that the money market is most suitable for investors who require regular income and for whom capital growth is not a prime objective, large corporations invest as well. The money market allows corporations with a temporary cash surplus to invest in short term securities such as treasury bills, cash deposits call accounts, commercial paper, corporate notes and treasury bonds. By the same token, large corporations can utilize the money market to secure short-term loans to meet their working capital requirements.

In spite of money market funds being the lowest risk variety of mutual funds, they are not risk free. Loss of purchasing power can really harm money market fund returns due to inflation. Similarly, persistent low rates as well as the variability of rates have

made money market funds relatively undesirable.

Whether it is a conservative investor or a large company looking to utilize the money market, a thorough assessment of the opportunities and drawbacks of a money market fund must be taken into consideration. It is guaranteed that the money market will always offer the lowest risk investments. Thus, to invest or not to invest; it all depends on your preference.


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Focus on Quality By Kigen Chelimo Each one of us is ingrained with the capacity to achieve greatness. We can all be great and it is only the size of your dreams and the strength of your beliefs that will define you. It is on this note that I have to express my dissatisfaction with how most people let their dreams fade into nothing more than mere fantasies. I am disheartened to think of the dreams that would have changed the world but did not. The people who would have left a mark in the world but, sadly, did not. I look forward to the day each of us will seek to live their dreams. I look forward to having less dreams being found at cemeteries and more being lived.

To live our dreams, we need to be driven by more than just fantasies. We need to believe in what we do and what we can be. I think that we will achieve more than our wildest imagination when we are ready to shed our misguided misconceptions and adopt more enlightened ideas. The most important idea we should embrace first as people, and even more importantly as Africans, is that of Quality.

Quality is one word that is rarely used in the same phrase as most African produce. I believe it is time for us to rethink our approach to quality. I look forward to the day when the phrase “African” will be synonymous with high Quality. But to get there, some of our ideas have to be turned on their heads.


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In seeking to achieve quality, we must seek to continually improve. The simplicity of this statement belies its importance. Quality should be an overriding objective. We should not limit our attempts at attaining quality to merely just one field but rather we should apply this philosophy to every aspect of our lives. Every single moment should be driven with the intention to attain the highest quality.

The first thing one should focus on is to set objectives. The objective should not be impossible to attain as this would cause disillusionment.

However, the objective should at least have the capacity to stretch you beyond your comfort zone.


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Once one has set an objective, one should not rest until the target is at-tained. This would set you on the course of attaining high quality. This article is by no means exhaustive but is rather intended to start you thinking of how do build quality. Quite essen-tially, the first step is usually the hard-est and it’s easier once the journey has started.

One step at a time, we can attain quality. The onus of responsibility rests with each one of us. Challenge yourself because that is the only way you can know the limits of your ability.

Recent Developments in the Kenyan Financial Markets

2013 had been a roller-coaster of events: Westgate attack, general elections, Lupita Nyong’o’s Oscar nomination etc. 2014 is off to a relatively good start. Lupita won her Oscar afterall.Interestingly, 2014 is also promising for the financial markets which are poised to be robust in many aspects.Kenya has an established future market. The market is yet to embrace the concept and so we shall have to wait and see how this will play out.The Nairobi Securities Exchange (NSE) recently marked its 60th Anniversary with a proclamation that it will list on the same exchange. In an environment where recent IPOs have failed (Safaricom, etc.), it will be interesting to see how the NSE will tackle it.The adoption of Real Estate Investment Trusts (REITs) is set to take root later in the year. These are basically unit trusts mandated to invest only in the real estate sector. These securities have been applied globally and successfully in developed countries and in African countries such as South Africa, Ghana and Nigeria. The CMA has approved certain REIT managers: Centum Asset Managers Ltd and UAP Investments Ltd in December, 2013; Stanlib Kenya Ltd, Fusion Investment Management Ltd and CIC Asset Management Ltd in

Venture capital (VC) has been brought to the media limelight recently with the well-documented success of HeshanDeSilva, Kenya’s youngest billionaire. What most people have failed to realize is that VC has been existence for a while and the Capital Markets (Registered VC companies) Regulations 2007 clearly defines a VC. More and more VCs continue to spring up though they need not be registered with the Capital Markets Authority (CMA).One of the revelations has been the private equity (PE)sector that continues to gain prominence in Kenya. To understand how a PE fund operates, just picture a show like Shark Tank or Dragons Den. The difference is that instead of funds being invested in a stake of a start-up, it is invested in an established company that needs growth. More often than not, PE funds invest in small and medium enterprises (SMEs) for about five years, gaining returns of 30% and above on exit (IPO, acquisition, management buyout, partial exit via re-financing).The Kenyan PE market has for a long time been dominated by Centum, Trans Century and Actis but other PE funds have emerged.

By Solomon Maonga


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There are currently about 45 PE firms in the country with more setting up shop. Some PE firms double up as VC firms since they basically do the same thing but VC firms prefer start-ups.However, Kenyan companies prefer to be bought out by cash-rich corporates rather than cede shareholding to private equity funds that would pressure for returns.Some of the buyouts in the Kenyan markets include that of Paul Kinuthia’s Interconsumer Products by French-listed cosmetic giant L’Oreal last year at an estimated Sh1 billion. Other recently-concluded deals include the purchase of motor dealer CMC Motors by Dubai based Al-Futtaim and that of Access Kenya by Dimension Data of South Africa. Unga Group is in talks to buy Ennsvalley Bakery in a share swap estimated at Sh446 million.Deals that were in the pipeline but did not succeed include South African manufacturer Tiger Brands buyout of Rafiki Mills and Magic Oven Bakeries, and that of KenolKobil by Puma. Transactions by PE funds include Fusion Capital Sh245 million acquisition of a 45 per cent stake in GAL Baking Services, and the entry of German based DEG’s in reinsurer Zep-Re. French based Amethis Capital and DEG also bought into mid-sized lender Chase Bank.

Bottom lineSo, what do these developments mean for the market? Well these developments reflect a need for modelling of securities and markets that have been successful in other countries to fit the Kenyan sector so as to incorporate phenomena unique to Kenya. Can you imagine taking a long position on a futures contract by using your mobile phone?The development of the futures market will most likely lead to more efficient use of forward contracts. Forward contracts are already in use (KQ on oil prices, etc.) but the exchange futures will provide a proxy for the forward prices. Hedge funds are likely to spring up since they use derivatives for arbitrage, hedging and speculation. There is also limited regulation and legal control. There is no law governing PE in Kenya, for example, but the CMA has authority to issue necessary regulations. The new products will need development of laws by legislators in conjunction with finance specialists.In a pre-dominantly accounting-based economy, there will be need for persons with financial expertise. The future seems bright so we have to be prepared!

Suffesa MonthlyReview June 2014

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USE OF MODELS IN SOLVING SOCIAL PROBLEMS

ith the high level of crime in Kenya today, it makes me question the government’s aim to not only promote safety to its citizens but also to improve the current state of unemployment in the country which currently stands at 40%. We are all living at a time of uncertainty with terror threats being sent every other time and also the negativity currently in the press.

A great economist, Gary Becker, is known as the great social scientist to have lived and worked in the 21st century. He used economic models to solve social problems. In his model of crime and punishment, he looks at criminals as rational individuals who seek to maximize their own well-being but through illegal means. This came to him while driving to an oral exam with PhD students and was in a dilemma on whether to park closer to a spot that was illegal or to park in a lot which was somewhat farther away. This probed his curiosity to derive a solution for crime.

In his model, he comes up with various mind-blowing solutions. He proposes that punishments should be limited to fines. This is because it becomes a win-win situation for both the government and the criminal in that, the government gets compensated while the criminals won’t be imprisoned thus saving the government the resources of having to employ guards to look after the criminals. This may only work in various kinds of crime like over-speeding but in cases of murder, this may not hold.

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”- Buckminster Fuller


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W

Grace Kamau

DEAD AID: WHY AID IS NOT WORKING AND HOW THERE IS ANOTHER WAY FOR AFRICA

Dambisa strongly talks against government to government aid. She argues that aid doesn’t necessarily make a country better off. For instance, there has been no evidence that aid has helped in job creation and reduction of poverty in Africa.

Aid should therefore not be seen as a solution but the problem to African countries. It has various negative incentives as it discourages investment and entrepreneurship and disenfranchises Africa as the governments are not accountable. It also makes Africa governments take a back seat and wait for help in addressing all their problems rather than actively addressing their problems.

She believes time is ripe for Africa to stand on its feet as an equal partner on the global stage. Some of the solutions she offers include drawing up a five year plan whereby the aid to Africa will be systematically reduced. She adds that the governments can raise funds through the capital markets e.g. by issuing bonds. Moreover, more focus should be given to having an environment that will encourage an increase in foreign direct investment. She argues that it will be better for the donor countries to give money to entrepreneurs to start up or grow their businesses rather than the governments to avoid the money flowing to a few greedy individuals.


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By Dambisa Moyo

The authors point out the main challenges which America faces that include globalization, the revolution in information technology, the nation’s chronic deficits and its patterns of energy consumptions. They try to analyze these challenges and spell out what needs to be done for America to rediscover its power and prowess. They also show how America’shistory if properly understood, provides the key to successfully coping with its challenges and explain how the paralysis of the US political system and erosion of key values have made it difficult to carry out the policies the country needs.

With china gaining dominance as the country that is overtaking America, this book is an interesting read as it shows us how this phenomenon can be possibly reversed.


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THAT USED TO BE US: WHAT WENT WRONG WITH AMERICA AND HOW IT CAN COME BACK

By Thomas Friedman & Michael Mandelbaum


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Jokes Corner1A mathematician, an accountant and an economist apply for the same job. The interviewer calls in the mathematician and asks “What do two plus two equal?” The mathematician replies “Four.” The interviewer asks “Four, exactly?” The mathematician looks at the interviewer incredulously and says “Yes, four, exactly.”Then the interviewer calls in the accountant and asks the same question “What do two plus two equal?” The accountant says “On average, four - give or take ten percent, but on average, four.”Then the interviewer calls in the economist and poses the same question “What do two plus two equal?” The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says “What do you want it to equal?”

2A mathematician, a theoretical economist and an econometrician are asked to find a black cat (who doesn’t really exist) in a closed room with the lights off: - The mathematician gets crazy trying to find a black cat that doesn’t exist inside the darkened room and ends up in a psychiatric hospital. - The theoretical economist is unable to catch the black cat that doesn’t exist inside the darkened room, but exits the room proudly proclaiming that he can construct a model to describe all his movements with extreme accuracy. - The econometrician walks securely into the darkened room, spend one hour looking for the black cat that doesn’t exits and shouts from inside the room that he has it caught by the neck.”

3“Economics is the only field in which two people can share a Nobel Prize for saying opposing things.” Specifically, Myrdal and Hayek shared one.

Note: Any suggestions towards improvement of the Suffesa Monthly review are welcome. We look forward to your views and comments on our Facebook page and contacts alike.If you wish to become part of the inaugural editorial team at Suffesa Monthly Review, don’t hesitate to contact the person below:Joy Kurui - +254 704 290 267.

Report by: Strathmore University Finance and Financial Economics Student’s Assosciation – (SUFFESA)

Email – [email protected]

Disclaimer: The content provided on this document is provided as general information and does not constitute advice or recommendation by SUFFESA and should not be relied upon for investment decisions or any other matter and that this document does not constitute a distribution recommending the purchase or sale of any security or portfolio. Please note that past performance is no indication of future results. The ideas expressed in the document are solely the opinions of the authors at the time of publication and are subject to change without notice. Although the author has made every effort to provide accurate information at the date of publication all information available in this report is provided without any express or implied warranty of any kind as to its correctness. You should consult your own independent financial adviser to obtain professional advice before exercising any decisions based on the information present in this document. Any action that you take as a result of this information, analysis, or advertisement is ultimately your responsibility.

Strathmore University, Student Centre, Clubs office, Madaraka, Nairobi. Tel: +254 704 290 267(Club Official)

SUFFESA Monthly Review - June_2014

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Transcript of SUFFESA Monthly Review - June_2014