Youth fund on the spot over Sh300 m loan deal

The Youth Enterprise Development Fund is on the spot over a decision by its board to grant a Sh300 million loan to a Canadian non-governmental organisation.

Correspondence seen by the Sunday Nation shows how the massive loan to Enablis Entrepreneurial Network was approved against the backdrop of vicious boardroom intrigues, pitting the board against the management of the Sh2.2 billion fund, eventually leading to the sending on compulsory leave of three top managers, including the chief executive Umuro Wario.

Due diligence

The documents show how the CEO made several attempts to block the deal with the Canadian NGO, insisting that due diligence and public procurement regulations needed to be followed before signing the loan agreement.

What was at stake was much more than a mere boardroom battle between the board and defiant managers. Underlying the controversy and the suspension of the managers are fundamental issues touching not only on the transparency of credit decisions by the fund but also the governance of what has become the largest source of subsidised credit in Kenya.

Even more significant, the activities surrounding the approval of the huge loan to the Canadian NGO provide an illuminating study on how state-sponsored credit subsidy programmes remain open to manipulation by well-connected power brokers and lobbyists.

According to the documents, the initial contact between the Youth Fund and Enablis Entreprenueral Network was through a former State House operative and well-connected power broker and political lobbyist, the late Alex Mureithi, a nephew of President Kibaki.

The genesis of the deal is traced to a July 28, 2006 letter from the chair and CEO of Enablis and well-known Canadian entrepreneur, Charles Sirois, to President Kibaki. In the letter, Mr Sirois pledged to create an Enablis Loan Fund in Kenya to support entrepreneurship in the country.

“If Kenya establishes a fund of $10 million, a matching $10 million will be introduced through Enablis,” the letter said, adding a proviso that the promises would be subject to a feasibility study by the provider of the funds — the Canadian International Development Agency (CIDA).

In February 2007, Mr Mureithi presented the letter to the acting CEO of the Youth Fund, Isaac Kamande.

Political connection

With such a powerful political backer, it was clear that the proposal by the Canadian NGO was bound to go places.

Even though it was not stated openly, the coded message was that anyone opposing the NGO’s proposal was against an initiative or directive from State House.

Events moved very fast thereafter. In March, 2007, Enablis made a presentation to the Youth Fund board, and by July, a memorandum of understanding had been signed.

In October, the then Youth minister Mohammed Kuti launched operations of the Canadian NGO in Kenya.

The loan agreement has become a talking point within the NGO sector, and questions are being asked why a new entrant that is yet to build a national network is being granted such a massive loan in a context of high demand and competition for money from the Youth Fund.

The youth enterprise support sector in Kenya has evolved into an industry characterised by mushrooming owner-managed NGOs — most of them one-man, urban-based entities. Some are actually consultancies.

The pie

Indeed, the Youth Fund has been inundated with applications from all manner of institutions and consultants — all angling for a piece of the pie and unique partnerships with the Fund to “train”, “mentor”, “coach” and “network” young entrepreneurs.

Traders savings and credit societies have joined the fray, offering to provide matching funds for loans from the Fund.

The loan to Enablis will be the largest to be released to a single institution since the Youth Fund, by far the most ambitious attempt by the Kibaki administration to direct credit to enterprises owned by the young people, was established two years ago.

Until now, the largest recipients of funds have been Equity Bank, Kenya Commercial Bank, Family Finance Bank and the First Community Bank of Kenya, which offers Islamic banking.

Other recipients include K-Rep Bank, Kenya Women Finance Trust and the Kenya Industrial Estates.

The fund has also lent millions to more than 30 intermediaries, including several constituency youth development committees, community-based organisations and youth associations.

In response to questions by the Sunday Nation, the chair of the fund’s board Hellen Tombo defended the deal with the Canadian NGO.

She denied giving Enablis preferential terms and said the deal was a “unique partnership” which could not be handled under public procurement regulations. She said what had attracted the board to Enablis was the Sh330 million which the NGO had negotiated with CIDA, making it possible for them to match what they would get from the Youth Fund with funds from CIDA.

Ms Tombo said that although Enablis had been exempted from some of the terms for granting loans to intermediaries, the board had not committed any improprieties because the lending conditions were not static. She stressed that the board was not obliged to follow public procurement rules in negotiating partnerships such as the one with Enablis.

The evidence, however, is that compared to the leveraging and matching fund arrangements which the Youth Fund has signed with intermediaries such as the KCB and Equity, the deal with Enablis does not have any major comparative advantages.

For instance, the arrangement with KCB is that the Sh100 million loan must be matched at a rate of 1:9, meaning that one shilling lent by KCB to a young entrepreneur unlocks another Sh9 to qualified borrowers.

In the case of Equity Bank, which has also been lent Sh100 million, the leveraging is at 1:8, meaning that a shilling lent unlocks another Sh8 from Equity.

“The opportunity cost of giving the massive loan to Enablis is just too high,” said the suspended CEO, adding that the Youth Fund can leverage much more money with the Sh300 million being given to Enablis by extending the facility to local commercial banks.

He added that another comparative advantage of dealing with local institutions is the fact that they have wide national branch networks.

Expressed fears

Mr Wario has also expressed fears that, considering that Enablis will just be extending loans to members of its own network – mainly urban-based entrepreneurs who have to pay a membership fee of Sh5,000 before joining – the money may not reach the Youth Fund’s target group.

Under the agreement with Enablis, a copy of which the Sunday Nation has seen, the Sh300 million loan will be provided for a four-year period.

The money, to be drawn in tranches, will be given to a new fund, the Enablis Loan Fund, to be run by a board of trustees whose chair will be James Gachui of the Transcentury Group Ltd.

The Enablis Loan Fund is to be managed by another entity- the Enablis Financial Corporation- for a fee.