VICTORIA COMMERCIAL BANK: WE DON’T TAKE ADVANTAGE OF OUR CLIENTS

Let's start with the theme of this year's banking awards and the survey, which is on responsible banking in a new era. We crafted this theme before Covid-19 came to the picture, what has happened is that the concept of responsible banking has gained a lot more credence now. 

Look at what is happening now, many banks are focusing a lot more on their customers, finding ways to work with them in these difficult times. How is your bank engaging responsible banking?

For us, our primary or underlying way of working has always been that we add value to our client. So, if a client came to the bank for example and said that I would like to have a loan and he's in the manufacturing sector, we could either say okay take this money and we earn our interest but that to us, as an institution, will be a short-term relationship. We are focused on long-term. And so we will we will sit down with the client, try and look at their complete cycle; we look at their balance sheet and then from there, perhaps suggest that instead of taking a loan, a letter of credit (LC) is what they need. Then they will save say, X percent, because they don’t pay interest on LC. By doing that you've added value to the client. So it becomes kind of a responsibility on our side to ensure that no client is in any way taken advantage of even though it may mean that the bank may have lose income. We've actually seen this happening with several of our clients like their balance sheet would be completely off, not because they're doing something irregular, but because of the way the structures are done is not the correct and we've over time helped them and they've actually come out from a complete borrowing situation to having money in surpluses. And that I think is one of the ways where we ensure that we are a responsible institution.

 


We also encourage clients to have more than one bank, not to bank solely with VCB. It gives clients an opportunity to benchmark. They can compare and know which bank actually serves them best. I can sit here blowing my trumpet the whole day, but the client is the one who must see that yes, what I'm saying is actually happening. So we encourage them to go to any bank whether it's in the tiers above us or the same,  it doesn't matter. It helps them to compare what we are giving against what we are actually saying.

 


That's interesting the first time I'm hearing a CEO of a bank saying that you actually encourage your clients to bank elsewhere as well. 

 


Sometimes it means that you are losing a certain percentage of the company's turnover to another bank, but let's look at it another way. That bank may give something that we have not thought of so to Mr. Oloo they will say, this is a better way of doing what you want and I may borrow that same thing and use it for another customer of mine. So eventually you benefit. I benefit the other customers benefits and the economy also benefits. 

 


So basically, its about learning from your customers also because when they are with another bank they come back and say this is what the other bank is doing. It gives you some insight into what is going on in the other bank. 

 


Yes, it may also mean that we can say no but that is not the right thing to do. Look at it in this manner, right? And eventually the focus is the client and the client should have benefited.

 


Do you have an investment subsidiary?

 


No we don't. 

 


All that assistance with structuring the balance sheets and so on. It requires professionals. 

 


Over time you come to learn a lot, one of the key advantages that we have at Victoria is that we have a very low staff turnover particularly at the middle and upper level. So my executive committee (Exco) team members have been with me for 28 years, 25 years and some 20 years, so over time they have experienced different models, different ways of working with people and where we feel that we don't have enough knowledge, or we are not competent enough, we always tell the client, look talk to your auditor for this or seek professional or legal advice on this aspect. 

 

 
The Central Bank came up with something called the Banking Sector Charter last year, basically spelling out what they expect banks to comply with in terms of customer service and so on. Are you already in compliance with that? 

 


Absolutely, we've done our chatter, we've submitted it, they've looked at it and yes, we are in compliance. 

 


I want us to discuss your half year 2020 performance within the context of the Covid-19 pandemic. I just want to understand the impact of Covid-19 on your performance.

 


Okay, so bottom line gross profits are down by about 20 -25 percent, however, that is not all attributable to Covid-19. There are some other factors as well. Last year we had very good income from bond trading, not only us but many banks in the industry, so far this year, that has not materialized. The other thing is the recognition of certain fees that we charge on an annual basis. We used to account for that at the time of collection, now in line with IFRS 9 and also with advice from our auditors, we now amortize that over the period of the loan. So that income also droped. If we were to adjust for those items then the profit drop is not as significant, but it would still be around 15 to 20 percent that would be attributable to Covid-19. You know, there has been a drop in loans also. The economic environment has not been very favorable so we are not lending as much as we used too. Importation has slowed down within the country, therefore LCs and foreign exchange income have also dropped.

 


So, you know, we've seen some banks post even larger drops than that and that's why I said that I don't think that we are badly off. 

 


What would your projection be for the end of year? Of course things are looking like we might be picking up, the scare that came with Covid-19 is sort of easing and people actually starting to go about their businesses. Is there any improvement in this third quarter?

 


Yes. We have seen a peak in the sense that we are getting much more requests and demands for funding. We are also seeing an increase on our liability side. However, a lot of these projects are planned for next year. So for this year, we may not necessarily see the growth coming through but pipeline deals are there. You know, it takes time to perfect securities and so on because of the digitization going on at the lands office, that slows down things as well. We can't disburse funds as quickly as we would like to, all of those factors would mean that next year, we are hoping to see a better performance.

 


So what's your projection for this year?

 


This year, I think we'll be down by between 20 to 30 percent from last year.

 


That's significant. 

 


Yeah, it is.

 


Let me just take you back over the years, anyone who's been looking at your performance will be impressed. You basically have been growing organically but the growth has actually been quite consistent probably for more than 15 years. Your NPL ratios have also been quite good. What do you attribute to this consistent growth?

 


It's all about value addition, ensuring that clients don't feel that the bank is here just to benefit from their hard earned money. I think it's also the reputation that we've enjoyed and a lot of referrals by word of mouth. You'll hardly see us advertising unless it's for specific reasons. Not the typical advertisement,  that we have hardly done, word of mouth has really helped us. One person referring another to come in to bank with us. At the same time, we are an institution where we don't open accounts for walk-in clients. So you have to be referred by an existing client but we will also do our own background checks. We will do our own Know Your Customer (KYC) checks before we onboard the client.

 


I know that in most banks, you open the account then they do their KYCs after. I your case you do it all before opening the account?

 

 
Yes,  because of two things. One is that we want to be as clean as we possibly can. You know fraud is a big problem within the industry. The other thing is that we may not necessarily be at the right bank for everybody. 

 


You want to make sure there is a good a good fit between the two of you. 

 


Exactly, sometimes the requirements are way beyond us. We have our own limitations, but we also have our own, you know, parameters, the mminimums that we do. So based on that. We would tell a potential customer that look we don't think that we are the right bank for you, I think you may need to go to another higher tier bank than us. 

 


Who is a typical Victoria Commercial Bank customer?

 


Our, typical customers are the SME segments, but the higher end of the SME segment. So we consider those to be our equivalent of a multinational but “adjusted” for the SME segment. Multinationals are too large, we cannot in most instances manage them. So they are generally handled by the tier one banks.

 


We have the the manufacturers, for example, wholesale retailers, the large FMCG companies that don't necessarily fit in the multinational bracket. They are SMEs but at higher level. Those are the clients that we target. 

 


Okay, if I was to describe Victoria Commercial Bank, I would say it is a niche bank. Even from  the way you onboard your customers its clear that you have curved a niche for yourselves. There's been a lot of talk about Kenya having too many banks and the argument that we don't need very many small banks. The excuse being that several small banks have failed before hence small banks are risky. You are a classic case of a small solid bank.  What makes VCB different? Why have you been able to avoid some of the pitfall that some small banks have faced?

 


We look at the profile and do the KYCs of a potential client much before we open an account for them. So let's say we have a distributor who desires to bank with us. We will do our own market checks. We will ask them to provide us with certain documents including their financials, their cash flows and so on. Having done a complete check on them and they pass, then we can onboard them.

 


I think one major thing that banks do or used to do is either name lending or security lending. So if as a CEO, I know Mr. Oloo,  I say I know him lend him a million, I don't look at the repayment. I don't look at the security. I know him lend him the money, okay. That is where a lot of money is sunk and lost.

 


The other is where somebody would say. I have this building. It's valued by Knight Frank for example at Ksh 1 billion, lend me Ksh. 300 million. So the bank would typically say wow, okay, Ksh. 300 million against Ksh 1 billion, yeah, that's fantastic. But the building is 80% empty. Now, how is the owner of this building going to pay me back? My interest is not in the building. My interest is in getting my money back so that my depositors can be repaid and that the business continues and that I can lend to another person.

 


But some banks could be doing that. They would say, even if they default I'll sell this building. When you actually go to go to sell as an institution you may perhaps get ten cents to the dollar.  There's all the litigation process and you will be in court for a significant time, your interest keeps compounding if you have a unusual situation, like now that the markets have dropped, then what happens? So, one of the things we do is that we put a lot of emphasis on cash flow. If the cash flow makes sense, then we will lend. 

 


The other thing which has kind of saved VCB is that because of the KYC processes, we've had very minimal fraud levels within the bank.

 


In fact, if you went through the crime listings at the Banking Fraud Investigations Department (BFID) you will hardly see our name anywhere. It's not that it has never happened, it has has but we have been fairly lucky from that perspective. So fraud is another thing which we've managed and then I think I'm very lucky with my staff. I have vary good staff, as I said, many of them have worked with me for many years. So, you know, the the working conditions the integrity levels all of that. It's really also the culture of the bank. Several of them have had good offers and they've turned them down.

 

 
I have kept a completely transparent and open door policy. So if you came to our Upper Hill unit, which was the head office until recently, you'll see it's just completely open. There are no no walls, no Boundaries. The door to my office is left open. You do not need to go to my secretary to ask for an appointment. You just walk in and tell me this is the issue that we are having. That, kind of, gives people the confidence that, look if I know something is going wrong I can walk in there and it will be sorted out. At the same time they should feel safe enough that they will not be made scapegoats. And that is for both staff and customers.

 


What I'm getting is that it's a governance issue. At the corporate level how do you handle governance? Of course it starts at the board.

 


So basically at VCB, decisions cannot be made by only one person, whether you are a director of the board, or the CEO or those in middle management. Whether it's lending decision or opening of an account.

 


If it's a liability issue and if it's straight forward, then yes, a liability person can do it. So for example a person has a deposit and it's coming up for maturity and today the interest levels are at six percent and the person is asking maybe six and a quarter or six and a half, there’s that leeway he is given, so that's fine. But if for example a liability team member says that I have a certain person who wants to deposit Ksh. 500 million with us. He is not our customer, but he wants to deposit Ksh. 500 million. It is not for me to say yes or no. We will as a team mainly comprising of Exco and the liability team and look at where is this money coming from. Who is this person? Why does he want to move to VCB? Why is he not happy where that money is? So it's not about just saying bring that money. If there is an element of that money being tainted for whatever reason, we will not touch it.

 


So that is the level of governance we have. The other thing is that our risk and compliance unit is completely independent.If they have foresee something which is untoward, they do not need to come to me. They have direct contact with the chair of the board. So they can go directly to the chair or they can go to the board committee chairman for risk and compliance and report that. They have complete independence. The other person having independence is the head of finance. I may for example say that as CEO, I want to go and buy a car for Ksh. 20 million, write out the check. It doesn't happen. He has the authority to stop me and there will be no repercussions. That is something that the board has clarified and documented. So people have that confidence. We want things to go in the right manner because it's public money. It's not my money, it belongs to the depositors. We are strong believers in karma, by the way, we believe that what we don’t do correctly will come back to haunt us.

 


There's a time you were actually the smallest a bank in the market. I mentioned you have mostly grown organically. Have you ever thought of scaling up maybe by acquiring another bank. Is your strategy simply to grow organically?

 


Our growth strategy is to remain within the confines of the area of businesses that we know best. To have made a huge leap would have been quite easy for us. You you are a master at at balance sheets, you know them inside out. If you look at our share capital, for example, we are way above the requirements. Even our ratios are very strong. To acquire another institution would not be an issue for us. But what I've always maintained is that if I know how to sell this phone then I should concentrate on that and make it better and better. So we,  or rather, at least for me and and the board at this stage are not interested in the retail market.

 


I'm interested in the corporate segment and I'm interested in a certain segments of the corporate market. I'm interested in a certain level of wealth that a person has so that I can effectively monitor our performance but more than that give them good service, the ultimate customer experience.

 


If I put my hand into corporate, then put it into retail and different units, eventually we will get stretched and something somewhere will collapse and we will have bad NPLs and frauds. We lose control. This October wwe are 33 years old, but we have five branches only, compared to many institutions of similar age that may have 15, 20, 25 branches. Yet our balance sheet is bigger, stronger and we are making more money.

 


Particularly now, for me it doesn't make sense to have more branches. 

 


So what is your strategy going forward? I am sure you have received offers from other banks seeking to buy you.
 

 

Well, we've said that the dowry is not enough. 

 


You are happy being single! 

 


Yes, there's been a lot of interest from many institutions, locally and internationally. It's not that we are being proud and saying that, you know, we know everything and we don't need anybody else. No, that's not the thing. 

 


But I really do want to maintain the strategies that we've adopted so far. I really do want to maintain the niche markets that we've had and which have been the reasons for our success. So if somebody were to come and say look we are willing to work with you on what you've achieved in the past. But we will give you know how, we will give you capital. We will help you improve, I have no problem.

 


To give you an example, when Chase Bank and Imperial Bank closed many Development Finance Institutions (DFIs) kind of took a back stand and said, let's see what happens to the banking sector in Kenya. It's a precisely at that moment that we got Swedfund to invest with us. Now, you know, the due diligence that you go through is phenomenal.

 


Swedfund have been incredible partners with us since then. We have empowered women not only within the bank but also our customers. Bringing that whole gender bias issue, the base is going up right from management to the board and to the grass root. So Swedfund believes in what we do and they have supplemented our way of working by training us on how to empower women, how to take them forward. That in itself helps not only the institution, but also families and that is a brilliant thing. 

 


Tell me a little more about that. What exactly is it? Is it project to improve gender equality in the workplace? 

 


Traditionally men used to be seen as the drivers of business. If you have a board of 10 people all ten were male. You look at the top positions. Everybody is male. The role of women was limited. It was perhaps to serve tea, Maybe do secretarial work, but beyond that, business was a male-dominated. Now we are finding that if you have women who are heading units, they have the ability to bring cohesion within those units, it's a motherly instinct. They are peacemakers. That lady being there also gets a certain level of income obviously. We've also found that women then take that money and save it to a significant degree and use it to educate the their children or use it for family expenses to keep the family comfortable.

 


Typically, a man earning a similar amount of money as a woman, would have different priorities over the use of the money. So there is a social impact to it, besides empowering women, we are also improving the social aspect of families and we are helping the institution by bringing in cohesion.

 


So, Swedfund has given us funds which we on-lend. But as an additional benefit, they give us training on gender balance.  

 


We've also tied up with the World Business Cooperation (WBC) and they will give us funding,  but that funding will be used for institutions that have a significant portion of women leaders within them.

 


Another thing that we never did but now do with DFIs is that we have embraced environmental and social factors. So when somebody wants credit we tell them but you know, you guys are throwing all this effluent into the rivers. It won't work for us. So they are helping us also implement the Environmental Social and Governance (ESG) factors.

 


If a client says, look I have this plan. We have all this plastic littered everywhere. There are many youths who are unemployed, rather than getting involved in vices, we will employ them to come and collect these plastics. We will buy incinerator, will clean it up and use it as secondary materials to make products, which are cheaper and Wanjiku can then use in her house. Now thats a project we will be interested in. ESG is now becoming a major thing, even when we do our analysis for credit, there is a writeup on what the borrower does in terms of ESG.

 

 
You mentioned fraud a little earlier and of course fraud has become rampant. A lot of fraud is now moving more towards technology. Interestingly, the solution is also in technology. Technology has also been instrumental in improving the customer experience. In terms of investment in technology, what have you done over the years?

 


We put a lot of emphasis on information and technology. Last year we upgraded our core banking software, which is Finacle to the highest version, which is 10.3. At the same time we've invested money in other electronic banking platforms. We've had very good reviews from most of our clients. We've built in firewalls and security measures such that even if somebody were to, for example, steal your PC or somehow hack into your PC, there will still be other controls and check where transactions cannot proceed. There will be further checks and balances , one two, and a third one before the transaction is goes through.

 


We are also quite advanced in the process of acquiring an anti-fraud and Anti-Money Laundering (AML) software. This will be online 24/7 real time and will keep checking on data and unusual transactions. It will stop transactions from going through if a certain pattern is noticed. So let's say for example, you are banking with us and you have a hundred shillings going out two, three, four times, the fifth time it will stop it will freeze it whether you are doing it yourself or a fraudster is doing it till the bank gets in touch with you and confirms that you are the one initiating the transaction.

 


It does also monitor where you are. Generally we request clients to inform us if they are travelling so that we know. What if you're using your credit card in Japan and you forgot to tell me that you would be travelling there? There's a time difference, but you want to use your credit card, what happens? We've come up with a technological solution that enables you to control your card from your own devices. You put in that you are now going to Japan and the card should work in Japan. But if you do not do that and it will not work.

 


I want to talk just a little more about the macroeconomic environment that you are operating in. Of course, the impact of the Covid-19 pandemic is being felt right across the globe and even locally, the macroeconomic environment is quite fragile partly because of Covid-19 but what is your assessment of the situation? What are some of the threats to Kenya's banking sector? Where do you see growth coming from?

 


I think the threats that we are having with in the economy, are largely on the fiscal side.

The exchange rate, for example has been quite volatile. And of course the impact of Covid is being felt heavily. Kenya is an agricultural country, if we can't export our flowers or our horticulture where will we get the hard currency from? If there are no inflow, but we have a lot of imports, of course we are going to see the devaluation of our currency and we are seeing it now.

 


The other problem is tourism. With the Covid-19 pandemic, that's gone. People are scared to travel and of course tourism brought in a lot of money.

 


The major source of foreign exchange was the diaspora remittances. Our people in the diaspora are having  trouble on the other side now. They are either on half pay or on unpaid leave or they've been made redundant. So those remittance have reduced.

 


Those remittances were also not only supporting the banking sector in terms of the foreign exchange but were also supporting many payments in like mortgages and upkeep of families and so on. So those are some of the real threats that we are seeing.

 


Yeah, I also feel that the non-performing accounts within the industry will rise considerably because businesses are unable to repay their loans. There's an article I read that says up to 70% of people cannot pay their rents currently. Keeping enough money to pay for your mortgages or for your loans will be a third or fourth priority. You will always give priority to food, shelter and education before you think of paying your bank.

 


So the NPLs will go up, at the same time the values of assets are dropping. There is no demand. Where there is demand, people want to have it at throwaway prices. The other thing is that banks are not lending. They are shy to lend at the moment. So, all of that put together will have a significant impact on the economy.

 


If there is substantial liquidity injected into the market, which people are able to use for consumption, then we
 
may possibly see a reversal. Just to give an example in the US where anybody who's without work is being given $2000. If we had that kind of money coming in, then of course consumption increases and it drives the economy, but unfortunately, it's a tough one for our economy. 

 


So you think that we would need a stimulus plan of some sort?

 


Without it, I think a lot of the SMEs will disappear. Look at the major multinationals, some are winding up, airlines are filing for bankruptcy,  big clothing stores and designer stores are also filing for bankruptcy and watchmakers have stopped manufacturing. When you look at that scale and then you look at the situation for our SMEs, then it's certainly not a far cry. It can very easily happen.

 


The problem is the social safety net is fragile. How do people manage their day-to-day living, how do they feed themselves, their families? How will the children go to school?

 


If you've not had a source of income from March, forget schooling, how do you feed your children. Children have to be fed before they can learn. You can't go to school on an empty stomach. 

 


The truth is we must find a way to get things running again. Any ideas on what a stimulus plan would look like? What is it that we need to take care of? The faster we're able to actually kick start the economy again the better.

 


So I think the government needs to give out cash. They came up with very good measures, you know straight after announcing the Covid-19 containment measures, such as reducing corporate taxes. But then, taxes on many other items have gone up exponentially.That is making consumption very expensive. So yes, you've got some relief on one side, but if you increase taxation on consumers’side than it doesn't help. So the government really needs to inject a lot of cash and even come with a plan to help those who are in defaulting situations to pay up. Some banks are having issues with their balance sheets,  a strain on their capital and on their liquidity. Banks have given moratoriums on loan repayments, but are we able to stop a depositor from taking his money? The answer is no.

 


What's on the vision board for VCB ten years from now?

 


I am very optimistic. I think it is going to be good.

 


We have many things that we want to try and achieve. We want to bring in growth through information and technology. We are investing heavily in that segment and we feel that in the next maybe two years or so, We'll see a lot of those investments bearing fruit.

 


Even right now, we have solutions were people having large quantities of cheques to bank, will have them cleared from their offices. They don't need to come to the bank. 

 


So basically what you have is a scanning system? 

Yes,  they just scan their cheques, it's comes to us. So, I can have a client in Migori but I don't need to have a branch there. I can capture his business. That plus a number of other things that are in the pipeline and because we are well capitalized and because of our NPLs levels are quite low compared to the market, I see a lot of this bearing fruit. 

 


We are also getting a lot of requests from in institution outside of the country who want to come into the country, but need local partners. So we are seeing things in the multinational space that we may be able to tap. There are other partners, like DFIs who have shown interest. It really looks promising.

 


You said that there are many suitors who have come looking for you but other than that, do you have a plan to go public? Doing an IPO and listing on the stock exchange or something like that? I know you don't need capital but that is not only reason that would make a company get listed. 

 


No, it's something to be honest, that we have not thought about. But that is not to say that it's a closed chapter. It's possible that we could go in that direction, but I think we need to be of a larger balance sheet size and if we can manage that and continue to sustain the the profitability for maybe at least five years, then I think we'll be
 
in a good position. 

 


So, that avenue is not closed? 

It's just not the right time to be thinking about it, personally, I think we're still not not at the stage where we would have enough interest to go into an IPO.

 


One last thing, succession. I know you've been at the helm of the bank for about 30 years I am not to saying that it's time for you to go. You're still young, but obviously succession is something a CEO has to think about. Will you be here 10 years from now.

 


I think in the current environment even 10 years is too far. You know the diseases which are coming up now we never as humanity even thought about them.

 


But we do have complete succession plans in place. We have already identified people who would step in if I were to either pass on or retire or become senile. I think, one very critical factor is what I mentioned earlier. That this institution is not run by any one person. 

 


We have the Exco and the board. Between these two we have a membership of 11 people including myself currently. Remove me for a second and think, what happens, VCB will continue without any hitches. The only thing which could possibly happen is that you may have some depositors who may be a little bit uncomfortable because now you have the person that you are used to as the face not being there. But I'm very confident in a very short time, the situation will reverse itself because It's not me me alone who decides whether I want funds or not from a certain person. It's not me alone who decides to give a certain percentage of interest. It's not me alone who decides to give a loan or not. It's not me alone who decides whether I'll invest a million dollars or a hundred thousand in technology. There are complete structures, there are committees, there are processes and procedures. Then there are three units which are completely independent from management.

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