Understanding the Prominence of Asian-owned Businesses in Kenya

A glance at the list of Kenya's 50 largest local-owned enterprises and one thing is apparent - there is a substantial number of Asian-owned companies. Asians first came to Kenya in considerable numbers during the construction of the Kenya-Uganda Railway from 1896. But considering that the combined population of Asians in Kenya is less than 1%, their ownership of large businesses seems disproportionate.

There are five reasons for this which I will cover below.  

For clarity (and not to offend the purveyors of political correctness), Asians here refers to Kenyan-Indians and to a lesser extent Kenyan-Pakistanis. Africans refers to the indigenous black population. Also note that this article in no way seeks to take away from the hard work and extraordinary persistence that has defined the success of many Kenyan-Asian businesses. Legitimate Kenyan-Asian businesses must be celebrated since they are just as Kenyan as Kenyan-African businesses. Many were simply at the right place at the right time and took the opportunity as any reasonable person would.

Rather, this is a look at some of the historical context of modern Kenya's corporate environment. It seeks to explain the contradiction between successful Kenyan-Indian entrepreneurs versus the hundreds of millions in extreme poverty on the Indian subcontinent. This disparity proves at least one thing - the entrepreneurial success of Asians in Kenya likely has little to do with genes.

So here we go.

1. Asians as Second Class Citizens in Pre-Independence Kenya

While Asians too were discriminated against under colonialism, they were a 'second tier' citizenry as was the case in many colonized African countries. Africans on the other hand were third class. Asians as such had access to better schools, opportunities and mostly had a free hand to run their own businesses. As early as the 1910s, Asians were the pre-eminent merchants in Kenya. 

In 1910, a successful businessman, A.M. Jeevanjee, claimed that, "no less than eighty-five percent of the trade of British East Africa is in the hands of the Indians.... In Nairobi they pay practically the whole of the taxes, and own nearly the whole of the town."   

Source -> here

"...of the total nominal company capital registered between 1946 and 1963, 68% was European, 21% Asian, 11% combined Asian and European, and less than 1% African. Thus, at independence, industrial structure was characterized by the minority groups who had acquired from the colonial economic, political and social system the necessary capital and technological skills. The African majority were left in subsistence agriculture, unskilled work positions.

...Asian industrial capital went into manufacturing after the Second World War. By then, a few Asians had managed to accumulate capital from wholesale and retail trade, and were able to venture into large scale manufacturing. At independence, Asian manufacturers dominated the clothing industry, furniture making, printing, soap fabrication, metalworking and engineering industries.

...African entrepreneurship played an insignificant role in the manufacturing sector during the colonial period. This was partly because of the restrictions imposed on African participation in any form of business by the colonial authorities and partly because of lack of capital and entrepreneurial skills."  

Source -> An Economic History of Kenya - William Robert Ochieng', Robert M. Maxon. (East African Publishers, 1992) 

So by independence in 1963, Asians were far better prepared, educated and experienced to hit the ground running. As an example, Comcraft Group, arguably the largest Kenyan-Asian owned conglomerate today, was founded in 1915 - half a century before independence.

2. Asians as the 'Sandwich Class' in Pre-Independence Kenya

Asians were a lower class than whites but higher class than Africans. There is no doubt that Asians too suffered from European colonialism. However, Asians had far more privileges and freedoms than Africans in pre-independence Kenya. 

The struggle for independence by the African masses was directed at the European settlers since they were at the root of the colonial system. Upon independence, the African population's leadership was thus primarily focused on getting back land from White settlers as this was the single-most contentious grievance against colonialism. Asian wealth was primarily held in businesses as opposed to large tracts of land and thus comparatively escaped the attention (and perhaps the wrath) of the masses. 

Also, Asians though beneficiaries of certain colonial privileges were also seen as legitimate victims of colonialism in their own right. So while White settlers were compelled to sell their lands, Asians experienced no such widespread compulsion. This explains the presence of many Kenyan-Indian businesses today as opposed to Kenyan-Europeans yet it is the Europeans who had the capital/financing advantage over other demographics at independence.

Unlike neighboring Uganda in 1970s that expelled Asians or Tanzania in the 1960s that nationalized Asian property, the Kenya government has never had that kind of policy. The result of this confluence of circumstances in Kenya is that (as we'll see later) Asian-owned businesses in Kenya have enjoyed a far longer period of history, continuity, stability and accumulated capital compared to African-owned businesses. Over 100 years of continuous capital accumulation.

3. Moi Regime's Coziness with Asian Business and the Financial Emasculation of Political Competition

August 1982 marked a turning point for the presidency of Daniel Arap Moi. Following an unsuccessful coup attempt, the previously affable, friendly Moi descended into destructive paranoia. As such, in the 1980s, numerous local companies were deliberately strangled if they were owned/associated with real/perceived political competitors of the authoritarian regime. The goal was to stifle financing for persons or regions thought unfriendly to the state. 

Asians in Kenya on the other hand have maintained a decades long apolitical tradition. This as well as their small population (thus negligible numerical impact on elections) meant they could 'fly under the radar'. In addition, some Asians partnered with Moi men, incorporated politicos as shareholders (e.g. Naushad Merali) or bribed Moi cronies (e.g. Kamlesh Pattni). 

“In being tolerable to Indians, Moi became the richest man in Kenya”, recalls Dhillon. James Shikwati, a Kenyan economist and Director of the Inter Region Economic Network, agrees. “‘Don’t touch the Asians’ was Moi’s policy”, he says, and it served Moi, and the Asians, well. Moi became Kenya's richest man.  

Source -> here 

The fears and frustrations over Asian economic power were reawoken by the scandals of the Moi era, in which Asian executives’ names featured with disturbing frequency.

Source: Kenya: A History Since Independence (1963-2011) By Charles Hornsby 

Save for some token exceptions (e.g. Hezekiah Oyugi, Joseph Kamotho, Samuel Gichuru), Africans from ethnic communities deemed anti-government could hardly prosper in peace. And collaboration with Moi's and his cohorts was difficult since their ethnicity meant designation as an enemy from the get go.

You can read more on the Moi regime's use of front-men (Asian and non-Asian) here. 

4. Crippling of Large African Banks

I will spend more time here because this is perhaps the most important point. Related to point 3. above, state-engineered corruption and mismanagement saw the crippling and/or collapse of state-owned institutions between 1982 and 2002. Whereas Jomo Kenyatta's administration of 1963-1978 was corrupt, the Moi regime took it to bizarre heights. Public institutions were looted with little concern for tomorrow. In several instances, barely literate individuals were placed in charge of crucial institutions.

In 2003, the government hired Kroll Associates to investigate offshore assets held by Moi-era leaders, particularly Kulei, Gideon Moi and Biwott. Their April 2004 report traced at least Ksh78 billion (US$1 billion) in assets overseas, including cash in banks, realestate and hotel investments.....There were also revelations from another Goldenberg Commission of Inquiry, appointed in 2003 to find out what had really happened a decade before. The judicial inquiry, chaired by Judge Samuel Bosire, dominated the news for months, as testimony from Kamlesh Pattni and Central Bank officials exposed the scale and complexity of the thefts that had occurred. The report, presented to Kibaki in February 2006, concluded that Ksh27 billion (US$600 million) had been lost or stolen under the export compensation scheme, pre-shipment finance, foreign exchange abuses, unsecured loans and cheque kiting. 

Source: Kenya: A History Since Independence (1963-2011) By Charles Hornsby 

While the corruption and mismanagement affected virtually all state institutions, nowhere was the effect as catastrophic as at the largest state-managed banks KCB, National Bank and Cooperative Bank.

National Bank is strongly associated with the stigma of its experience during the Moi regime when it extended substantial unsecured loans to politically connected individuals and institutions. When they defaulted and disappeared, National Bank took a bullet in its balance sheet. It tottered precariously and almost collapsed until the government recapitalised it around 1995 through government bonds worth over Sh20 billion.

Source: 'What National Bank Needs' - Nairobi Law Monthly, September 2013

...the company’s [KCB] loan portfolio was terrifying, with Ksh3.3 billion loaned to Mugoya Construction, its largest debtor, and dozens of non-performing loans to companies associated with politicians, policemen, civil servants and bank officials.111 By 1999, the bank was in serious trouble. Non-performing loans rose to Ksh18.8 billion, and the bank posted a Ksh2.2 billion loss. It continued to lose money in 2000, dividends fell to zero, and the bank started shutting branches to cut costs.......The same occurred with the NBK....it lost Ksh2.6 billion in 1998, Ksh3.5 billion in 1999 and Ksh1.6 billion in 2000. Restructuring under new management followed, but it remained close to insolvency, with 30 per cent of its loans non-performing, valued at over Ksh7.5 billion (US$100 million). It was only sustained by government support. Again, poor credit practices and a disregard for profitability had brought a state-owned enterprise near to collapse. 

Source: Kenya: A History Since Independence (1963-2011) By Charles Hornsby 

The impact on the economy was more far-reaching, long term and devastating to the ordinary citizen than Moi and his cronies could possibly have envisaged. To make matters worse, point 3. above meant the Moi regime had also overseen the crippling large privately-owned African banks.

The vast majority of budding African entrepreneurs now had very few options for business financing. On the other hand, 'Asian banks' such as Diamond Trust Bank (founded in 1945), I&M Bank (founded in 1974), Bank of India-Kenya (founded 1953) and Bank of Baroda-Kenya (founded 1953) remained stable and survived. 

To understand how devastating this was to African entrepreneurs, look at it this way. If a UK citizen (Caucasian preferably) and a Kenyan citizen (African preferably) walked into a Barclays or Stanchart manager's London office with the exact same idea, the UK citizen is likely to get a more attentive ear to their proposal all other factors constant. The same is true if an Indian and African both approached Bank of India, Bank of Baroda, Diamond Trust Bank or I&M Bank.

Yes. I know. It speaks to an uncomfortable but universal truth. Business decisions are not just the result of an objective and dispassionate evaluation of risks and opportunities. There are soft factors involved too such as 'relatability', familiarity, rapport, family ties etc. Soft factors often provide the tipping point.

And few things confirm this principle more starkly in Kenya than the emergence of successful African-owned businesses as well as a large African middle class in just the last 10 years. There has been a huge surge of large African businesses in Kenya starting in 2003 when Kibaki largely frowned upon political interference in state and private enterprises. 

Many people may not quite appreciate that Kenya's largest and most successful African banks today KCB, Equity Bank and Coop Bank have grown and expanded into the region just in the last 10 years. An impressive feat particularly for institutions like KCB which just 15 years ago were on the verge of collapse from massive bad debts.

The revival of African banks had a positive domino effect on African businesses across the country. Little wonder that the banks' success coincided with the exponential growth of African-owned companies such as UAP, Britam, Jamii Telecom, CIC Insurance, Hashi Energy, Royal Media Services, Centum, Transcentury, Tuskys, Naivas etc.

The importance of banks in the fight against poverty cannot be over-emphasized. No people or nation can develop without access to a critical mass of sizable financial institutions that understand them enough to support risky but lucrative business ventures. 

5. Obscurity from concentration of African Wealth in Land and Property

Following sensitivities around land ownership witnessed pre- and post-independence, Asians realized they would always be viewed as 'outsiders' if they owned large swathes of land and therefore focused their energies on business. Asians lived in communities within urban areas. Owning or living in isolated farms upcountry was out of the question.

Wealthy Africans on the other hand concentrated their investment in land and property more than in business. And because it is hard to tell just how much land a person owns (the information is not public), the wealth of elite Africans remains opaque compared to that of wealthy Asians. Put another way, it is near impossible to hide or understate a large business - it stands out unlike land ownership.

There is a relatively simple test to show this obscure African wealth. Nairobi's Central Business District (CBD) and Upper Hill are the two most expensive locations in the country as far as land prices go. Yet, there are very few Asian-owned commercial buildings in the CBD or Upper Hill.

So how did Africans end up so fixated on land? It is hard to definitively tell what led to this but I would offer two rational explanations. 

The first is that the land dispossession of Africans by White settlers in turn triggered a massive fear of landlessness. When Africans could eventually freely purchase land, they went all out. It is interesting that while obsession with land is a national pastime, it is particularly pronounced among the Kikuyu and Kalenjin communities. Maybe this has to do with the fact that these communities bore the heaviest brunt of land dispossession pre-independence?

The second is that post-independence, the political elite in the Jomo Kenyatta and Daniel Moi presidencies acquired large tracts of land often under questionable circumstances. The fact that these opinion leaders and the political elite visibly pursued land as a financial security end in itself, ingrained this mentality in the minds of the masses thus creating a vicious cycle. 

Conclusion

The 1982-2002 period during the Moi presidency was a 20-year economic black hole in Kenya's history whose massive damage Kenya will take a while to recover from. But with increased access to capital/financing and the removal of state interference in enterprise, Africans in Kenya have demonstrated over the last decade that they probably need no affirmative action to recover from those lost years. Today, many Asian-owned businesses face formidable competition from African-owned companies.

Obviously the Asian community will continue to have the advantage of century-accumulated capital that will continue to multiply within Asian-owned businesses (Communities supporting their own businesses is not unique to Asians but a worldwide phenomenon. Closer home, it is seen among Somali and Kikuyu businesses). But if the enabling business environment of the 2002-2013 years is maintained for just a decade or two longer, the number of African-owned businesses in the rankings of Kenya's largest enterprises will continue to grow.

In any case, Kenya can take some solace that it corrected its path earlier than its neighbors Uganda and Tanzania where there is an even more disproportionate domination by Asian- or Arab-owned companies as well as a scarcity of large ($100M turnover) African-owned businesses.