Basics of raising capital for startups and SMEs

Capital is the lifeblood of business. If you run out of it and lack access to additional resources, in many a case the game is over. As the founder of a startup, you’ll find that raising capital is a significant part of your efforts and, for better or worse a major challenge. Unless you have a clearly defined plan and a path you will follow, you’re going to end up wasting precious time that could have been spent elsewhere.
So, understanding the basics of raising capital will be critical to your success. If you’re clear on what you need to do to get from where you are to where you want to be, you’ll be less likely to derail while you’re in the thick of it. Here are the factors to consider:
Preparations, Preparations, Preparations
This step is often overlooked but unless you want to be constantly pumping your own resources into your business, you’ll want to assess and address various aspects of your company to ensure its overall readiness. Not only will you need to examine your team’s overall health from every angle, but to research your industry, competitors and the market, define your products prepare financial projections and determine how much money to raise, plus decide whether to tap into debt or equity.
Preparations may be the most time-consuming and effort-intensive aspects of raising capital. But if you know what you want and outline the rationale behind those choices, you’ll find it easier to figure out whom to target and ask for what you need. Remember, as you court investors and financiers, they will be asking the tough questions. So, you’ll have to be equipped with all the relevant information you need that will make them understand the business you’re in closer to how you know it.
Just because you have decided whom you are going to go after and what amount to ask doesn’t necessarily mean you are going to get what you’ve requested when it comes to financial matters, the more options you can identify, the better. That way, you will always have a backup plan when you need it.
Among the different types of investors out there that you may consider are: family, friends, banks, microfinance institutions, venture capitalists, angel investors, private equity firms, business incubators, investment groups, crowd funding pledges and the stock market.
Keeping in mind that some forms of funding are costlier and riskier than others, you can also use lines of credit (i.e. letters of credit and guarantees), bank loans, notes and bonds offerings and the like. These financing options are often last resorts or backup initiatives, as they are more contingent on the condition of your personal finances and assets, versus the value or potential value of your business.
Searching from the web or engaging capital raising consultants will inform you about the necessity of a “pitch deck” (basically a brief presentation, created using PowerPoint, or Keynote which is used to provide your audience with a quick overview of your business plan. Usually used during face-to-face or online meetings with potential investors, financiers, and such business partners) and the ways in which to put an effective presentation. The fundamentals are that your presentation should be used to highlight the most attractive aspects of your business.
Keeping your target audience in mind and knowing what’s important to investors is key.
Generally, 10 to 15 of pitch deck slides containing information your company, your team, competition, target market, milestones, future plans and funding requirements is sufficient. Armed with this information, your prospective investors should be better able to decide on a course of action.
You can never know too many people. While networking, you don’t necessarily need to be constantly promoting your business; you should make sure you are helping other people. This will help you garner a positive reputation, and when you help others get what they want, they will be more likely to help you.
Keep in mind that you will face rejection when discussing your business with others. Some investors may not be looking for an opportunity right now. For other people, your concept simply won’t be the right fit. Knowing this while going in can save you a lot of heartache and stress.
Researching various investment groups and resources online can prove worthwhile as well, especially during this time and age where internet and web searches resources are significantly helpful. Just make sure that you don’t get so much sucked into the bottomless blackhole of the internet. Once you get what you want from the internet, use that in trying to reach out specifically. Such as by making phone calls or sending emails to specific individuals, so that you specifically address what you want while you also remain proactive when reaching out.
This will assist in finding tailored solutions streamlines your process of finding capital and getting the source of capital convenient and aligned to your business objectives and needs while addressing the growth aspect of your business.
It is however important to note that, even with all your ducks in a row, there are no guarantees you’ll get the capital you need from the investors you’re courting. But no problem-solving is part and parcel of entrepreneurship. Knowing all your options and what you can do to get the money you need can give you greater confidence when you encounter bumps in the road. And that is something you unfortunately, can count on.
In line with the above, as one of the interventions to help bridge the gap for the SMEs sector in the context of access to capital, the DSE is considering introducing the “DSE Enterprise Acceleration Program” with the objective, among others, providing capacity building to identified growth-start up and SMEs in order to enhance their capacities in key areas of their growth ecosystem as well as easing their access to various sustainable capital raising and financing options, both locally and internationally.


Stock Markets and the Economy

In last week’s article we covered years of stock market’s experiences for both the UK and the US, covering 119 years for the period starting from year 1900 to date. This was from the recent Credit Suisse which was the eleventh edition dubbed the 2019 Global Investment Returns Yearbook: 119 years of financial history and analysis.
Now, year 1900 was a long time ago. A lot has changed ever since, for instance over 80 per cent of the value of invested assets during then was in industries that are today too small or are extinct altogether, on the other side — a high proportion of today’s equity raising, and listed companies come from industries that were small or non-existent in 1900. But then, we quoted a line from the Biblical book of Ecclesiastes 1:10 which asks and says: Is there anything whereof it may be said, see this is new? It was here already, long time ago – nothing is new under the sun. So, it’s been 119 years of experimentation and experience and nothing new.
As you reflect on 119 years, add this into that — the first stock markets were established in 17th century London coffee houses. During this time, people who were interested in owning commercial shares of businesses came to places like Jonathan’s Coffee House. There, innovators such as John Castaing posted stock and commodity prices for “marketable securities in London,” according to the London Stock Exchange’s historical record. This was the “earliest evidence of organized trading,” moving from coffee houses to an actual exchange on March 3, 1801. Now, compare that to the typical of today’s market with sleek electronics and frenzied trading floors; but even with this, still nothing is new as has been foretold.
Whether new or not, in countries around the world, stock exchanges are being used to help businesses raise capital and give investors opportunities to back new and established enterprises. In recent times, there seem to be no geographical limit or bias to the stock market which means that individuals from a diverse array of countries can use stock markets to build wealth and invest responsibility. By any standard of measure, the functionality and utility of the stock market is becoming universal by the day – now this may be something new. In today’s article we go back into the basics, we will try to answer the question — what is the role and impact of the stock market in the economy?
Raising capital
Stock markets are, first and foremost, financial institutions established to help businesses and entrepreneurs come together to transact (buy, sell and trade) shares for the purpose of providing capital to enterprises that need it. Were it not for stock exchanges, entrepreneurs would be left to their own devices to find investors, and consumers could wind up at the mercy of unlicensed and unregulated financial products with no oversight.
Servicing Investors
Another role of stock markets is to act as an intermediary for large and small investors seeking to make money outside the realm of standard banking institutions. The role of a stock exchange in an economy is to maximize return on savings that might otherwise languish in static bank accounts with low returns. Stock exchanges promise and often deliver higher profits, and in return, investors receive measures of assurance, diverse opportunities and flexibility. Further, a stock exchange offers investors assurances via formal oversight on investments. There is the negative side as well, where for some reason the companies listed in the stock market does not perform as expected, and investors risking losing value of their investments.
Barometer of economic health
A stock exchange can serve as a barometer of a nation’s fiscal health, broadcasting the ups, downs, trends and shifts of the domestic economy. For matured markets, the relationship between a society and its stock exchange is so deeply embedded that analysts can influence both the domestic economy and/or the stock market it relies on by signaling optimistic outlooks, or the opposite.
Good governance and financial accountability
Sophisticated financial market systems require credibility and accountability if they are to function on behalf of businesses and investors as interested in ethics as they are in profits. For this reason, a stock exchange benefits from a formal structure upheld by rules, laws and regulations. Management and operational standards set by governments, bureaucrats and agencies overseeing stock exchange operations add authority and oversight to the institution, giving stockholders, investors and businesses checks and balances necessary for investor confidence.
Economic effects
The direct effect of stock market activity can impact a nation’s economy in multiple ways. Stocks fall, spending stops, consumers lose confidence and a nation’s financial state begins to falter. Conversely, stocks rise, confidence spreads, spending and investments grow. A nation’s mood can rise or fall on stock market activity and performance, which shows how important the role played by a stock exchange can be in a society’s social and fiscal fabric.
Expanding diversity
If one of the stock market’s roles is to bring together like-minded investors, exchanges also serve as fiscal melting pots, giving minority businesses an opportunity to place shares of new company assets before potential stakeholders who might not otherwise learn about diverse new products were it not for the existence of stock exchanges. Few economies can hope to flourish without infusions of new ideas, systems and opportunities — all represented by cash — which is why this confluence of financial needs and wants regularly merges on the floor of a vibrant stock exchange.

Important Lessons from Years of Equity Markets

Credit Suisse recently published their eleventh edition report dubbed the 2019 Global Investment Returns Yearbook: 119 years of financial history and analysis. The report covers 23 national stocks and bonds markets and almost all financial products, from stocks, bonds, currencies, and indexes that trade in these markets. Countries and markets covered in the report represented 98 percent of the global equity markets in 1900, but still represent 90 per cent of the investable universe as at the start of 2019 – some closely reflecting what is being said in the book of Ecclesiastes 1:10 — “Is there anything whereof it may be said, see this is new? It was here already, long time ago”. And so, here are some of the highlights from the 119 years:
At the beginning of the 20th Century in 1900, the UK equity market was the largest in the world accounting for about 25 percent of the world market capitalization, followed by the US (15 per cent), Germany (13 percent), followed by France, Russia and Austria-Hungary. This hasn’t changed significantly – 119 years later, the US market is now dominating, accounting for 53 per cent of the total world equity market value. Japan (8.4 per cent), and the UK (5.5 per cent).
Then there are some shifts in sectoral concentration in the equity market, but not so stunning. Markets that started in the beginning of the 20th Century were dominated by railroads, which accounted for 63 per cent of the US stock market value and almost 50 per cent of the UK value. Over a century later, railroads have declined almost to the point of extinction in the stock markets listed securities market cap, representing under one percent of the US markets and close to zero of the UK stock markets. It may be interesting to note that, although railroads stocks have declined reflecting the decline in the industry itself, but railroad stocks performance beat the overall market performance and indices in the US market. In fact, railroads stocks outperformed both trucking and airlines since these industries emerged in the 1920s and 1930s. Learning from this, could we finance then, Ok, there is nothing new – should we our SGR and other railroads projects by issuing stocks or infrastructure bonds to the DSE?, or would we be going to the US and UK of the 1900s? Anyways, if we decide otherwise, at least we know this is how history records the financing of railroads whose demand by those countries in the 1900s may be similar to our current case.
Another interesting set of facts presented by the Suisse Report which show the similarities between 1900 and 2019 are: the banking and insurance sectors, which was important then, continue to be important now. Industries such as beverages (including alcohol beverages), tobacco, utilities were largely present in the early 1900s and still survive today, as they continue to be among the top sectors represented in stock markets. In our case, we have only seven listed banks (out of more than 55), no insurance listed company, only one alcohol beverage, only one cigarette company listed – again no insurance company, no soft drinks company, no utilities company among the listed securities at the Dar es Salaam Stock Exchange. Isn’t it odd! Why is this the case at this time and age — with globalization, free enterprising, free markets, broad access to commonly shared prospects via common ownerships, over a century of experience and learning that we could easily be leapfrogged, why are such companies outside of the stock market space?
In the UK, quoted mining companies were important in 1900 just as they are in the London Stock Exchange today. Out of the many mining companies operating in our local environment because of our endowment, and they are very important to us today, but unfortunately none of them is listed in the Dar es Salaam Stock Exchange to form part of the domestic equities and domestic market capitalization. Are we such backward in this perspective to the point of being not closer to the UK and US of the 1900s? – what is the meaning of learning, what about the idea of inclusive growth and citizens economic empowerment?
Deflecting a little from Ecclesiastes, it is similarly interesting to note that of the US listed companies in 1900, over 80 per cent of their value was in industries that are today too small or are extinct altogether. The same situation applies for the UK, for the rate is 65 per cent. Other industries that have declined significantly over this period include textiles, iron, coal and steel. Now, as we pursue these industries, in 2019, should we understand that same industries controlled significant value of listed firms and market capitalization for stock markets in the UK and US in 1900, that citizens in those countries owned companies in these industries and benefited from their common ownerships via the stock market?
However, it is equally true that a high proportion of today’s equity raising and listed companies come from industries that were small or non-existent in 1900; actually, it is 62 per cent by value for the US and 47 per cent for the UK – what prohibits us from pursuing industries such as those in ICT, sciences, etc?
All in all, the value of the Credit Suisse report isn’t some sort of a roadmap of investment returns expectations and opportunities. It instead gives us a better sense of where the equity market has come from and its evolving in these past 119 years. We also should be mindful to the fact that a lot has happened during this period – two world wars, several recessions and financial crises, reshuffling in the global equity, financial markets and economies. If we only could reflect, learn and assimilate – so Ecclesiastes 1:10 implies.

On Expanding the Tax and Taxpayers Base (III)

This is the continuation from last week, and last piece on the topic. As it were, these are personal recommendations, further to what many others have undertaken already, i.e. drawing up accounts of what are considered necessary in the expansion of our tax and taxpayers base. Read on:
On presumptive taxation
In concluding last week’s comments on this aspect – in the ultimate analysis, under no circumstance should a taxpayer be allowed to hide for his entire productive life in the comforting embrace of an unduly favorable presumptive taxation system, or non-filling of returns. Progressive assimilation of these into the tax net should be not only through tax education, but also through increased risk perception regarding the likelihood of penalties being imposed.
It is equally important to ensure that small to medium enterprises which are in the normal tax system should not be allowed to migrate into the simplified system to avoid paying tax. In addition, an effective method to monitor small enterprises that opt for presumptive taxation would be to insist on their filing declaration of their accounts annually and it should be made mandatory for them to issue receipts for each transaction, with serial numbers of course.
On small and medium-sized enterprises (SMEs)
Perceived or real high tax rates, the inability to understand a complex tax system and procedures, and the lack of confidence in government’s efficiency in the use of revenues are usually key reasons for low voluntary compliance. Therefore, tax administration measures to improve SMEs tax compliance could include quick and easy processes for registration and TIN issuance; clear and easily available information on tax registration, filing and payment obligations and procedures; a turnover based regime and audit activities that take into account specific characteristics of different groups of SMEs.
Once compliance behavior is understood, raising compliance is likely to again call for simplified returns, with simple profit and loss statements and a simplified capital allowance so that whichever SME is selected, their audit remains fair and transparent and not prone to disputes. Also, setting up of call centres in major TRA regional offices for responding to and resolving basic queries and visit by specialized officers in a group for SME support could be another milestone.
On retail/small traders
Informal and unorganized small traders often have a tendency not to pay taxes and most are not even TIN registered. A conducive environment and tax culture should be created to encourage them to pay their tax dues voluntarily. In addition to Special IDs that are being distributed to small traders, they could also be encouraged to use debit cards/mobile transaction more extensively, this way they could be attracted to enter the formal sector. Further to that, they also would leave an audit trail of transactions undertaken by them, which could be leveraged for widening the taxpayer base. The small retail traders could also be encouraged to enter the banking network by providing the facility of fast-tracking applications for business, educational, housing loans, etc once they are categorized as tax payers.
On high net worth individuals
Wealth tax base can be increased by following international practices, where revenue authorities, exclusively focus on high net worth individuals (HNWIs). On this, administratively there is need for a separate unit for HNWIs within the revenue authority structure with a view to improving the understanding of different customer needs and behaviours in order to respond to them appropriately, assisting them to get their affairs right and pursuing those who bend or break the rules.
On special tax treatments
Further to what has been the approach in these recent years, there could still be a room for a comprehensive review of exemptions. Both the Ministry and revenue authority could consider measures to phase out some forms of unwarranted tax exemptions that continue in the form of various fiscal preferences. The revenue authority could endeavor to analyze the outcomes of these exemptions and inform better decisions.
Specific economic parameters like growth rates of specific sectors, growth of businesses and households, etc could be identified and analysed for increasing the taxpayer base. Such economic parameters, once selected, could be periodically verified, improved and modified. Cases of broad parameters should be narrowed down into more specific ones as experience in parameter analytics is gathered and consolidated.
Exemptions/deductions based on specific economic areas and industries could be minimized. If at all, investment incentives could receive a tax preference because they directly affect growth; then such incentives should be for specific periods of time. A comprehensive review of exemptions will facilitate the deepening and widening of tax base.
On survey and searches
Surveys and technology-based information and intelligence systems should be used to identify potential taxpayers. Databases from different government agencies could be used to locate those do not file tax return and also those who stopped filling for returns.
Such surveys should be based on growth trend in sectors and industries especially clusters of business units known for use of undocumented and cash transactions; expenditure and lavish life style etc. Tax administrators could develop/use software to zero-in on such behavioral indicators.
Enforcement could be strengthened to heighten the perception of the risk of being caught and of penalty for non-compliance being high. Anti-avoidance provisions should be incorporated in our tax laws and then be implemented with great care and sensitivity.

On Expanding the Tax and Taxpayers Base (II)

This is the continuation from ended last week. They are personal opinions to what many have undertaken already to draw up informed accounts of what could be considered necessary for the expansion of our tax and taxpayers base. The broadening of the tax base and greater compliance could boost tax collections, even while the overall tax rate could fall – for resource mobilization and economic growth. Therefore, further to the general observation in the last article, these are high level summarized specific recommendations:
On increasing the number of taxpayers
There is a gap in the number of corporate tax payers registered with the TRA vis-à-vis the number of working companies registered with the Registrar of Companies (BRELA), even though most of them are legally required to file returns mandatorily. The revenue authority should pursue this lead to identify corporates that are registered but are not filling returns.
As we noted last week, 2.75 million have a TIN among us and out of these about 300,000 file income tax returns, i.e. about 89 per cent of registered taxpayers are not filing returns. In here, a mechanism needs to be put in place to ensure the filing of returns by all registered taxpayers. The revenue authority could investigate and carry out a robust analysis on why the percentage of returns filed is so low compared to the number of registrations.
Furthermore, we know that the tax base is not commensurate with the growth in both corporate and individual incomes especially in recent past. An effective mechanism for collecting information from varied sources should be put in place to identify potential taxpayers and bring them into the tax net and broadening the tax base. The compliance system could be made simple and more user friendly to encourage voluntary compliance, thereby broadening the tax base.
On Withholding Tax
The beauty about withholding tax (WHT) is that it leaves an audit trail that acts as a deterrent to tax evasion and in early collection of tax as soon as a transaction takes place; it is also a non-intrusive method of expanding the base. Therefore, regular monitoring of tax deduction transactions therefore could be made and compared with the tax return data to identify whether deductees do file tax returns.
It would be ideal if WHT deductors would file the WHT returns on time, each quarter and must include the details of name of the deductees, their TIN and amount of transaction.
WHT coverage could be expanded to capture more and more transactions, especially those that involve large amounts of cash but remain outside the tax net.
It is however important to note that the taxpayer base may not necessarily increase merely by introduction of WHT unless deductees and deductors file correct returns. To ensure that correct returns are filed, WHT needs to be supplemented by enhanced enforcement methods.
On the cash economy
In my opinion, the cash economy is a major problem in our economic system as large-scale transactions reportedly take place in cash, especially in land dealings, the construction sector, etc. In this aspect, a non-intrusive verification system could be designed so that more cases of capital gains liability are detected and taxed.
Certain measures could also be put in place to discourage cash transactions. For example, local authorities and the revenue authority could be encouraged to bridge the gap between the tax computation rates that is used for property valuation for tax imposition, and the market value of properties (even allowing for a lower property tax rate) and increase the digital footprint of transactions.
Coupled with this, there is also a need to develop better assessment of the “underground economy” both in terms of its size and the economic behavioral factors that motivate the players in that economy. There is no recent study that I have come across on the issue, and if this is generally the case, there is an urgent need to promote research which is Knowledge, Analysis and Intelligence-oriented in this area. That would provide much needed insight into the functioning of the “black economy” and how to harness it with appropriate revenue yielding administrative measures.
Meanwhile, there is no robust instrument at present that captures details of bank accounts/transactions, as they relate to tax payments. The availability of such information could help the revenue authority in widen its information base on the use of black money.
On presumptive taxation
This is the particular area that in recent years has played a major role in enhancing the widening of tax and taxpayers base. However, there is still a large number of individuals in businesses, trade, services and professions, (especially in the informal sector and sectors where large scale transactions take place in cash) who are outside the tax net. Therefore, the presumptive income estimation scheme should further be reviewed based on appropriate analysis and its scope be enlarged with the view of attracting more into the tax net.
Many small businesses are still in the informal economy and remain untaxed. For these groups, in addition to the ongoing efforts following the President’s directive, the tax administration could design, promote, and establish simple, optional presumptive tax schemes, including those based on a compounding (turnover) basis, for example in the service tax that are below a threshold.
Since there is still some scope for presumptive taxation in the Finance Act, currently applicable to only some business sectors with a turnover below a threshold limit, data mining remains crucial for analysis-based strategies to examine if its scope should be expanded.
However, the presumptive taxation scheme should always be backed by taxpayer education programs to bring taxpayers up to the point at which they can enter the regular tax system. The revenue authority has in recent years increased the visibility of tax education and awareness programs; this should continuously be an important goal of the presumptive scheme. To be continued next week.

On Expanding Tax and Taxpayers Base

Many have undertaken to draw up their account of the aspects considered necessary for the expansion of our tax and taxpayers base. Since myself have carefully followed up such debates, it seems good that I comment on these things. And so, few weeks ago I wrote a piece “The case for Tanzanians to Embrace Paying taxes”. This is the second article.
Among other words of wisdom said by Justice Wendell Homes (former Associate Justice of the Supreme Court of the United States) is: “I like paying taxes. With them, I buy civilisation’’ – implying, taxes are the cost paid for living in a society and for being part of civilisation. Taxes are utilised to meet basic functions of the state like defence, law, justice, public services and good governance. Unfortunately, people take taxes only as a burden on their income and treat the filing of returns as a mere formality.
In one way or the other, we all pay indirect taxes, charged on goods and services that we all consume. I would therefore focus on the direct taxes.
According to publicly available data, in the last 3-years, direct tax collection has increased by about 7 percent, while the number of taxpayers has grown by 20 and 3 per cent for individuals/sole proprietorships and corporate types of direct taxes respectively. Direct taxes (PAYE, Corporate Tax, etc) contributes about 40 percent of our total tax revenue. The total number of taxpayers in the lowest income bracket (i.e. below Tsh 100 million) comprises almost 99 percent of total taxpayers, from whom 20 percent of the tax revenues collected. The highest bracket of the above Tsh 100 million comprises a 1 percent of total taxpayers, contributing 80 percent of tax revenues. In FY2017/18 the numbers of corporate taxpayers in the Tsh 100 million bracket was about 67,000 and those above Tsh 100 million bracket numbered just 20,000 taxpayers. This suggests that the income tax base in revenue terms is very narrow and adversely affects tax buoyancy.
Tanzania has a low taxpayer base even as a percentage of the total population. With a population of over 55 million, only 2.75 million have a TIN and of these, 21,000 have filled for VAT and about 300,000 file income tax returns. Only 5 per cent of the population pays direct tax, which is very low compared to 30 per cent in Botswana, 25 per cent in Namibia, 20 per cent in Mozambique, etc. One could argue, of course, this reflects Tanzania’s low-income levels, which, for a large part of the population, falls below the basic income tax threshold; yes, but yet significant potential remains to expand the taxpayer base. However, due to various structural reasons that I will explain, the base could perhaps be doubled at most to say 10 per cent (i.e. 4.5 million tax payers). A huge gap has also been noticed between the number of entities to which tax deduction and taxpayer identity number (TIN) has been allotted vis-à-vis the number of those filing income tax returns. A significant cause for the difference is that not all those allotted TIN file returns.
Even though widening the tax base has been one of the key action plan areas for the past recent years, achievement has fallen short of targets. There is, therefore, an urgent need to pursue efforts for enlarging the tax base as well as taxpayer base (which is currently not commensurate with the growth in income and wealth) through both policy as well as enforcement action.
Why the 4.5 million potential? Let’s do the maths, assuming an average family size of 7, there are then over 7 million families on the 55 million population. Assuming, further, that 30 per cent of the households earn only subsistence wages and therefore below the income tax threshold, there will then be 5 million potential taxpaying families. If 70 percent of this is assumed to derive income from agriculture, we remain with 1.5 million potential taxpayers’ families. If three individuals in such families could potentially pay income taxes, these are 4.5 million individuals, compared to the current 2.7million. Even from this simple analysis (with many faults), there is, thus, a significant scope to increase the tax payer base and a lot of this increase will need to come from both increasing the tax base and ensuring true income disclosures. Widening the tax base raises equity, because if all persons liable to pay tax are brought on tax records, the burden on existing taxpayers can be brought down. The overall level of compliance improves when a large number of persons who are legally required to file returns, do so. It also encourages others to comply with their legal obligation to pay their taxes dutifully.
As the President directs, the focus has to be on bringing in new taxpayers, rather than putting a heavier burden on payers who are already in the tax net by targeting sectors that are currently untaxed, especially the informal sectors. There also has to be a comprehensive review of exemptions, incentives, etc., with a view to rationalising them, which may require legislative changes. Attention has also to be given to minimisation of tax avoidance/evasion by developing a better understanding of the “underground economy”, both in terms of its size and the economic behavioural factors that motivate players in the economy, identifying vulnerable areas of tax evasion, and co¬ordination and collaboration with other government agencies for exchange of information on a real time basis and its effective utilisation. Without impinging upon good taxpayers, tax avoidance needs to be examined very carefully in those identified areas. The tax administration also may consider to be oriented more towards customers; an idea adopted by many modernising tax administrations for improving voluntary compliance. This could go a long way in expanding the taxpayer base.

Building a Saving and Investment Culture

For the past six-years the Dar es Salaam Stock Exchange have been running an edutainment challenge dubbed DSE Scholar Investment Challenge whose objective is financial literacy i.e. educating and sensitizing the youth, especially those in universities, colleges and secondary school, about the necessity of savings for investment, in this case investing in listed securities and bonds.

This is in trying to avoid situations where the next generation will have to live in the situation of not having enough assets (i.e. share, bonds, property, cash, etc) to meet obligations which then create significant stress, leading to host of problems, such as depression and heart diseases.

As it is said in the book of Proverbs 21:20 – [There is] treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up. Also Proverbs 13:11 – Wealth [gotten] by vanity shall be diminished: but he that gathereth by labour shall increase.

Thus, educating oneself and pursuing the discipline of savings and investing for the future is where wisdom towards financial freedom begin. This applies to individuals, but a nation also needs to create the saving culture and the saving-investment identity. This is necessary for the national income, because the amount saved in an economy will be the amount that can be directly invested or intermediated for investment in new physical machinery, new infrastructure, new inventories and the like. It is true than in an open economy private saving plus governmental saving plus foreign investment domestically equates into physical investment. In other words, the flow of investment must be financed by some combination of private domestic saving, government saving (surplus), and foreign saving – it is good to enhance domestic private and government savings.

Going back to personal finance – from overspending and financial setbacks to incurring massive debt and simply just not making enough money, there are several huddles that one has to overcome. Therefore, cultivating the habit of savings is very important and can be helpful in many aspects of life. A good saver can set aside funds for business, is debt free and has already made a right as well as bold step towards financial freedom. A good saver can also reach certain goals that cannot be attained on the limited income that one gets.

In many cases, people and companies tend to save and invest if they trust the institutions that manage their money and the economy at large. Countries with a high savings rate withstand financial shocks and channel more funds towards critical sectors of their economies. However, building this resilience is steeped in a culture of saving and investment. We are told that less 20 per cent of Tanzanians have a bank account, and as it stands only about 1 per cent have an investment account at the stock exchange.

As I argue for an idea and a culture of saving for investment I also underscore the fact that ours is a developing nation pursuing a vision of becoming a middle income country within this next decade, that as it stands those among us with formal employment are few and with poorly paying jobs to meet the cost of living –individuals have minimal disposable income and less to save and invest. I understand all of that, but within such circumstances there is opportunity to save for investment, you see this is also largely of a cultural issue. We all know some of us whose circumstances are better and could save and invest than they already do, however without discipline and a propensity to spend than to save – it becomes difficult. This is a question of choice. As I said in previous articles, one need to assess his/her financial health to help in the understanding the direction is headed towards achieving financial freedom. In doing this one need to have a clear picture of income and expenses, then plan and be focused on setting aside a portion of your income for investing, don’t spend unwisely.

As for our collective greater good – what is being currently pursued by the government in strengthening property rights by way of land titling will go a long way in promoting greater saving and investment in the area of real estate, and beyond. Along with this, ongoing efforts by the government to improve the business environment and addressing infrastructure challenges especially in the areas of energy, transport and communication is another key aspect of what the state can do to incentive people within the society to save and invest in new projects. Embedded into the above is also the commendable act by the government to shift public expenditure and spend more on infrastructure projects than on wages, goods and services.

I know this can sometimes seem complicated and may require a good way of striking the balance, especially based on what I said earlier — better wages and well-paying jobs enable individuals’ savings for investment – but for our collective greater good, sometimes the principles of social contract enshrined onto Leviathan (or commonwealth) as argued by Thomas Hobbes (the philosopher) may have to come into play. After all, if the state can save and invest on our collective behalf, benefits could apply the same, as long as mechanisms and tools for distribution of the wealth created is equitable and efficient. But it all starts with the knowledge, commitment and focus.

Is it time to Invest in the DSE Listed Stocks?

An analysis of the underlying activities driving our equities and the fixed-income markets over the last couple of months presents reassuring outlooks for prospective investors at the Dar es Salaam Stock Exchange’s listed securities. It is a fact that the recent past has been depressing to some investors, but not the value-investors.
For a start, the DSE bourse is currently trading at attractive multiples on the back of significant sell in 2018 which saw, DSE indices and market capitalization for domestic listed companies decline by 6 percent. The cause for the decline may be many – depends on the perspective, in summary key ones are: (i) sell-off by foreign investors in preference of US dollar-based assets (equity, bonds, currency)– note that foreign investors contributes up to 80 percent of liquidity creation at the Exchange; (ii) the declining appetite and change of priority/preference from listed equity by domestic institutional investors – particularly pension funds; and (iii) the selloff pressure by retail investors due to increased social economic demands requiring liquidation of their investments and/or also preferences for other alternative asset classes. However, putting these factors aside –because the intent of this article is not to explain the decline in prices — now let us proceed to the issue.
The upside to this [experienced decline in prices and depressed values of listed equities], is that valuations are now ever so attractive, presenting excellent entry point for most stocks which were previously traded at a premium relative to their true intrinsic value. What I am almost arguing is for investors to do away with speculative motives and sentimental driven investment approach and consider the “value-investment” approach and strategy. For more on this read the writings by Warren Buffet and his mentor Benjamin Graham, or Buffet’s long-term investment partner Charlie Munger.
Why the proposal to invest now may be attractive? Because, macro-economic forecasts support the idea of value investment. According to forecasts by the Government, the Gross Domestic Growth in 2019 will be about 7 percent, the same growth rate as has been in the past two decades. This growth rate is one of the highest not only in Africa, but across the global. Furthermore, data on the forecast by various agencies indicates that this growth will be sustained/maintained in the medium term, with some potential for the upside.

This positivism in sentiments and the underlying fundamentals of economic activities should somehow be reflective in corporate entities forecasts and performances. Data indicates that lending to private sector and productive sectors of the economy is increasing, in the stock market there has been less profit warnings, but rather reported stronger earnings growth, on the back of more attractive macro data and background. These indicators once digested are supposed to reflect and drive activity on the bourse.

Data also indicates that industrialization drive is gaining traction, as it is for the infrastructure and public investment activities. Based on these, and other factors, there seem to be investment opportunity presented in the banking, manufacturing, agribusinesses, infrastructure and FMCG sectors. I therefore would imagine that there will be opportunities for relatively good returns for investors in these sectors counters of listed securities, i.e. for those investors with medium to long-term view in their investment approach.

Without going into specifics but looking into the price earnings and price book value valuation matrices to determine which listed counters presents the most viable investment option, there are several counters which presents attractive prospects for value-investors, while others are also good buys for dividend seekers. For instance, while the banking sector has an immense potential, on the fact that some banks are trading at the trailing Price Earnings Ratio of 5 times and Price Book Value of less 0.5 times. Overall value weighted average PE ratio for banks listed in the Nairobi bourse, trades at 7.32 times and a value weighted Book Value is 1.32 times compared to our value weighted average NBV of 1.17 times. The same can be said of other sectors.

Let me conclude by summarizing this case: in India and almost elsewhere, there was a push for socio-economic growth via economic liberalization and market-based approaches and the more use of capital markets in the early 1990s – but, despite this, few expected much from a small software company that struggled to list its shares in Mumbai Stock Exchange in February 1993. Despite its size and potential, during then India was an economic “small fish” and the technology sector was tiny and untested. Those who were brave and bought shares of Infosys Technologies did well if they held on to the shares to date. The company reported an operating profit for the year ended 31st March 2018 of over US$ 2.6 billion – on a turnover of more than US$ 10 billion. Shares were worth 4,000 times more than they had been 25-years earlier.

Our TBL and TCC shares are now worth 20 times more than they have been 20 years ago when they listed in the local Exchange, but those who benefit from these (and other such stories I previously shared in my articles) are those who doesn’t get pulled or pushed by momentary sentiments of the stock market.

Early Financial Planning and Execution for a Better Retirement

Our priorities, goals and needs change constantly as we journey through life. Lifestyle choices like cars and holidays occupy and dominate our thinking early on as we start our career, then as years go by imperatives such as renting, buying or building a house come along.
After that we have education for our children, health care for us and our families and all the things that goes with growing families and expanding responsibilities. All the while, we have to keep an eye of the possibility of a comfortable retirement with some form of “financial freedom”.
Juggling these competing financial needs, on a limited and finite income stretches most of us to the core. However, the part of the secret to succeed in these challenges lies in start early, making plans and sticking, as much possible, to those plans. Have you ever heard words such as “financial freedom”, “the freedom fund”, or “the Rule of Seven”? – where you are encouraged to make regular and sustainable savings in pursuing to create a fund which is made up of investments in income producing investments (i.e. dividend paying shares, income-earning cash (i.e. fixed deposits and treasury bills), bonds, real estate’s rental income, royalties, etc) whose ultimate objective is to enable you live a relatively similar life as the one you had when you were earning regular income from your day job during the active career years.
What I am saying is that, you should get into the good habit of saving, early in life. The earlier you start the better, because the small amounts you save – with a compounding effect – turns into large sums over time. When you are trying to accumulate wealth for future, the longer you have your money invested the more it will grow in value.
The other advantage in starting early is the mindset it helps create. You begin to see savings not as some sort of luxury but as an essential part of your overall financial plan and execution. Basically, savings should be an integral piece of your planning and seen as important as your rent, or loan repayments or, school fees. The best way to approach this is to have personal plans and create the budget to support implementation of those plans. If there won’t be conscious and deliberate efforts to ensure all these are put down on paper – then the follow through would also face challenges. Unfortunately, most of us, approach matters of income and spending via focusing on the short-term, the here and now, where we act as if what is here now is far important to what lies ahead of us not so long down the line.
Because of lack of plans or the habit of putting matters on hold until the last minutes, or according priority to matters that are not, we end up spending money on things that we do not even need or know about. In this context, getting the basics i.e. personal planning, budgeting and budgetary control is essential.
Earlier [above] I introduced the concept of compounding, in accounting and finance this is a key term, and this is how it works — let us assume that your savings are kept in the form of bank deposits with a fixed term and your return is interest earnings. In this case, there will be the effect of compounding interest – meaning that the interest you earn each period is added to your principal and re-invested, so that the balance doesn’t merely grow, it grows at an increasing rate. It is the basis of everything from a personal savings plan to the long term growth of the stock market. It also accounts for the effects of inflation, and the importance of paying down your debt. What it also means is that the earlier you start savings the better. Let us assume that you are now in your early 30s and started saving, your chances of getting enough funds, not only for retirement, but also for buying/building a house, taking children to good schools, etc are much higher relative to if you started savings at 40s where the struggle to achieve financial freedom will be far much higher. Now, personal and financial planning is key – setting out your goals, setting out the plan to achieve the said goals and prioritizing objectives for executions.
But before you proceed with any savings plans, you have to map out your action plan for getting there. In other words, you need to determine if you have the spare cash to make savings. Thus, you need to construct your personal balance sheet and cash flow statement that seek answers to some important questions to see where you financially stand. Only once you have paid off all your short-term debt and you have income left over should you consider saving.
So, first thing you need to consider, is to settle your finances and outstanding high interest debts. This is not a rule but a prudent advice because if you have debt that is costing you say 20 percent in interest per annum and your invested savings is growing at more than 20 percent per annum and you can liquidate your invested savings to repay the debt, you are then doing very well, but this is often difficult to achieve and thus it is advisable or rather recommendable for you to take a simple approach, which says invest your savings, do not borrow or get into debt to make a saving investments. Look at your current financial position, i.e., your personal balance sheet and cash flow statement to understand where you stand.
In any case, even if you are on your 40s or 50s, you still have 20 or 10 years before retirement, and there is still quite a lot that can be done. It is never too late to start, what is important is that you have to have a sensible savings and investment strategy, act on it and seek help from financial advisers, when needed.

Trust Funds for Protecting and Preserving Wealth

Earlier this week I read a newspaper story about a mineral billionaire who passed away recently, and his estate administration turned into chaos and hate among family members. In digesting what is written I thought about the role of trust funds and how helpful they can be in such situations.
Trust funds are a great way to build, protect and preserve wealth for future generations, but many people tend to shy away from them because they think they are only for the rich. Almost same perception held for stock markets investments. Although it also true that trusts have an association with rich and powerful families, but trust funds can make a lot of sense even if you are a widowed mother who just wants to leave some form of wealth to a child to help him or her complete his or her education.
Before we proceed – let us answer the basic question, what is a Trust Fund? it is a special type of legal entity that holds assets/property for the benefit of another person, group, or organization; and there are three parties involved in almost all trust funds:
• The Grantor: the person who establishes the trust fund, donates the property (such as cash, shares, bonds, real estates, investment units, livestock, art, a private business, and other valuables bequeathed to a minor as is declared in a formal will) to the fund, and who decides the terms upon which it must be managed.
• The Beneficiary: the person for whom the trust fund is established. It is intended that the assets in the trust, though not belonging to the beneficially, will be managed in a way that will benefit him or her, as per the specific instructions and rules laid out by the grantor when the trust fund was created.
• The Trustee: The trustee, which can be a single individual, an institution, or multiple trusted advisors, responsible for overseeing that the trust fund maintains its duties as laid out in the trust documents and applicable law. The trustee is often paid management fee. Some trusts give responsibility for managing the trust assets to the trustee, while others require the trustee to select qualified investment advisors or a custodian to handle the money.
Over time the need for trust funds has become increasingly popular, and in demand, occasioned by the unfortunate occurrence of death or other events, and as it should be beneficiaries (i.e. minors) are practically incapable of making choices on how to use assets/property left for them by their parents or guardians. In such cases, trust funds are great vehicles that ensure the purpose for which assets were set is met.
Even in cases where the deceased may have omitted some dependents knowingly or otherwise, Trustees would normally have discretionary rights on how to have funds distributed, however, whatever it may — it would be best to ensure that the funds are distributed according to the wishes of the deceased. In case beneficiaries they are minors, funds should be set aside as a trust to meet obligations that range from upkeep to school fees in favor of the minor.
So, why would one consider using a Trust Fund? In addition to the beneficiary’s protections, there are several reasons trust funds may be of use, among others, these may be key:
• If you don’t trust your family members to follow the letter of your intentions following your passing, a trust fund managed by an independent third-party trustee can often alleviate your fears.
• Parents often set up trust funds for their children, designed to pay educational expenses. When the children graduate, any additional principal remaining is distributed as start-up money which they can use to establish their post-college life.
• Trust funds can protect assets that you cherish, such as a family business, from your beneficiaries. Imagine you own a bottled water factory and feel tremendous loyalty towards your employees. You want the business to continue being successful and run by the people who work in it, but you want the profits to go to your son and daughter, but who has an addiction problem. By using a trust fund, and letting the trustee be responsible for overseeing management, you could achieve this. Your son would still get the financial benefits of the business, but he would have no say in running it.
What we learn is that, to a great extent, trust funds ease the burden on the guardian or the surviving spouse who now has to raise children alone, even once the children come of age, with the approval of the trustees, the remaining funds can be released to them directly.
How does it work? Trustees normally set up a trust fund which can have a pool of trusts managed professionally by a team of service providers such as a fund manager and/or a custodian who may a bank. This ensures transparency in the day today transactions of a fund. These service providers report to trustees on the schemes of performance and other functions as per their mandates.
However, bearing in mind the costs needed to set up a trust and maintain it, trustees can opt for already existing trust funds in the market, unless it is completely necessary to do so. Under the principle of economies of scale, a pool of trust funds will help in cost saving while maximizing on returns.
Although trustees can opt to continue managing these funds on behalf of the minor, having the funds managed in an established trust fund that houses a pool of schemes is often easier as directly managing the same can be demanding. This has to be done through the consent of the guardian with the sole purpose of helping them better understand the decision and why it is easier. Well set up trust funds ensures money is continually invested and good returns are realized.