Ensure no money is lost in Cytonn saga

For me, what I want to hear from both Cytonn Investments and the Capital Markets Authority(CMA) is that member deposits and investments are safe and redeemable immediately on request.

Whether or not the situation we are dealing with presents a case of regulatory overreach is a moot point.

The most pertinent issue the episode raises is the following: what level of protection do investors in money market funds schemes enjoy in this country?

If I were the one making policy and writing the law, I would introduce laws requiring that any private party who makes an invitation and collects the money from the public must be subjected to very high levels of prudential regulation.

I propose higher levels of prudential scrutiny to everybody regardless of whether you are collecting money from the public through a private placements transaction or whether the people you are collection money from are knowledgeable qualified institutional investors with access to lawyers and financial advisers and consultants. Nairobi has too many smooth-talking cowboys.

The first group I will target are those smooth- talking developers who collect deposits from members of the public in the name of the so called off-plan housing projects.

I would introduce stricter standards for transparency and disclosure and insist that any party who makes and invitation to members to invest in his project be made to must disclose audited details on parameters such administrative expenses, how much he has borrowed from the bank for project- and whether the land on which the off-plan project is to be built has been fully paid for.

I would insist that developers must produce and disclose the contracts they have entered into with building contractors.

Most important, I will want to see evidence of existence of mechanisms for protecting members of the public in the case where schemes collapse.

The game is all-too-familiar: A smooth-talking developer approaches you with a title owned by an SPV with an opportunity to purchase a plot in a major property project.

Invariably, the signature development and main attraction will be a golf course surrounded by high-end villas and first-world standard amenities- all built behind high security walls.

The developer proposes to build all other ancillaries: Water supply systems, roads, electricity, swimming pools and a nursery school.

All that you are required to do is pay a deposit, typically, 10 per cent of the value of the plot, and enter into an arrangement committing you to make instalments and complete payments within a year.

Under the arrangement, you are required to build your own high-end villa to an approved design.

Months later, hints of trouble start showing. The title deed is nowhere to be seen, the golf course is not happening, water, electricity and other infrastructure are not being built.

A year later, you get frustrated after you notice that your title deed is not being processed.

Scared, the first thing you do is to withhold monthly instalments. Indeed, the country is littered with too many examples of half-completed property development projects where unsuspecting individuals have paid millions in deposits, but have no title deed many years later.

It begs the question: Whose responsibility is it to tame crooked developers who have collected deposits from unwitting citizens, invested elsewhere and left the projects in deep financial distress?

This is how the model by these crooks run: Borrow money from the bank to partly buy and partition a coffee estate into plots, present the same land as security for the loan, and finally, use the cash flow from the deposits and from the pre-sales you collect from members of the public to build a massive gate, perimeter fencing and a club house.

Because the cowboy has no money of his own to put into the project, he invariably, runs out of cash after a very short time because money is squandered in high administrative expenses such as expensive cars for family and managers –expensive schools for children- and in expensive advertising.

Pressure on the operation start the moment members of the public who deposited money for the plots start smelling trouble, and, especially when they realise that work on the golf course, on the water, electricity and internal roads, is not progressing at all.

The depositors stop payment of instalments for the plots, with dire consequences for the developer.

But the real crunch starts when interest on the money the cowboy developer borrowed to buy the coffee estate kicks in and starts building up.

The unsuspecting individuals who squandered their hard-earned savings paying for plots, which remain un -serviced, are left holding the wrong end of the stick.