Why the world can do without America

At the dawn of 2019, the United States and Isreal quit UNESCO. This is a continued surge of American carnage, where United States is drowning the established global order. The World should ignore the American theatrics and move on. The World can do without the United States.

On 1st January 2019, the United States and Israel officially quit the United Nations Educational, Scientific and Cultural Organization (UNESCO). This was a culmination of a process that was triggered more than a year ago.

It is not the first time the US is pulling out of UNESCO. It did so in 1984, during the Reagan administration, under the pretense that UNESCO was mismanaged, corrupt, and used to advance Soviet interests.

The US will later rejoin the body in 2003. Only to quit again in 2019, now in order to side with Middle East bully Israel, and as a protest for UNESCO having (almost) unanimously voted to admit Palestine as a member. They wrongly accused this UN body for anti-Semitism.

President Donald Trump, during his inaugural address as president, promised the end of American Carnage. Seemly, what we are now witnessing is the surge of American carnage, with president Trump as the god of carnage.

President Trump has been on warpath against multilateral global order. One of the lows of his ignoble presidency, is when he withdrew United States membership from the Paris Agreement, an ambitious deal aiming at combating climate change, a phenomena that has an existential threat humanity.

America, now join other two states, Syria and Nicaragua, who are outsiders to Paris Agreement. Fears, and these are not misplaced, American indifference to global affairs may result to a collapse global order.

But digging history shows the world has shown resilience on various fronts in absence of American leadership. The World can in fact do without America and should call a bluff to US tantrums. We illustrate.

US, through the warlord and perpetrator of crimes against humanity, President Bush, withdrew from the Statute of Rome, a treaty that creates International Criminal Court. Yet, even though with flips and bumps, the world has marched on and brought various crimes against humanity perpetrators to account.

United States is yet to ratify United Nations Convention on the Law of the Oceans. Yet the world oceans are being managed well, demarcated, and highs seas protected.

In the 1920s, America refused to be a member of the League of Nations, during its moments of ill advised isolationism. The League kicked off, deterred world wars for a period, and laid the ground for United Nations, which US has now hijacked.

United States refused to ratify the Kyoto Protocol, the predecessor to Paris Agreement, and yet world made some steps in reducing greenhouse gas emissions and combating climate change.

United States (and Somalia) are the only two countries yet to ratify Convention on the Rights of the Child and optional protocols under it. Yet, progress has been made by world states in guaranteeing children rights.

United States is yet to ratify the Convention on the Elimination of All Forms of Discrimination Against Women, which would guarantee women equal rights in various facets. Yet, progress has been made, women are making strides, even in Saudi Arabia, the hell on earth for women.

United States is yet to ratify treaty on nuclear weapons test ban, popular as Ottawa treaty banning landmines. Yet, it is the only country that has used nuclear weapons in war to effect a massacre.

The country has not ratified the Moon treaty that prohibits abuse of celestial bodies, yet progress has been made.

The crux of our contention is the world can still surge forward on various fronts of mutual concern, with or without the United States, a crumbling giant which is becoming an impediment to global order. The Paris Agreement, the the UNESCO, and other beacons of global order, can be implemented, with or without the United States.

A Guide to Drafting a Prenuptial Agreement

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Adultery, has been given a bad name. It has been blamed for the rising cases of marriage breakups. Sensational. Data reveals property wrangles and management of finances as rampant trigger in divorce cases.

Once upon a time, people entered into a unity of matrimony on bonds of affection. Those were the days, that again would never return.

For in the current era of pragmatism, a party entering into union of matrimony must be eager to determine what the prospective counter-party brings on the table. What they may bring on the table is either cash flows or prospects of future cash flows. This journal is not sure whether beauty counts.

Thus, even at the heat of courtship, it becomes a necessity to be clear on how finances and property would be managed once wedded, instead of handling the issue through trial and error, as is often the case. Just like way before mergers of business concerns a deal has to be struct, with conditions precedents and conditions subsequent, same way before making an agreement to marry.

One of the tools of actualizing this objective is having a well written prenuptial agreement (a prenup). A prenup is an agreement made between two people before marrying. It establishes rights to property and support in the event of divorce or death.

A prenup has a legal basis. The Constitution provides for the right to own property in any part of Kenya. The enjoyment of any right to own property cannot be restrained on the basis of marital status.

The Matrimonial Properties Act provides that parties to an intended marriage may enter into an agreement prior to their marriage to determine their property rights.

Even though the popularity of prenups has been growing, most of them end up being invalidated, because parties failed to seek legal advise or to draft them properly. It is true there are grounds for Invalidating a Prenup, either on account of the agreement being influenced by fraud, coercion or being manifestly unjust.

Hence, to ensure a prenup is valid, it must abide by following principles:

One, the agreement must be freely entered into. The should be no coercion.

Two, the parties must have a full appreciation of the implications of the agreement. It should not be unjust or unfair.

Three, the parties should make full and frank disclosure of all of their assets including those that they intend to exclude under the prenuptial agreement. This is a requirement at common law.

Four, the right of the child to support should be addressed prior to signing the Agreement, noting that the interests the child take precedence over all other interests under Kenyan law.

Five, the position at common law appears to be that prenups must not be entered into less than twenty-one (21) days before the marriage. The party initiating the process should therefore ensure that the other party is provided sufficient time to review the prenuptial agreement and the financial disclosures.

The parties should note that the agreement could be set aside by the Courts on the ground that it was unfair or manifestly unjust.

Therefore, the parties should ensure that the agreement does not have the effect of producing gross inequality between them either at the time of execution or during the marriage and that the division of assets is not weighted too heavily in favour of one party.

The habit originating from era of romanticism, where a party, often a male, kneels down with a ring to initiate countdown to a marriage is obtusely naive. Agreement to enter into a union of matrimony should be a toast, after hard negotiation and signing a prenup.

Revisiting Regulatory Models of Banking Sector in Kenya: From Njuguna’s Restraint to Njoroge’s Missiles

Former CBK governor Njuguga Ndung’u exercised regulatory restraint in regulating the banking sector and payment systems. This hands off approach led to growth of Fintech in the country making Kenya to be among the leaders. But it also led to accumulation of risk and unsafe banking practices. Governor Njoroge has taken a prescriptive regulatory approach, in its wake leading to collapse of three banks. Even though this may have led to stability in banking sector, such cautious regulatory approach  is stifling innovation. There is need to urgently create a regulatory balance. 

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CBK Governor Patrick Njoroge in a media briefing. Photo: courtesy

By gatuyu t.j

The Kenyan Microfinance banks are doing badly. A report by the Central Bank of Kenya (CBK) reveals microfinance banks gradual decline in profits from KES 549M in 2015 to a loss of KES 731M for the year 2017.

The poor performance has been attributed to the low mobilization of deposits, emerging financial technology (Fintech) and imposition of interest rate caps that has contributed non-performing loan portfolios.

To address these issues, the CBK, in a consultative note, has proposed regulatory measures to enhance corporate governance structures, increase adequacy of capital and liquidity and reduce reliance on deposits and borrowed funds.

The CBK desire to ensure financial stability, promote consumer protection, and maintaining market integrity and transparency, create resilient and viable business models in the financial sector is appreciated.

However, there is need for moderation on the methods employed. The CBK proposals are excessive intervention and overly prescriptive. The implication of such actions is they may cause undue market distortions and stifle innovations.

Most often, the regulatory enthusiasm can trigger government failures in trying to address market failures. It may increase the risk of unintended consequences such as unduly increasing compliance costs to financial institutions.

Ensuring financial stability is indeed an essential goal. However, when regulators pursue financial stability as if it is the only overarching goal, financial institutions may become overly risk averse and refrain from discharging their intermediation functions, restraining economic growth.

This calls for the need to strike the right balance between ensuring financial stability and securing effective financial intermediation. This results to a virtuous cycle where sound banks support economy and sound economy makes banks sound.

In bid to protect consumers, if financial institutions consider that compliance with rules is all that is expected of them, they may not make efforts to improve their products or services to best suit the interests of customers. In such case, financial industry’s contribution to the growth in national wealth is limited.

There is thus need to ensure that financial institutions abide by rules as a matter of course but equally strive for better services.

Indeed, market integrity and transparency is a precondition for the proper functioning of the market. However, should the Kenyan market stay stagnant while markets across the world compete with each other vigorously, it cannot make enough contributions to efficient corporate financing or growth in house held assets.

Balance need to be created for a market which attracts critical information and players from around the world and provides a variety of opportunities for financing and investment. Bid for transparency should not sacrifice market vigour.

Therefore, financial regulation goals of financial stability, consumer protection and market integrity should be balanced with the outcomes of effective intermediation, better services and market vigor. To achieve the ultimate goal of enhancing national welfare, the CBK proposals should seek to attain both outcomes.

A look at the Kenya’s banking industry, there exist multiple equilibria, where some institutions are making huge profits while others are not doing so well. A sector with multiple equilibria is always ripe for disruption to attain an efficiency gain by shifting to a better equilibrium.

Nevertheless, such a shift may require a strategy change. Sometimes, prescriptive laws hinder operational flexibility.  It becomes that no financial institutions is willing to change their strategies as the first mover may become prey to other firms, presenting the prisoner’s dilemma scenario.

For instance, no bank exits from the strategy focusing on lending volume as the first mover may lose market share. That is why it is necessary to make supervisory approaches to be consistent with the ultimate goal of regulation. The first mover breaking away from the prevalent inefficient business model can become disadvantaged against its competitors at least for certain period of time.

One of the ways for the CBK to create financial stability in banks is by addressing vulnerabilities in the financial system arising from negative externalities.

As was witnesses in the successive collapse of Dubai Bank, Imperial Bank and near collapse of Chase bank, a bank’s failure has domino effects on other banks due to the inter connectedness, but the management of the bank may not take the potential spillover into their consideration due to  information asymmetries.

Depositors who do not have enough information to distinguish good banks from bad banks may cause runs on good banks. Regulators must protect consumers of financial services against disadvantages stemming from information asymmetry and from limited means available for them to handle stress events.

In promoting better services, market force may not necessarily foster competition towards better services. This because financial institution have varying asset management capabilities or in their dedication to customers’ best interest may not be properly appreciated by customers due to information asymmetries and bounded rationality, and thus may not lead to differentiated growth of firms.

The CBK and other regulators can address this by promoting disclosure by financial institutions and enhancing customers’ financial literacy.

Lastly, to promote market vigor, regulators should work to eliminate obstacles and provide necessary conditions for market agglomeration to happen, as the benefit of agglomeration might not be fully reflected in individual market participants’ decisions (positive externality). In view of the foregoing narrative, the question is how best can the CBK minimize government failures while addressing market failures?

The current CBK supervisory approach outlined in prudential regulations, based on compliance checks and asset quality reviews, may no longer be effective.

Mechanical and repetitive application of rules makes the industry to be obsessed with compliance with the letters of the rules (focus on form), backward-looking review of the evidence of the past (focus on the past) and analysis of details and elements (focus on elements).

Examination in the light of forms, not substance,would for instance make bankers find it easier to defend lending decisions by referring to collaterals and guarantees than by presenting bankers’ own views on borrowers’ future business prospects.

It promotes complacency on the sustainability of banks’ business models in the future. CBK or any regulator may spend most of their time criticizing specific past incidents of misconduct but may fail to discuss whether firms meet the changing needs of the customers.

The CBK should expand the scope of its supervisory approaches from a backward-looking, element-by-element compliance check with formal requirements to substantive, forward-looking and holistic analysis and judgment so that the banks will better contribute to the ultimate goal of regulation by attaining basic goals in a balanced manner. The new supervisory approaches have the following three pillars.

The first pillar is the enforcement of minimum standards. Examples of the minimum standards include accounting standards on loan classification, loan write-offs and loan loss provisioning, capital adequacy requirements, rules and regulations on consumer protection and market integrity, as well as the minimum levels of internal control as a precondition for adequate business management, customer protection and risk management.

The second pillar is the dynamic supervision. It will also avoid imposing a one-size-fits-all solution across the industry and continue its efforts to develop approaches to engage in constructive two-way dialogue with an individual financial institution to explore possible solutions tailored to its own circumstances.

The third pillar is the promotion of disclosure and engagement with financial institutions aimed to encourage financial institutions’ pursuit of best practices.

Given the rapid evolution of financial businesses, financial institutions’ practices will quickly become outdated if they are designed just to satisfy minimum standards. Their business models and risk management practices should be renovated day by day.

Equally, better financial intermediation, better services and more vibrant markets can be attained only through firms’ diverse initiatives to innovate themselves. Basel III, the international framework for prudential supervision of banks, also adopts this three pillar approach.

A key to establishing this virtuous cycle is the creation of shared value between financial institutions and customers. In their 2011 article Creating Shared Value, Michael E. Porter and Mark R. Kramer argued that companies can find new markets and achieve a competitive advantage by creating shared value with customers, the community, and the society in their core businesses.

By providing high-quality products and services that meet customer needs and contribute to customers’ growth, companies can solidify the foundations of their businesses and increase their corporate value, according to their argument.

The author is the managing editor of the Gatuyuriana and a financial markets specialist. 

Kenya Public Pension Scheme Require Overhaul

In Kenya, pension expense take a huge percentage of public expenditures. Yet, the government is making payments to people who are able bodied, but not contributing to public coffers. Such regime of social security is outdated. Public pension schemes require immediate overhaul
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Photo: Courtesy
It is the German Chancellor Otto von Bismarck who introduced the world’s first public pension system in 1870. At the time, the retirement age was 70, and the average life expectancy was 45.
 
Today, in case of Europe, the average European retires at 65 and lives until he or she is at least 80. In Kenya, retirement age is 60 and average life expectancy is 65 years.
 
At the time Otto Von was introducing pensions as social security forms, expectation was very few workers would live to enjoy it. It is no longer the case, as people live longer. This where the problem lies.
 
Having overly generous pension benefits are destabilizing public finances, compromising the inter-generational social contract, and creating discontent. This problem has to be fixed.
 
The standard way to fix it is is by way of raising the retirement age or cut pension benefits. Each of these measures comes at a cost. The longer that older workers remain in the labor force, the more exposed they are to technological unemployment.
 
Cutting benefits, as Greece’s experience during the euro crisis showed such can force retirees to reduce their consumption, causing recessionary pressures.
 
In stagnant economies, where youth wait for attrition or retirement to be absorbed into the workforce, raising retirement age may fuel further discontent. There are two ways out.
 
One, everybody should contribute for their pension benefits, and this should no longer be a government role. This could be actualized by scrapping the defined benefit schemes in public service and replacing it with defined contribution benefit schemes.
 
Second, even though most seniors are ill-suited for today’s fast-changing labor market, they still have the skills, wisdom, and experience to contribute to society.
 
As such, governments should start treating them as a segment of the workforce, rather than as a burden on public spending and economic growth.In such case, eligibility for pension benefits should be pegged on performing some community work.
 
Such community work would have benefits for pensioners, too. Typically, idle retirement leads to a sharp decline in one’s cognitive skills, whereas a policy of active retirement would encourage older people to pursue fulfilling new challenges.
 
The government should not continue paying people who are able bodied free money. They should equally work and deliver something for it. For this, public pension has to be overhauled.

End of Dollar Dominance and Its Malcontents

Dollar dominance may have reached its end. Evidence portray a trend of massive de-dollarisation by world economies. It is time emerging economies such as Kenya adjusted accordingly.
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Photo: Courtesy
A random invoice will demand that payment to be made through SWIFT. This is an international payment system by the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), which is a dominant wire transfer.
 
Recently, on recent days, if the invoice originates from a Chinese, they have omitted SWIFT and replaced it with CIPS. The cause is China has abandoned SWIFT in favour of its own China International Payments System (CIPS), which they launched 2015.
 
In addition, the Chinese Renminbi has been admitted into the IMFs Special Drawing Rights (SDRs) basket, making it one of the top-tier international currencies.
 
The casualty of these Chinese overtures has been the US dollar. President Donald Trump has escalated the dollar slaughter through his confrontational foreign trade policy targeting China and and trade agreements.
 
In the aftermath of the World War II, the US Dollar, Euro, Yen and British Pound become the four main base currencies for settling international transactions. But the Dollar become dominant of theme to form the main base currency.
 
The trend that followed was a massive dollarisation of the world economies. Dollarisation is the use of the US Dollar in addition to or instead of the domestic currency as legal tender.
 
In fact, some countries, such as Ecuador, East Timor, El Salvador, Marshall Islands, Micronesia, Palau, and Zimbabwe use the US Dollar as the only currency include.
 
However, countries have been abandoning the dollar. This is a phenomena of de-Dollarization, where there is a deliberate action by a nation to cut down on the use of the U.S. Dollar.
 
The New Development Bank, earlier known as the BRICS evidenced the scenario of weakened Dollar when they announced the issuance of 3 billion yuan worth of five-year “green bonds” denominated in the Renminbi, to raise funds for clean energy and infrastructure projects.
 
These de-Dollarization efforts have implications for Kenya. Currently, the Central Bank of Kenya has foreign exchange reserve of USD 8000M (approx Ksh 800B) 5 months of cover. The CBK should diversify this reserve with other base currencies.
 
This would reduce the impact of USD fluctuations on the Kenyan currency. Lastly, as a country that has a substantial portion of its debt obligations to China, Kenya should do a currency swap relations with China.
 
The days of dollar dominance are all over and requisite adjusting are immediately required.

Why the Proposed Privatizations is Glory to the Capital Markets

By g.j

The Privitisation Commission has approved the offloading by equity stake in 26 state owned entities, some which be sold of through initial public hearings. This is good news.

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Privatization often brings into the market new industries, which increases investor’s diversification opportunities, and improves market liquidity.

In case where privatization is by cross-listing of stocks, that is, the floating of a company both in the domestic and international exchanges, such as dual listing planned for National Oil Corporation, it will enlarge the participation of foreign investors, hence capital inflows.

An historical analysis of privatizations in Kenya show it has always represented a boon for capital markets. Most of the IPOs done by state owned agencies, have in fact been oversubscribed IPOs, and had a multiplier effect of attracting a good number of private companies.

The first privitisation through capital markets was in 1988 by Kenya Commercial Bank. It was oversubscribed at 327%.

The euphoria that KCB raised was so much, Total Oil Company, Nation Printers (now Nation media) and Standard Chartered Bank got into the market, with subscription rates of 106%, 113%, and 233% respectively.

In 1992, the privatization of Housing Finance Corporation through an IPO immediately attracted Crown Berger, East African oxygen (BOC), NIC, Firestone, Rea Vipingo and East African Portland Cement to the stock market.

Without doubt, therefore, privatizations through the Nairobi Securities Exchange (NSE) is a catalyst for capital raising and listing by private enterprises. This trend has similarly been observed in several other jurisdictions notably India, China, New Zealand, South Africa and Egypt.

More recently in 2017, the Brazilian government announced its largest privatization package since the 1990s to bolster investment in order to revive the economy.

A total of 57 companies have been earmarked in the package, including the Brazilian Mint which prints the country’s currency and passports, 14 airports, 15 port terminals and energy firm Eletrobras. The Brazilian Government aims to raise 14 billion U.S.D.

Privatization is more likely to result in increased efficiency and improved equity outcomes of state owned entities. Incompetent managers will be able to be routinely routed out, and market dynamic will guide their operations.

Kenya has a well regulated capital markets and privatization will produce optimal outcomes. Furthermore, citizens will have a chance to venture into the market and have an investment opportunity.

The planned privatization is a good policy. Citizens have a right to be wary, but they need to vigilant to ensure the process is done properly. The days ahead are good for the capital markets

How to Ensure Kenya’s Unique ID Project Succeeds

Kenya’s identity ecosystem is messy. There is very little linkage between foundational identities and functional identities. This has led to duplication of registrations and proliferation of cards, to a huge cost. The country is planning to issue a single unique identifier (NIIMS), a Kenyan version of Aadhaar.  It would have been preferable if the country had adopted the foundational ID system. Nevertheless,  for NIIMS to succeed, some things must be done properly. One is privacy and data protection, second is technology and cybersecurity, and third is to avoid exclusions and discrimination.

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Photo: Courtesy

By gatuyu

A national identity is a key product of modern nationalism. The ability to prove your identity is critical for access of public services and exercise of legal rights. Kenya has a well-established national identification (ID) system, where a national ID is a mainstay of daily life. However, the greatest weakness with Kenya’s identity ecosystem is the two identity modes, the foundational systems and functional systems have very little interoperability.

Foundational systems are civil registrations meant to provide general identification and for official purposes, such as a national ID, alien and refugee registrations. Functional systems are registrations for a particular service or transaction such as health cards, passports, driving licenses, each relating to a particular agency.

A wallet of a Kenyan is full of multiple functional cards. The problem has always been with the foundational systems registrations. The National ID card, despite having all the personal data details including biometrics, has very little utility in functional systems. Failure to have linkage between foundational and functional systems has led to duplications in registrations and wastage of resources.

It is therefore refreshing to learn the government has prioritised reforming the identity ecosystem by adopting foundational ID system through the proposed National Integrated Identity Management System (NIIMS). Recent pronouncements by government officials reveal certain decisions have been made to this effect.

These include issuing a single unique ID number form birth, a single national population register that includes citizens, aliens and refugees, and a smartcard for citizens. NIIMS will provide a foundational ID system, where other databases, such as registries of voters, will be built on top.

A World Bank research reveals many countries have realised considerable benefits by adopting efficient ID systems. In Argentina, integration between the tax databases, occupational and other registers through a unique ID improved tax audits, generating over USD 44M in additional revenue from a reduction in tax fraud.

The India’s Aadhaar has significantly facilitated access to and delivery of services.  Visibly, rolling out an efficient identity system will present opportunities terms of fiscal savings, development of the digital economy and enhanced public and private sector service delivery.

A well-designed NIIMS is capable of acting as basis of vote registry and the government could save significant costs from need to carry out periodic voter registration drives. It would facilitate digital authentication that would open doors for e-government and new e-commerce markets.

While NIIMS opportunities abound, so are challenges and risks. There are some things that have to be got right in order to promote trust and confidence in the system. There is need to examine the regulatory enabling environment to on privacy and personal data protection, technology risks, and unintended risks of exclusions.

With electronic ID systems, need to secure data, prevent inappropriate sharing or use of data, including discriminatory use against certain individual or groups is paramount. Data collected for one purpose may be used for other purposes such as profiling and surveillance, including by government agencies, which may compromise trust and integrity of the system.

Equally, cyber security risks such as data theft, fraud, manipulation or hacking, or even destruction needs to be considered. Vulnerable infrastructure, systems and data will erode user confidence making use of the systems less attractive.

The roll out of the program should be inclusive. The Commission of Administrative Justice (Ombudsman), in a report titled ‘stateless in Kenya’, has documented the agony of acquiring identification documents in some regions. A further ill-designed registration approach, which is not facilitative in terms of cost, distance and time to register, or discriminatory, can lead to exclusion. Insights can be drawn from rush and hurdles that resulted from a recent policy requiring students to provide birth certificates in order to sit exams.

Lastly, technology risks, including being proactive in contract negotiations in procuring IT systems to prevent any vendor lock-in practices. The processing of the data needs to be localised through a data centre in the country. The vendors should be deprived controls to prevent hurdles that face the KRA i-Tax system or those purportedly faced by IEBC during presidential election petitions. Inappropriate design of IT system will result into substantial costs increases, reduced flexibility and sustainability.

To mitigate these risks, NIIMS program ought to be founded on clear rules, specifying the rights and obligations of issuers and users, and to avoid unintended consequences such as inadvertent exclusions. It would be appropriate to have a comprehensive legal framework to ensure a NIIMS that promotes trust in the design, implementation and use of ID.

Currently, the only legislative proposal is contained in Statute law (Miscellaneous) Amendment Bill. It is not fair that such a landmark project is initiated in through an omnibus bill, whose sole purpose is to make minor changes in statute book. There is need to adopt a consultative legislative approach that inspires confidence.

There is need to enact an inclusive legislation, focusing on inclusion, non-discrimination, individual privacy, data protection and IT systems. These are important to ensure public trust which is a critical factor for the success of the program, especially to promote the ‘demand side’ case for people registering.

Where individual privacy is not safeguarded, or the new ID system is seen as discriminatory or exclusionary, people may withhold information, supply inaccurate information, or simply avoid participating, reducing the economic and development impact of the program.

Equally, before investing in smartcards and centralising data from different sources into a single database, there is need to consider alternative options including latest technology trends such as distributed ledgers and mobile phone based IDs and experience from other countries. These could be leveraged and ensure the country adopts the best methods.

The author is the Managing Editor, Gatuyuriana