Banks, stockbrokers fight for bonds market millions

A recent bonds market boom has renewed an old rivalry between banks and brokers that now threatens to suck in the financial services and capital markets regulators – the Central Bank of Kenya and the Capital Markets Authority.

At stake is control of the multi-billion shilling bonds market that so far remains in the tight grip of stockbrokers to the discomfort of banks who boast of being the biggest single players in the fixed securities market.

Banks have been demanding that they be licensed as bond traders – a move that would enable them to trade the bonds directly among themselves and save them the millions of shillings they pay brokers in commissions every year.

Brokers and investment banks have, however, put up strong opposition to the move, citing the law that blocks the trading of securities – both shares and bonds – outside the Nairobi Stock Exchange.

Stockbrokers earn commissions of up to 0.04 per cent of the value of every bond transaction, which bankers say is undeserved because they add no expertise to the process.

More recently as investors fled the bearish run at the stock market for safety of fixed income securities, the bonds market has been the main beneficiary earning brokers millions of shillings in commissions.

Last year, the bonds market volumes rose to an all time high of Sh110 billion earning the brokers about Sh440 million in commissions.

Bonds market trading volumes gained a new momentum late last year after the NSE installed an automated trading system (ATS) that enables investors to freely trade the debt papers in the market.

Launch of the ATS saw volumes rise by 358.7 per cent from the Sh9 billion transacted in November to Sh42 billion in January alone.

This growing appetite for debt papers has raised the profile of the fixed income market renewing the old rivalry between banks and brokers.

Banks buy the bonds to earn interest income or make capital gains by buying low and selling high.

Barclays, one of Kenya’s top banks, for example earned Sh3.3 billion in interest income from its Treasury Bonds portfolio last year, Standard Chartered and KCB made Sh3.1 billion each while Equity Bank returned Sh1.3 billion from the bond trade.

Significant demand for bonds has also come from foreign investors keen on cashing in on the relatively higher returns in frontier markets such as Kenya and the ease of trading afforded by the automated trading platform.

CMA — which regulates trading of all listed bonds — had promised to amend the law to allow for a “hybrid” system that would free bankers from the grip of the brokers and allow them to trade bonds among themselves but there has been no action on the matter.