Mr Job Kihumba, executive director at Standard Investment Bank. He says the idle capital will now be used as working capital. Photo/FILE
What you need to know:
Investment banks will now hold core capital of Sh20.6 million from Sh250 million, freeing more cash.
Under Kenyan law the banks are required to have core capital of Sh250 million but operators in Rwanda, Uganda and Tanzania were only required to pay minimal fees.
The stock brokers and investment banks will, however, still be required to keep liquidity at eight per cent of total liabilities to cushion investors in case of a sudden need to meet some of the liabilities.
Kenyan investment banks are expected to get a boost in working capital once new East Africa Community laws requiring them to hold core capital of only Sh20.6 million ($240,000) come into force.
The capitalisation was revised when the East African Securities Regulatory Authorities (EASRA) met in Burundi last week to review the legal structure of the intermediaries.
“We will wait to see what the CMA will direct on the capital, but the Kenyan rules meant there was a lot of idle capital, sitting as cash or near-cash. This can be used as working capital once the new rules take effect,” said Job Kihumba, executive director at Nairobi-based Standard Investment Bank.
Under Kenyan law the banks are required to have core capital of Sh250 million but operators in Rwanda, Uganda and Tanzania were only required to pay minimal fees.
The stock brokers and investment banks will, however, still be required to keep liquidity at eight per cent of total liabilities to cushion investors in case of a sudden need to meet some of the liabilities.
“Brokers are required to maintain at all times a risk-based capital adequacy requirement liquid or working capital of eight per cent of total liabilities,” said the Capital Market Authority in response to enquiries from the Business Daily.
In Kenya, brokers who are not investment banks are required to have capital of Sh50 million. With only Sh20.6 million needed as capital, the balance could be released into working capital.
Investment banks, however, trade on their own account and could engage more in market-making for both bonds and equities.
This could see increased turnover on the Nairobi Securities Exchange (NSE) or even in the primary market for bonds and Treasury bills.
The new rules for securities are part of efforts to integrate the region economically, ahead of the launch of the monetary union.
Kenyan market players said the change was mainly intended to benefit other countries in the region so that they may be able to deal even in Kenya.
“Unlike the case of Kenya, the other countries required very low capital to conduct the business of an intermediary for securities,” said Mr Kihumba. He said the excess capital would also be usable as liquid assets.
The liabilities contemplated under the law in the case of investment banks would include investors’ portfolios and bank credit.
The CMA said the directive would be approved by the EAC Capital Markets Insurance and Pensions Committee and thereafter considered by the Sectoral Council on Finance and Economic Affairs.
It would then be adopted by the Council of Ministers, to be domesticated into the national regulatory frameworks.
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