Editorial: CMA must move quickly to restore confidence

For Kenya’s capital markets watchdog, four failed stockbrokers in as many years is not exactly a flattering record.

The decision by the Capital Markets Authority (CMA) board to take over management of Ngenye Kariuki and Company stockbrokers last Friday must therefore have been a hard one, taken with the full knowledge that it would only deal a further blow to the already fragile investor confidence.

It has become almost routine that since March 2007, a new name is added to the disgraced roll of collapsed market intermediaries every year, right around the time the regulator is supposed to renew the institutions’ annual licences.

Four failed players in four years may sound like a simple statistic to the majority of a public that is all too familiar with news of corporate failures; but behind these numbers are thousands of innocent investors and families’ dreams that have been shattered by the negligence, acts of commission or omission of a few.

The CMA’s primary mandate is to obviate such failures and protect investors who surrender their hard earned money to brokers and other capital markets licensees.

The collapse of four players in quick succession can therefore only be taken to be evidence of a horrible institutional and regulatory failure.

Yet the red flags were always clear to warn those who cared to see about the systemic weaknesses that have seen brokers give way at the slightest push.

When the CMA was established in 1990, it was in all likeness just another state body that was meant to protect public interest while drawing its funding from Treasury.

The authority remained a nondescript entity throughout the 1990s which some analysts have termed as Kenya’s lost decade as the economy came down on its knees owing to mismanagement and investor fear wrought by political uncertainty.

But come the year 2003, the change in government revived economic activity and had the visible effect of boosting investors’ confidence and money flowed freely to the stock exchange as the newly rich sought avenues for investing their disposable incomes.

What followed was a strong market bull run that set new NSE 20 share index (6,000 points) and market capitalisation (Sh1.2 trillion) records in early 2007 and late 2008 respectively.

The initial signs that all was not well appeared as early as 2006 when the highly oversubscribed KenGen initial public offering exposed most stockbrokers’ managerial inability to cope with the surging number of new investors.

Share application and allocation reconciliations for the KenGen IPO were at best a sham, but the CMA decided to look the other way as thousands of investors complained that some brokers had cashed what was supposed to be their refund cheques from the power company’s IPO.

It was not long before the flood of investor claims took its toll on Francis Thuo and Partners Ltd, the first stockbroker to go under in early 2007.

Francis Thuo’s collapse laid bare all the managerial deficiencies and systemic loopholes that brokers faced in a market that had seen investor numbers multiply from a low of less than 100,000 to close to a million punters in less than three years, but it appears few lessons were taken as Nyaga Stockbrokers, Discount Securities and now Ngenye Kariuki also came tumbling down the now well- trodden path.