Corporate note holders including insurance companies and pension funds will be allowed to lend them to other investors who can use and return them at a fee.
Investors borrowing the bonds can then earn interest income as indicated in the prospectus of the bonds once they have them back.
The Capital Markets Authority (CMA) plans to step up the lending and borrowing of bonds in an effort to raise their turnover at the Nairobi Securities Exchange (NSE) by 50 times by the end of next year.
Currently, the corporate bonds market turnover is only 0.1 per cent of market capitalisation of the securities, meaning there is hardly any trading taking place among investors.
Investors in bonds tend to hold them to maturity, but now there is a chance to lend them and earn an income while retaining ultimate ownership.
With securities lending and borrowing (SLB), it is expected that the corporate market will be more liquid, acting CMA chief executive Paul Muthaura said on Thursday.
In the case of equities lending it means a borrower earns the dividend intended for the owner of the shares and has voting rights associated with them. But the liquidity of the equities market — unlike that of corporate bonds — is not a major concern since the turnover has been high.
The Central Depository System Corporation and the NSE are expected to use new ICT systems that will be able to facilitate transactions allowing SLB.
“The NSE has implemented a new trading system for fixed-income securities. CDSC is acquiring a new system that will have SLB functionalities,” said the CMA during a workshop called at the Hilton Hotel, Nairobi on Thursday to discuss the capital markets master plan.
The plan provides a road map for the industry for the next 10 years.
Mr Muthaura said that the CMA was also going to allow the introduction of market makers for the government primary bond market which would ensure that any bonds put out for sale in the second market would actually be sold.
There would therefore be a higher amount of bonds or securities traded in the market.
The CMA would also allow the trading of bonds in an over-the-counter (OTC) market whereby the instruments are available both on the NSE and outside it as often demanded by bankers.