Robin Hood Tax and the capital markets

In Kenya, the 2018 Finance Bill (published in June) proposed a Robin Hood Tax (RHT) where 0.05 per cent excise duty would be charged on money transferred by banks, money transfer agencies and other financial service providers in amounts of Sh 500,000 or more.

The Capital Market responded to the news instantaneously with investors’ especially foreign investors, exiting the market in search of more favourable market conditions and better yields.

Following aggressive market lobbying and public engagement, the President in September, signed the 2018 Finance Bill which excluded the proposed RHT. The repercussions of the proposed tax are still being felt today in the securities market with quarter three being the toughest trading period this year.

In a sector where even the smallest change or uncertainty can cause massive repercussions, the fear of the proposed tax led to reduced activity in the capital markets owing to investor anxiety on the transaction charges on trading.

In the months where the fate of the proposed tax was unknown, the transactions by foreign investors decreased from about 300,000 in the month of May 2018 to about 50,000 in the month of September 2018.

Local investors also decreased in the same period from approximately 3.1million to 1.6 million

The impact of this tax can be corroborated with what happened in other jurisdictions for instance Sweden which implemented the RHT in 1984 but shortly removed it in 1991. Sweden had only raised about a fourth of what they had projected to raise and the amount of money collected from other tax revenues also decreased.

This resulted in losing investors to countries like the United Kingdom as their market liquidation was also volatile.

We are therefore delighted that the government reconsidered the proposal owing to the adverse effect it would have on the financial markets. The collaborative efforts by all stakeholders in resolving this matter signifies how by working together we can find sustainable solutions for our economy.

Currently the securities market is a “buyer’s market” in which supply exceeds demand which causes a reduction in share prices giving purchasers an advantage to own great companies at highly discounted prices.

The securities market, is a cyclical one, and the discounted prices will not last long. Warren Buffett said it best, "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

Geoffrey O. Odundo, chief executive, Nairobi Securities Exchange.