The Central Bank of Kenya (CBK) has introduced a mobile- based Treasury Bills and Bonds trading platform that will make it easier for individuals to invest in government securities through their mobile phones. It is the way to go.
We forget that when the government borrows from money and capital markets, the ultimate borrower of that debt is the taxpayer.
Yet until recently, the only people who have been reaping and making profits from the interest the government pays on that debt have been shareholders of commercial banks — some of them — living in far-flung parts of the world.
With the new Treasury Mobile Direct platform, the taxpaying citizen is directly going to fund the government. If the experiment works, the retailer will cut out the tiny elite of institutions that have been making a killing from trading in government securities — banks, insurance companies and fund managers. Interest income earned from government borrowing will accrue to the same taxpayer. And banks will be forced to rethink their intermediation models.
For a long time, they have been following the lazy model of collecting cheap money from the public and packing it in government paper. With the new Treasury Mobile Direct platform, banks are going to be forced to rediscover their core calling, namely, allocating scarce capital to projects and businesses offering the highest return.
Whether this new platform will provoke massive movement of retailers into the securities market remains to be seen. Two years ago, we predicted that the launch by the National Treasury of the product M-Akiba ,would be a game-changer. We predicted the return of the excitement and feverish activity last witnessed in the capital markets in the days of the KenGen and Safaricom IPOs in 2007. Indeed, it was the excitement and exuberance of that time that introduced into the marketplace an unprecedented number of unsophisticated retailers and speculators into the market.
With the advent of M-Akiba, we predicted that money and capital markets would be hit by a new wave of impulsive behaviour and irrational exuberance by retailers.
Yet two years after the introduction of M-Akiba, we all realised that all those predictions we made had been exaggerations. Several reasons have been floated for M-Akiba’s less than satisfactory performance.
First, the product was poorly marketed. Secondly, poor broad band connectivity also turned out to be a major problem. There were several cases where retail investors who put in bids did not get allocations, let alone responses from the issuers. Many were discouraged.
The point of departure between M-Akiba and the new Treasury Mobile Direct platform is that while M-Akiba was about a specific bond of a fixed amount and tenure, the new platform will allow the retailer to participate in all existing and new debt securities offered by the government. This is not a one-off experiment. In my view, major reforms will have to be implemented to ensure that the new government borrowing model does not lead to profligacy. We need to move to the direction where money raised through the Central Bank’s Treasury Mobile Direct is not used for general budget support, but is ring-fenced and spent on specific projects. A retail market for government securities will only work efficiently if we create a Treasury Management Agency to take over the responsibility of overall government fiscal agent from the CBK.
Treasury Mobile Direct could be the perfect Trojan horse for removing the CBK from playing the conflicting roles of being the government’s fiscal agent, whereby it borrows money from the market on behalf of the State, when its primary responsibility is to conduct of monetary policy.
This is also a good time to look at other fundamental reforms to enhance the efficiency of financial markets infrastructure institutions such as the Central Depository System (CDS) that sits at the CBK and the Central Depository and Settlement Corporation (CDSC) that serves capital markets.
While CDS manages payments and settlements of government securities, CDSC performs a limited function of keeping records of ownership of equity securities. Perhaps, it is time we thought about expanding the mandate of the CDSC to include taking payment instructions and — even more important — settlement of payments.
We would have then set the stage for a merger of CDS and CDSC, allowing Wanjiku to buy government paper, corporate paper and equities through the mobile phone.