Editorials

EDITORIAL: Chase Bank: Create fund to cushion bondholders

chase bank

A Chase Bank branch in Nairobi. FILE PHOTO | NMG

The Sh4.8 billion Chase Bank bondholders’ loss marks yet another low for investors who put their hard-earned cash in the corporate paper.

Relegating the bondholders to the back of the compensation queue could be what the rule book provides, but it does serious harm to the already struggling corporate bonds market.

It could take years to repair market confidence lost.

The unpleasant experience evokes memories of the dark days when investors regularly lost their money at the market, and calls into question the efficiency of the current vetting system for firms seeking to raise capital through issuance of corporate papers.

Pensioners, through their funds, are likely to be the big losers, with billions of retirement savings at risk.

Financial markets are built on a platform of stability and trust.

The blow to investor confidence in the market is considerable.

There has been only one corporate bond issue in the past two years, during which time Chase and Imperial banks collapsed with investors’ funds.

It does not bode well for the Kenyan market when investors lose money.

It is even worse when this market should be providing a viable alternative as a platform to raise capital in a period when bank loans have dried up for many in the private sector due to the bank interest rate cap.

What the market is now crying out for is a solid plan by the Capital Markets Authority outlining how it intends to address this underlying problem.

The Chase and Imperial Bank bonds that were given a clean bill of health just before the institutions collapsed should serve as a lesson to the regulator.

It is also time that a compensation fund was set up to cover bondholders in case an issuer goes bust.

In the chain of claims, depositors are covered by the deposit insurance fund run by the Kenya Deposit Insurance Corporation, while investors in equities are also covered by the investor compensation fund that is run by the CMA.

Such a fund must now be put in place for corporate bondholders, otherwise this segment of the market will continue on its path to a painful death.