At its peak in 2014, the Nairobi Securities Exchange (NSE) traded shares worth Sh215.7 billion, with its benchmark NSE 20 Share Index averaging 5,115 points during the year.
What investors did not know was that this was the tail end of a bullish run that had lasted for a decade, and which had ushered in a new generation of stock investors while minting new millionaires by the dozen.
Fast forward eight years later, the stock market is yet to fully recover from a dip that set in from the second quarter of 2015, deepened by successive shocks that included the political heat of the 2017 General Elections, the Covid-19 scourge and the ongoing Russia-Ukraine conflict.
This year, the main index has traded at lows of 1,500 points, which were last seen in 2003, brought down by investor apathy after years of capital losses on most but a handful of blue chip stocks that have been propped up by foreign investor trades.
Equity turnover has dropped steeply, coming in at Sh137 billion in 2021, the lowest since 2012. In the first half of this year, investors traded shares worth Sh54.2 billion, pointing to an even lower annual total compared to last year if the trend is maintained in the second half of the year.
It is this drop in traded turnover that has caused the biggest headache for players in the market whose revenue is derived from commissions charged on trades.
Stockbrokers, the NSE and the Central Depository and Settlement Corporation (CDSC) have all fallen on harder times as a result of the prolonged market downturn, exposing the underlying weakness in a market dominated by retail investors whose fickle trading habits and dormancy have stifled hopes of a vibrant market.
At the NSE, stockbrokers are allowed to charge a commission on every trade capped at 2.1 per cent, though in reality they offer discounts on this rate due to competition.
The exchange and the Capital Markets Authority (CMA) are due a cut of 0.12 percent each out of this commission, while the CDSC is paid 0.08 per cent.
Last year, the 22 licenced stockbrokers and investment banks collectively made Sh2.2 billion in brokerage commissions, which also include takings from bonds trading on which they charge a fee of 0.03 per cent per transaction.
In 2014, when the equities market was at its most vibrant, they made Sh3.7 billion in commissions, and this was a time when there were 20 licenced to trade on the market floor.
This 40 per cent fall in commissions has directly hit their profitability, given difficulties in controlling operational and employee costs which between 2014 and 2021 rose by a quarter to Sh2.5 billion.
The sector’s total income in the period fell by 27 per cent to Sh4.1 billion, while net earnings were down by 46 per cent to Sh680 million.
SBG Securities Chief Executive Officer Gregory Waweru told the Business Daily that the lower traded volumes have made it tougher for the intermediaries to maintain their profitability, while a top-heavy industry where a few brokers dominate trading has not helped smaller ones cope well with the downturn.
“The industry and the competitive environment has become tougher, exacerbated by the fact that there is a high degree of market concentration within a few companies in terms of average daily trading liquidity,” he said.
As a result of the decline in income, the asset base of the industry has shrunk by Sh2.1 billion to Sh13.3 billion since 2014, with only four intermediaries—Dyer &Blair, Renaissance Capital and Standard Investment Bank—holding assets above Sh1 billion.
For the NSE and the CDSC, their thin share of the brokerage commissions has put even more pressure on their bottom line, forcing them to diversify and seek new income lines.
The CDSC has recently mooted introducing an account maintenance fee for investors and entitlement schedule fees for issuers in a bid to bridge a funding gap that isn’t helped by rising system maintenance costs and demands or a return by its principal shareholders.
CDSC chief executive Nkoregamba Mwebesa told the Business Daily that market infrastructure operators such as the depository and the NSE require constant investment in technology, risk management, and human capital to ensure the continued availability of critical and essential services such as trading, settlement, custody and entitlement.
“For all the players, revenue now needs to be diversified. In our case, this has to be within our space of the capital markets, so we are looking at offering depository services to the likes of the tea auction and commodities exchange,” said Mr Mwebesa.
The schedule fee would be charged whenever a listed firm requires the CDSC to avail an updated shareholder register for purposes of corporate actions, such as dividend issuance.
The depository has had to suspend the plans for the fees for further consultations after a pushback by the market.
“The market will only remain sustainable through continuous and rigorous enhancement of our systems, processes, and human capital to meet evolving investor, issuer and regulatory requirements. This comes at a cost.”
For the NSE, the search for new revenue has seen the exchange introduce new products, such as derivatives and day trading to try and reinvigorate the market and unlock new activity that will generate fees.
The exchange has also sought to monetise its market data, which eight years ago was being offered to investors for free.
The CMA has fared better though compared to the other key market players, given that its role as regulator affords it additional income from licensing fees, issuance fees for government bonds, fines and penalties.
In the year ending June 2021, the CMA handed the National Treasury a surplus of Sh285.9 million, arising out of total revenue of Sh1.16 billion.