Capital Markets

Investors use half of NSE shares to secure bank loans

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A stockbroker at the Nairobi Securities Exchange trading floor. FILE PHOTO | NMG

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Summary

  • Retail investors on the Nairobi Securities Exchange (NSE) have used 52.4 percent of their shares to secure bank loans, indicating that less than half of small investors’ portfolio represent actual wealth.
  • A report by the Capital Markets Authority (CMA) shows that individuals pledged a total of 6.52 billion shares in the quarter ended September, up from 6.43 billion shares a year earlier.

Retail investors on the Nairobi Securities Exchange (NSE) have used 52.4 percent of their shares to secure bank loans, indicating that less than half of small investors’ portfolio represent actual wealth.

A report by the Capital Markets Authority (CMA) shows that individuals pledged a total of 6.52 billion shares in the quarter ended September, up from 6.43 billion shares a year earlier.

The value of the bank loans or the shares was not disclosed but the figures are expected to run into hundreds of billions of shillings. The total stock market capitalisation stands at Sh2.7 trillion and retail investors have a significant stake in the bourse.

While the number of pledged shares rose in the review period, they represented a reduced fraction of the total units held by retail investors because the shareholders had bought more stock.

The shares held by the small investors increased to 12.4 billion from 10.4 billion, helping to lower the share of pledged stock to 52.4 percent from 61.6 percent.

The CMA report shows that the shares were pledged by only 41,308 individual investors who have major holdings compared to the rest of the 1.52 million retail shareholders in the review period.

The number of individuals who used their shares as collateral a year earlier stood slightly higher at 42,478 while that of their non-borrowing peers was 1.47 million.

Borrowing against shares helps individuals to access funds without selling their stocks at a loss or before reaping maximum returns through capital gains and dividends.

Businessman Jimnah Mbaru is among the prominent investors who have used listed equities as collateral. Mr Mbaru used part of his shares in Britam Holdings to take a bank loan of Sh500 million in 2013 when the insurer’s stock traded at a range of between Sh7 and Sh18.

Britam’s share price subsequently rallied to highs of Sh40 in 2014 before gradually declining to the current levels of Sh7.5.

Mr Mbaru, however, sold 50 million shares in 2019 to Swiss Re at an above-the-market price of more than Sh17 apiece, pocketing more than Sh900 million in the transaction.

Mr Mbaru also earned dividends that were distributed by the insurer over the years. The businessman’s dealings show the investment flexibility that borrowing against shares can bring.

The individuals borrowing against their portfolios are likely to be entrepreneurs and professionals with annual incomes running into millions of shillings.

The majority of individuals taking bank loans usually secure the debt using other assets like property or rely on their payslips.

Banks typically issue loans at a significant discount to the prevailing price of the shares to mitigate risks of loss in case the borrower defaults and the stock price declines.

The pledged shares are typically frozen and investors only regain full control of the stocks after clearing their bank loan.

Banks risk booking losses if a borrower defaults and the value of the portfolio also tanks massively.

The CMA does not disclose the shares pledged but they are likely to be mostly liquid stocks of large, profitable companies like Safaricom, Equity, East African Breweries Plc and KCB.

The increase in pledged shares comes amid a rebound in the stock market, led by a rally in Safaricom, which dominates the bourse.

Average market capitalisation in the quarter under review stood at $25.15 billion (Sh2.7 trillion), representing a 19.25 percent increase from $21.09 billion (Sh2.3 trillion).

The jump in paper wealth has given investors an opportunity to take profits besides a bigger headroom to borrow against their rising portfolio.