Stockbrokers’ survival hangs by a thread as NSE suffers listing drought

Investment brokers on the trading floor of the Nairobi Securities Exchange (NSE). 

Photo credit: File | Nation Media Group

Stockbroking firms on the Nairobi Securities Exchange (NSE) are fighting to stay relevant more than a decade after the collapse of the stockmarket boom in 2007 that ushered in a prolonged period of declining revenues from both equity and bond transactions.

Revenues from advisory services on rights issues and initial public offerings (IPOs) also vanished as companies went slowly on floating shares to the public after risk-averse investors snubbed Co-operative Bank and Britam share sales that were undersubscribed by 19 percent and 40 percent in 2008 and 2011, respectively.

The persistent bear run on the 70-year-old exchange has left several brokers’ survival hanging by a thread because of the falling revenues.

Some have diversified their revenue streams to alternative investments including offshore investments, corporate finance advisory, unit trusts in fund management, and development of digital solutions targeting the new generation of young investors to stay afloat.

“Many of them have gone to corporate finance, offshore investments, and also to the unit trusts in the fund management space and particularly those which are investment banks. These are the key trends that we are seeing,” says Paul Mwai, vice-chairman of NSE.

Standard Investment Bank (SIB), for instance, has ventured into offshore investments through its multi-asset strategy fund Mansa-X and also received a permit from the Retirement Benefits Authority (RBA) to manage pension funds.

“We are now in a better position to diversify our services and meet the evolving needs of our clients, especially in the crucial area of retirement planning,” says James Wangunyu, founder and chief executive of SIB.

AIB-AXIS Capital Ltd has introduced a digital solution dubbed  ‘AIB DigiTrader App’ that allows investors to open Central Depository and Settlement Corporation (CDSC) accounts on their mobile phones and invest in shares with as low as Sh3,000, with a further opportunity to buy as little as one share compared to the standard block of 100 shares.

“The new generation of Kenyans are different. They want to do things online,” says Mr Mwai, who is also the AIB-AXIS Capital chief executive.

The NSE Plc, which self-listed in 2014, is diversifying to data vending to sustain the business as revenues from equity transactions plummet.

Its equity transaction levy fell by 6.51 percent to Sh211.1 million in 2023 from Sh225.8 million in 2022 while its bond levy declined by 19 percent to Sh64.4 million from Sh79.4 million in the same period.

Usually, stockbrokers depend on commissions from levies charged on equity and bond transactions and, in a booming market, they diversify their income streams by offering advisory services in IPOs, rights issues and mergers and acquisitions.

Brokers charge a commission of 1.5 percent for equity transactions above Sh100,000 and 1.76 percent for transactions below this amount while their net brokerage commission on bonds is 0.024 percent on the value of bond transactions in the secondary market.

Kenya has not had an IPO from a corporate entity since 2008, except for the self-listing of NSE in 2014.

The Growth and Enterprise Market Segment (Gems), the trading platform for small and medium-sized firms, only attracted five companies since its launch in January 2013.

These are Atlas African Industries, Flame Tree, Home Afrika, Kurwitu, and Nairobi Business Venture, but Atlas African Industries has since been delisted.

Banks that rushed to acquire stockbroking units at the height of a five-year (2003-2007) stockmarket bang are struggling to keep their businesses.

Their hopes of using their large customer base to drive stockbroking business failed to yield much success after the small and retail investors who drove the market at the height of the stockmarket boom fled the market over concerns of trading malpractices and loss of funds to failed brokerage firms.

The lenders that acquired brokerage firms include ABC Bank, which acquired 86 percent stake in Crossfield Securities Ltd and renamed it ABC Capital in 2008, and Equity Bank, which acquired a trading licence from Juanco Investment Bank and renamed it Equity Investment Bank in the same year.

However, hopes of minting money from the stockbroking business fell apart after the speculative stockmarket bubble burst at the height of the global financial crisis in 2008/2009, resulting in a significant loss of paper wealth for investors.

This was compounded by the collapse of three brokerage firms—Francis Thuo, Nyaga Stockbrokers and Discount Securities—with millions of shillings worth of investors’ funds.

Since then the stockmarket has not been able to recover, resulting in low trading volumes while pushing stockbrokers and investment banks into losses.

Even though these brokerage firms are not making money banks have been left holding unprofitable investments, which they cannot dispose of because it could send wrong signals in the market and hurt investor confidence even more.

Audited financial statements of several of these stockbrokerage firms show many posted net losses and reduced earnings during the accounting period that ended December 31, 2023.

Kenya’s five-year stockmarket craze started in 2003 and peaked in 2007 characterised by long queues at stockbrokerage firms as investors sought to buy into initial public offerings such as KenGen, Eveready, Mumias Sugar Company and ScanGroup.

Bank managers were drawn to the flourishing stockbrokerage business.

Equity turnover in the market recorded a 6.5 percent decline to Sh88.2 billion in 2023 from Sh94.2 billion in 2022 due to erosion of share prices, with bond turnover declining by 13.2 percent to Sh643 billion from Sh741 billion due to reduced valuations on already issued bonds as a result of rising interest rates.

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