Securities trader Mbuthia Irungu at Nairobi Securities Exchange (NSE) trading floor at the Exchange building in Nairobi on August 26, 2020. PHOTO | SALATON NJAU | NMG
Retail investors on the Nairobi Securities Exchange (NSE) have used 54 percent of their shares to secure bank loans, indicating that less than half of small investors’ portfolios represent net wealth.
The latest quarterly Capital Markets Authority (CMA) report shows that individuals pledged a total of 6.38 billion shares as of June 2022. They held a total of 11.8 billion stocks in the period.
The use of stocks as collateral has declined from a high of 59.4 percent a year earlier when retail investors used 6.5 billion shares out of the total of 10.9 billion they held to obtain loans.
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 Sh2.1 trillion and retail investors have a significant stake in the bourse.
The reduced fraction of shares used to back loans in the review period represents the impact of the purchase of more stock by the retail investors and the release of some units that were previously locked due to indebtedness.
The CMA report shows that the shares were pledged by only 40,717 individual investors who have major holdings compared to the rest of the 1.7 million retail shareholders in the review period.
The number of individuals who used their shares as collateral a year earlier was higher at 41,687.
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, offering financial and investment flexibility.
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 decrease in pledged shares came amid falling share prices which can significantly reduce the value of the portfolios used as collateral.
Average market capitalisation in the quarter under review stood at Sh1.9 trillion, declining from Sh2.3 trillion in the three months ended March.
The decline in paper wealth has been attributed to a massive selloff by foreign investors spooked by multiple factors including the weakening of the shilling and the global economic uncertainty brought by the Russia-Ukraine war.
