Plan to unlock potential of stock market

Over the recent years, Kenya’s capital market has registered impressive growth in virtually all parameters, thanks in part to reforms initiated to improve the stock market.

This rapid development has, however, brought to light several challenges that limit its future growth.

This brings to the fore the need for stronger market infrastructure, increased diversification of financial products and services to cater to the growing needs of investors and issuers.

There is also the need to enhance the level of awareness among potential and existing investors regionally and internationally.

To help address these challenges, the Financial Services Volunteer Corps (FSVC), the US Securities and Exchange Commission (SEC), Bloomberg and Fordham Law School are collaborating with Capital Markets Authority (CMA) to build the capacity for the authority and market intermediaries.

CMA Chief Executive Paul Muthaura while addressing participants who attended a Securities Lending and Borrowing (SLB) forum in Nairobi last week, said the collaboration will encourage the growth of a vibrant securities market in the country.

“After a comprehensive review and analysis of the securities market, the CMA has identified several areas for improvement, including Securities Lending and Borrowing (SLB), strengthening of Collective Investment Schemes (CIS) reporting and structuring,” said Mr Muthaura.

“This will be in line with the ambitions of the 10-year Capital Markets Master Plan, positioning Kenyan securities and the overall market for inclusion in the right market indices.”

Market attractiveness

He said improved liquidity, or volume and pace of trading in capital markets is vital to improving the attractiveness of the market through ensuring easier entry and exit. 

Last week, capital market experts from Bloomberg and FSVC, including representatives from SEC met with CMA officials, financial sector regulators and market stakeholders.

They presented international best practices in adopting and implementing SLB and CIS transparency, as well as offered suggestions for new products which will facilitate trading on the Kenyan market. They also discussed the adoption of measures that will enable the recognition of Kenyan markets on globally competitive indices.

CMA is working on a tax framework for SLB that will ensure the product will not distort normal trading at the NSE once it goes live.

Mr Muthaura said they are working with the National Treasury to ensure that there is tax neutrality for those looking to borrow or lend stocks.

This is mainly to those looking to do margin trading or short selling - so that they don’t enjoy a tax advantage over normal board traders.

SLB is a system in which traders borrow shares that they do not already own, or lend to other investors the stocks that they own but do not intend to trade on immediately.

Uneven taxes in a securities market can cause distortion by driving activity to one segment at the expense of the other.

Under short selling, savvy investors are able to sell borrowed shares or bonds in the hope of a future price drop that will allow them to buy back the same stock at a profit.

Short selling will only be carried out by regulated persons, as per draft regulations released by the CMA in October last year.

Vibrant financial sector

FSVC President and Chief Executive Andy Spindler said they will help CMA establish a vibrant and competitive financial sector driving economic growth in the region.

“Drawing upon FSVC’s significant expertise in the area of capital markets development, these consultations will help enable the CMA to develop new products and undertake key reforms to improve liquidity,” said Mr Spindler.

He added that robust capital markets play a critical role in sustainable economic development by mobilising domestic savings and foreign capital for long-term productive investment.

CMA and other players in the market are banking on the introduction of short selling to increase liquidity in the market especially on the corporate bonds segment.

Corporate bonds lag behind government securities in terms of activity in the market, accounting for less than half a per cent of total bond turnover at the NSE.

Last year, the corporate bond turnover was Sh1.53 billion, equivalent to 0.35 per cent of total bonds turnover of Sh433.12 billion.