Kenyan firms looking to offer online forex trading services will have to raise Sh50 million in minimum capital, new draft regulations governing the business say.
The licensing requirements contained in proposed amendments to the Capital Markets Act say that only companies limited by shares will be allowed to run the online forex trading business, spelling the end of individual middlemen who have mushroomed in recent years offering similar services.
The new rules were promised by National Treasury CS Henry Rotich in this year’s Budget as the government sought to exert a measure of regulatory control over the online forex business, which has attracted more than 50,000 active investors who use offshore platforms which are not overseen by Kenyan regulators.
“An applicant seeking a licence as an online forex broker shall be a company limited by shares, have a minimum capital of Sh50 million, make an undertaking to maintain the minimum capital at all times plus five per cent of liabilities owed to forex customers in excess of Sh50 million and ensure that Sh40 million or 80 per cent of its capital, whichever is higher, is in form of cash and cash equivalents in financial instruments at all times,” the regulations read in part.
The licensees will also be required to hire as chief executive a person with at least five years’ experience in buying, selling or dealing in forex, forex futures or futures contracts.
Foreign dealers wishing to trade in Kenya will also be required to maintain an equivalent of the Sh50 million capital in the country.
Kenyans trading forex online—attracted by potential high returns — are doing so through foreign registered brokers who link them to clearing centres in Europe, Asia and the US.
“It is estimated that over 50,000 investors are participating through foreign registered brokers who link them through the Internet to access the highly liquid currency clearing centres in the USA, Europe, Japan and other countries,” said Mr Rotich in the budget statement.
“Providing a legal framework for the online trading of foreign currency goes hand in hand with making Nairobi an international financial hub.”
To further reduce the risk factor in the business, the regulations propose capping the leverage a broker may offer to a client to 10 times their deposit in case of trades pairing the Kenya shilling and hard currencies, and 20 times of deposit when pairing two hard currencies.
Leverage refers to margin-based trading which allows investors to bet into the market amounts far higher than what they have deposited in their accounts with the brokers.
With a leverage factor of 10 for instance, an investor depositing Sh10,000 with a broker can take a bet on the forex market of up to Sh100,000, allowing making a large profit on a small investment.