Capital Markets

Kenya’s financial markets shine but more work ahead

Different economies have registered varying degrees of success. FILE PHOTO | NMG
Different economies have registered varying degrees of success. FILE PHOTO | NMG 

Kenya’s financial sector has in recent years been feted as one of the most dynamic and resilient in Africa, buoyed by the country’s mobile money inspired growth in financial inclusion.

Across the continent, different economies have registered varying degrees of success in developing their financial markets.

Last month, Barclays Africa released its first annual financial markets index, which will be evaluating developments in African markets and offering investors a chance to benchmark the state of their local financial markets against peers in Africa.

The index evaluated 17 African economies along six pillars of market depth, access to foreign exchange, market transparency/tax and regulatory environment, capacity of local investors, macroeconomic opportunity and legality/enforceability of standard financial markets master agreements.

South Africa tops

Overall, South Africa is ranked top with an overall score of 92 per cent, with Mauritius following at a distant second with 66 per cent, Botswana at 65 per cent, Namibia at 62 per cent and Kenya in fifth place at 59 per cent.

Kenya performs best in the ability to enforce agreements, which Barclays says is as a result of good enforcement of netting and collateral positions.

The index ranks Kenya third in this pillar, just behind South Africa and Mauritius.

A good legal system also helps, where parties entering into agreements are assured of a credible fallback in case there is disagreement.

This also goes hand in hand with arbitration, an area where Kenya and Rwanda have been putting a lot of effort in recent years.

The country has done well to enact a large number of international standards and market agreements, but the adoption still remains wanting, pointing at gaps in auditors and regulators who are supposed to enforce them.

For Kenya’s capital markets though, the report serves as a wake-up call, showing the need for the country to deepen the sector by expanding the number of listed firms in the stock exchange, as well as the variety of products on offer at the bourse.

Low capitalisation

The index highlights the relatively low stock market capitalisation size to GDP at 28 per cent, lagging far behind South Africa (358 per cent), Mauritius (80 per cent) and even Botswana (269 per cent).

The country also has very few outstanding corporate bonds (nine) which means that firms are hardly using capital markets to raise funds.

As such, the report recommends that the country should increase the number of listed firms, which the Capital Markets Authority says it is actively pursuing as part of its masterplan.

Increasing the capacity of local investors is also important, the report says.

Domestic institutional investors hold about $12.6 billion (Sh1.3 trillion) in assets, but are majorly the buy-and-hold type meaning that these assets are not being actively passed around to help develop the liquidity and vibrancy of the capital markets.

On the foreign exchange market, Kenya has the second highest interbank foreign exchange turnover at $34 billion (Sh34.1 trillion) on the continent after South Africa, which bodes well for a foreign investor looking to do business with and in the country.

The index flags a weakness in the monetary regulator, saying that the Central Bank of Kenya’s ratio of foreign reserves to net portfolio flow is low and that it limits the apex bank’s ability to manage foreign investor demand for the shilling.

Kenya maintains official foreign reserves of about $7 billion (Sh721 billion), from which the regulator meets the country’s foreign payment obligations, and which are also deployed occasionally to calm volatility in the money market.

Participation in the foreign exchange market is also largely dominated by about five banks.

Mixed bag

On the pillar of macroeconomic opportunity, Kenya once again returns a mixed bag, performing the best among the surveyed economies on transparency of monetary policy and provision of fiscal and budget data while suffering from low export competitiveness.
The latter, says the report, is indicative of problems in education, transport and bureaucratic barriers to doing business in the country.

As such, Kenya is ranked sixth in this pillar, falling behind Uganda and Nigeria.

The transparency in fiscal and monetary policy is seen though as key in helping attract foreign investment, given the importance attached by such investors to getting the right information about a market or economy before putting in cash, especially in a high risk environment such as Africa.