Kenya Rules Over ‘Virgin” Territory

In Kenya the capital markets are no longer a mystery understood by a select few. This demystification has seen the country’s bonds and equities market developing faster than among its neighbours.

Stella Kilonzo, former CEO, Kenya’s Capital Markets Authority (CMA), best sums up the events that marked her four-year tenure at East Africa’s leading capital market, which ended in June 2012. She says one of the key milestones achieved during her stewardship of the CMA came in February 2011, when the 30-year Savings Development Bond was issued. To date, it is the longest-dated Central Government Debt instrument in East and Central Africa’s history.

Kilonzo attributes her successes at CMA to an improved business confidence due to a growing economy and adoption of best business practices within the capital markets industry. “In the secondary markets, equities market performance was the best over the past three years and one of the best since the establishment of the Nairobi Securities Exchange,” she says. “Market capitalisation averaged Kshs 1 trillion ($12.4bn) throughout the year, while share volume and equity turnovers posted all time annual historical highs.”

Kenya leads the sub-region in terms of volume and performance of the capital markets. Government treasury bills and bonds, traded at the local stock exchanges, reflect the size of the market. According to the IMF, Kenya leads the region, with government securities at 27% of GDP. Tanzania comes second with 10.3% and Uganda takes the third slot with 8.1% of GDP. Both Uganda and Tanzania managed to increase the maturity of their treasury bonds to 10 years.

This aspect illustrating Kenya’s capital markets’ vibrancy is more pronounced when one refers to the regional stock markets where the inequality is much larger as compared to the debt markets – the Nairobi Securities Exchange (NSE), reaching market capitalisation of 46% of GDP. Both Tanzania’s Dar es Salaam Stock Exchange (DSE) and the Uganda Securities Exchange (USE) have market values of about 15% of GDP. The Rwanda Stock Exchange (RSE) is yet to pull its weight and, as there is no stock exchange in Burundi, capital is raised from commercial banks.

Owing to its history and early implementation of a free market economy, Kenya has a more advanced economy than its neighbours. Records at the Kenyan National Archives indicate that as early as 1920, when Kenya was still a British colony, shares and stocks trading was already in vogue with deals made on a ‘gentleman’s agreement’ basis.

The NSE was set up as an overseas stock exchange with the help of the London Stock Exchange (LSE) in 1954. The exchange was located in the present site of the New Stanley Hotel, where it now serves as a bar. Over the years, the NSE, now Nairobi Securities Exchange, has undertaken major changes and achieved significant milestones. With 60 listed firms and 95 players, NSE is sub-Saharan Africa’s fourth-largest bourse and the one with the longest history in East Africa. The number of central depository accounts in Kenya rose to 1,943,771 with 17,863 new accounts opened during the year. In addition to leading the region’s capital markets, Kenyan companies are also cross-listed across the region.

The Dar es Salaam Stock Exchange (DSE), registered in 1996 but beginning operations in 1998, is the second largest with 17 listed firms in DSE and five cross-listed from NSE.

The Uganda Securities Exchange (USE) comes third with 14 listed firms, seven of which are cross-listed from the NSE.

The youngest market is the Rwanda Stock Exchange (RSE), which opened its doors for trading in January 2011, replacing over-the-counter securities trading (OTC) it had launched in 2008. RSE has five listed firms, three of which are cross-listed from the NSE. Out of the 60 firms listed in the NSE, only seven are cross-listed in the regional bourses. None from DSE, USE and RSE are cross-listed in the NSE.

Cross-listings

Kenyan firms view the sub-region as an important market, hence their faith in cross-listing at this early stage and export of expertise. Kenyan cross-listed companies include well-known brands like East Africa Breweries (EABL), Kenya Airways (KQ) Jubilee Insurance Holding (JIH), Equity Bank (EB), Kenya Commercial Bank (KCB), Nation Media Group (NMG) and Centum Investment Company (also in the Ugandan, Tanzanian and Rwandan bourses).

Between 2006 and 2012, Kenya’s Capital Markets Authority (CMA) approved the issue of corporate bonds for PTA Bank, Barclays Bank, Mabati Rolling Mills, Shelter Afrique, CfC Stanbic Bank, Safaricom, Housing Finance and Consolidated Bank. These eight organisations were able to raise $779m jointly to fund their operations. Others who joined the coveted NSE listing include Longhorn Publishers, and the trading of the new 1.03bn shares of Kenya Airways (KQ), whose listing is the largest rights issue in East Africa to date.

In 2008, the government issued its first infrastructure bond to raise $209m for projects for water, energy and roads. It was oversubscribed by 45%. In 2011, it issued a 30-year savings bond, the longest tenure in Kenya’s history, not to mention the region. NSE’s 2011 equity turnover dropped by 13% from 2010’s $2.09bn to $1.8bn. The NSE All Share Index (NASI) rose by more than a fifth in the first half of 2012. This saw it being ranked as the third-best global performing stock market after the Venezuela and Egypt exchanges.

Kenya’s bond market, which reflects that of the region, is, however, still underdeveloped and dominated by government securities and a select few corporate bonds. To change this anomaly, which brings about liquidity and low capitalisation in the capital markets, the five member states of East African Community (EAC) bloc have been attempting to attract more private sector players.

The Uganda Capital Markets Authority Survey reveals that Kenya dominates: “Kenyans accounted for 23% of the total employees in the industry … The level of competition in the market was found to be low. There were only eight brokers and six fund managers. There were only 14 companies listed, of which only seven were Ugandan. Others were cross-listed and mainly from Kenya. There was virtually no competition in the market as the market was full of monopolies.” As yet, only Kenyans are taking full advantage of the benefits of regional integration.

Virgin territory

In 1997 the East African Securities Regulatory Authority (EASRA) was established to enhance the integration of the markets by bringing together all the member states’ capital markets regulatory bodies. This was two years before the EAC treaty. In 2011 the East African Common Markets Protocol was signed giving EASRA’s efforts more impetus.

Capital transactions are liberalised in Uganda, Kenya and Rwanda. In 1997, while undertaking far-reaching market reforms, Uganda became the first East African nation to fully open capital accounts. In Kenya investments in domestic markets are still plagued by restrictions for foreigners even though East African investors are categorised as local investors, thanks to the EAC Treaty. However, Tanzania is dragging its feet on removal of capital controls.

According to the African Development Bank (AfDB), cooperation for harmonisation initiatives in the EAC is well advanced compared to other regional markets. The IM, however, points out that it still lacks a robust capital market regime due to structural weaknesses and a general lack of investors. Through the EAC, regional governments are using the regional bloc model to try and overcome this weakness. The region is still widely seen as virgin territory for capital markets. The bloc of Burundi, Kenya, Rwanda, Tanzania and Uganda is now using a common approach to develop its capital markets, harmonise market infrastructure and eliminate constraints on capital transactions.