Since the establishment of the Nairobi Securities Exchange (NSE) in 1954, it has traditionally been very difficult for Kenya’s retail investors to gain exposure to shares, bonds, and other listed assets.
Under local capital market regulations, any investor at the NSE is required to buy a minimum of 100 shares per transaction. This can make many assets, particularly those which command higher values, prohibitively expensive.
For example, at the time of writing, Standard Chartered Bank was trading on the NSE at 148 Kenyan shillings (KSh). This would mean that anybody wanting to purchase the company’s shares would need to stump up a minimum of KSh14,800 ($120). Those looking to put their money into British American Tobacco, which was trading at around KSh440, would need to invest at least KSh44,000 ($360).
These sums represent a high barrier to entry in what remains a lower middle-income country. Given these restrictions, it’s little wonder that there are only around 1.5m registered retail investors in a population of over 55m.
However, Kenya’s Capital Markets Authority (CMA) and the NSE have recently granted a licence to a Nairobi fintech startup that could facilitate much greater retail investment in the country’s securities market. Hisa Technologies has partnered with Faida Investment Bank to offer the fractional ownership of securities to retail investors.
Platform gives Kenyan investors easier access to stocks
Under this model, investors can buy a certain percentage of a security – as small as $5 worth. They are then paid a dividend that is proportionate to how much of the security they have purchased. The model works as the broker, in this case Hisa, pools all its customers’ funds to purchase securities en masse. With retail investors acting collectively in this way, it’s much easier to fulfil the minimum capital requirements set by the regulators.
Hisa launched last year with a mobile app that offered Kenyans the opportunity to own fractional shares of US stocks and exchange-traded funds (ETFs). Eric Jackson, co-founder and chief technology officer at Hisa, tells African Business that the idea was sparked by the difficulties he experienced when looking to purchase stocks.
“I’ve previously tried to invest in the local stock exchange. Initially, the process was that you’d have to fill in manual forms, and then you’d have to wait for two to four weeks for an account to be opened,” Jackson recalls. “And then you’d have to go through a broker, who wouldn’t have any mobile application or online trading platform.”
“That’s why we thought about how to come up with a platform that could specifically allow retailers not only to access Kenyan stocks easily, but give them access to different investment options,” Jackson says.
Youth tempted by risky investments
According to Jackson, Kenya’s stringent capital market regulations may also have helped to push many Kenyans, particularly younger people, into riskier investments such as cryptocurrencies.
A recent report by the United Nations Conference on Trade and Development (UNCTAD) revealed that over four million Kenyans own digital assets – almost three times the number that own shares. UNCTAD added that 8.5% of Kenya’s population own crypto, the highest percentage of any African country.
Perhaps more concerningly, Jackson also thinks that the capital market regulations can partly explain the rise of services such as mobile sports betting. Kenya has the highest number of young people involved in gambling in sub-Saharan Africa, with rates of addiction concerningly high.
“Things like crypto and mobile sports betting have really caught on, because many couldn’t participate in capital markets and didn’t have good alternatives,” Jackson says. “There wasn’t enough motivation for new retail investors to come into the market because the barrier to entry was too high.”
“Even those who were already in the market did not participate as much as they could have,” he adds. Jackson hopes that Hisa’s platform will allow a greater number of people to invest in the NSE and thereby make safer investment choices.
Kenyan investors must be better informed
Mathias Althoff, a partner at Tundra Fonder, a Stockholm-based asset manager that specialises in frontier markets, sees “the introduction of the possibility to buy and sell fractions of shares as positive”.
“Although it won’t have a huge impact on liquidity, in the long run, it should help to provide retail investors with more opportunities for investing their savings [according to] their desired risk profiles,” Althoff says.
However, he warns that Kenya now needs to take steps to ensure that the country’s level of financial literacy is sufficiently high, with the regulators also needing to guarantee a fair and transparent market.
“This access also comes with a great responsibility to inform and educate investors about subjects such as risk, financial analysis, how to understand the different drivers of the stock markets, and the importance of corporate governance,” Althoff notes. “Authorities must make sure that there is a level playing field, and that information is available (and correct) to all investors at the same time.”
Removing other barriers to entry to NSE
While the regulators’ moves to facilitate fractional ownership of securities is certainly removing a major obstacle for retail investors, there remain several difficulties. Edwin Dande, chief executive officer of Nairobi-based Cytonn Investments, believes that there are various other barriers to entry on the NSE which are still in place.
“The barriers to entry in this market are significant on two fronts. First and foremost is the cost of trading, which can be up to 4% for plain ‘vanilla’ products, such as equities,” Dande tells African Business.
“In more developed parts of the world, vanilla trading now comes at a negligible cost, or is free.” In Kenya, Hisa charges 1% of the total transaction value for global stocks and 2% for local stocks.
“Unfortunately, I don’t think fractional ownership will have any effect in this market yet because there are more pressing and more basic market infrastructure issues, such as the high cost of trading and the lack of end-to-end digitisation and automation. We need to solve these basic challenges before we can access the benefits of more esoteric offerings like fractional share trading,” Dande says.
Given current economic conditions in Kenya and globally, he also questions “whether there can be uptake” of this new solution.
Kenyan investors have much to gain
Provided they are doing so in a safe and informed way, Kenya’s retail investors could have plenty to gain from greater involvement in the NSE. Although by current global standards the country’s inflation rate is relatively moderate at a level of 9.5%, it’s particularly important at a time of rising prices that citizens have the option to try and hedge the value of their savings.
It’s also preferable that they can do this on regulated, transparent markets rather than in the murkier and riskier worlds of cryptos and gambling.
In Althoff’s words, “the stock market is great at transferring risk and providing long-term saving options.”
Although there remains work to be done if the NSE is to become fully accessible for all retail investors, the move towards fractional ownership of securities is a step in the right direction.
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