{{ text }}

24 June, 2022
Blogs

Barriers to Growth of Kenya’s Capital Markets

Capital Markets are financial markets whose main goal is to facilitate channeling of funds from Investors, who could be individuals or institutions, to businesses and governments. The funds from investors could be channeled to business as either loans, where by the investors are paid back by the businesses or governments their principal amounts plus interest after a particular period of time, or invested in businesses whereby investors own a portion of the businesses and are entitled to any future earnings that will be earned by the businesses. Businesses then use these funds to expand their production capacity, improve their distribution networks, clear maturing loans and pending payments, marketing and research, and also invest in other projects. Some of the products that are offered in the capital markets include Equities, Governments securities such as Treasury bonds and Treasury bills, Corporate bonds, Commercial papers and Collective investment schemes among others

Over time, Kenya’s capital market has evolved and achieved a number of milestones, which have catalyzed the growth of Kenya’s economy. Some of these milestones include:

  1. Issuance of Real Estate Investment Trust (REITS) such as Fahari I-REIT from ICEA Asset Management LTD and, ASA-I-REIT and ASA-D-REIT from Acorn Holdings Africa,
  2. Launch of day trading, where by investors can buy and sell the same company shares several times during a single day,
  3. Creation of a Sandbox that allows people to test their products and technology before rolling them out,
  4. Launch of the Unquoted Securities Platform (USP) to facilitate the trading, clearing and settlement of securities from unquoted companies.
  5. Establishment of the Growth Enterprise Market Segment (GEMS) to enable venture companies without a profit history as well as small and medium sized firms, and,
  6. Continued approval of corporate bond which have seen companies such as EABL, Family bank, Centum Investments Company and Kenya Mortgage Refinancing company (KMRC) issue corporate bonds.

As much as there are significant developments in Kenya’s Capital market, we still lag behind when compared to capital markets of developed countries. This is evidenced by Kenya’s low Mutual fund to GDP ratio of 1.1%, which is very low compared to more developed countries such as Australia, United kingdom and United States which have a ratio of 343.6%, 174.0% and 125.4% respectively. Some of the barriers that hinder the growth of Kenya’s capital market include:

  1. Restrictive regulatory frameworks – Trustees plays a very important role in Collective Investment Schemes (CIS) and REITs by ensuring that the other service providers perform their functions accordingly. Unfortunately, the current regulatory framework seems to lean towards qualifying banking institutions as investment funds’ trustee primarily due to the high minimum capital requirements. For instance, the minimum capital requirement for REIT trustees is Kshs 100.0 million which is 10 times higher than the minimum capital requirement for pension schemes corporate trustees, which is Kshs 10.0 million. This essentially limits the eligible trustees to bank, further eliminating other corporate trustees. The status quo is especially unideal given that banks compete directly with capital markets, bringing about possible conflict of interest
  2. Hostile environment to Private offers – Unregulated markets are governed by the prevailing contracts between the participating parties and therefore they are not regulated by a specific regulator; however, the process of offering is usually regulated so that it follows a set of defined rules and guidelines. Unfortunately, the growth of unregulated products in the Kenyan capital markets continues to be curtailed by the lack of regulatory support, which has fueled the misconception that private offers are unsafe destination. This has made investors to shy away from private offers and also limits business from using private offers to source for funds
  3. Obstacles to REITs capital formation – Based on the current regulations, the minimum investment amount for D-REITS is Kshs 5.0 million, which is quite high, considering that 75.0% of Kenyans earn below Kshs 50,000. Therefore, only a few number of Kenyans have the ability to invest in D-REITS, and this has hindered the growth of D-REITS,
  4. Inadequate Knowledge – Inadequate knowledge among some investors and general public has led to less participation in the capital market and overreliance on bank funding, which according to the World Bank, has seen banks in Kenya provide 99.0% of the funding to businesses with other alternative source of funding such as the capital markets providing only a mere 1.0%,
  5. Past corporate failures – Some investors have in the past lost money in the capital markets and this has led some to have a negative perception of the capital market, thus making it difficult for them to participate in new offerings if they are to come in the market
  6. Complexity in issuers approval process – The cost and complexities encountered by companies seeking to issues their securities in the Nairobi Security Exchange (NSE), has led potential issuers to shy away from the capital market evidenced by the fact that only 65 companies have been listed in the NSE since it official declaration

In conclusion, the growth of the capital market is hinged on having supportive regulatory frameworks that will ease the process of approval of potential issuers and support the growth of private offers to encourage business to use the capital markets as an alternative to bank funding when looking for financial support. At the same time, a supportive and comprehensive framework helps to ensure the safety of investors’ funds and avail diversity of products for investors to choose from, thereby propelling investors’ confidence in the capital market and thus investors are more willing to put their funds in the capital markets. In addition, investor education will help investors understand how the capital markets operates, its products and the risks involved, so as to enable investors make well informed decisions and debunk myths about capital markets

Top