Interview : Kenneth Kaniu
How can retail investor participation in Kenya’s equity and fixed-income markets be encouraged?
KENNETH KANIU: We already have a good level of awareness as far as the equity markets are concerned. If we look at the initial public offerings (IPOs) since 2003-08, we can see very strong and positive retail participation. Also, we have seen the number of Central Depository and Settlement System accounts increase. The challenge, however, is that a lot of investors have lost money with many of these IPOs, and more generally through the stock market. Looking at retail investors, we need to be able to talk more about engaging intermediaries, particularly fund and asset managers, and we need to be able to spread awareness about getting into a diversified pool of regulated funds to maximise on returns while managing risk.
To what extent will increased infrastructure spending affect residential and office real estate?
KANIU: What we are seeing from the government is a recognition that what is holding development back is a lack of infrastructure. For example, no matter how many ships are docked in the harbour, there is only a fixed amount of containers that can be moved through the port. In terms of roads, the number of kilometres of tarmac also remains insufficient to move people around the country for private or commercial use. Therefore, the government has been investing in a number of infrastructure projects, such as the railway linking Nairobi to Mombasa, the widening of the road connecting both cities, and the construction of a refinery and pipeline. These are all positive developments for Kenya. It has, however, put a lot of funding pressure on the country in the face of higher spending and borrowing. One way of remedying this situation would be to provide the infrastructure sector with the right profile of capital as opposed to the current funding model, which relies on shorter-term debt instead of allocated into longer-term assets. While planned developments are a positive step, more could certainly be done in terms of identifying the right financing structure and funding model to generate more value from these necessary infrastructure projects. There is also something to be said for prioritising key projects. For example, rather than setting up a six-lane highway on the Nairobi-Mombasa road to complement the investment in the Standard-Gauge Railway project, we can consider upgrading the Nairobi-Nakuru road, which currently has only two lanes, adding Uganda as a final destination, seeing as its Kenya’s largest trading and export partner.
What are the regulatory and taxation changes affecting Kenya’s financial services?
KANIU: Kenya is grappling with a fiscal deficit, which appears to be widening, largely driven by the current government’s standing programme on infrastructure. Government spending is growing faster than revenue and tax collection, and more tax pressure is being put on the disposable income of ordinary Kenyans. As a result of this, the financial sector is being targeted to bear more of the tax load due to its historically strong growth. For instance, we have now started to see excise duty on banking money increase from 10% to 20%, and excise duty rise from 10% to 15% for mobile money transfers by cell phone companies, which will invariably impact the gains made in financial inclusion.
On the macro level, we are expecting inflation to creep up. From a tax perspective we have seen a couple of new tax regulations that are likely to impact the capital markets sector. For instance, tax incentives for new companies listed on the Nairobi Securities Exchange, which were initially fairly generous, have been capped at 25% for the first five years for companies that list over 40% of their share capital. Moreover, asset transfers into asset-backed securities are now taxable. Each of these factors communicate that the financial services industry is currently experiencing a challenging period.
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