Listing the benefits: Demutualisation of the exchange kicks off a round of reforms

The Nairobi Securities Exchange (NSE) demutualisation in 2014 marked the beginning of a period of rapid innovation in East Africa’s capital markets. Together with the Capital Markets Authority (CMA), the sector’s regulator, the reforms should put the country’s markets on track for steady growth over the long term. The framework for reforms is the 10-year Capital Market Master Plan, which was launched in November 2014 by the cabinet secretary of the National Treasury and links to other major national projects, including Vision 2030.

There have, however, been challenges. Obstacles to progress include foreign investors selling in 2015 and locals switching out of equities into high-yielding short-term debt instruments. Trading volumes suffered in early 2015 after a capital gains tax (CGT) was reintroduced on equity and bond sales. However, the government responded positively and the Finance Bill of 2015, signed into law in September, removed both CGT and its successor, withholding tax, on NSE-traded securities, as well as a stamp duty on property transferred into real estate investment trusts (REITS).


The NSE’s successful demutualisation in June 2014 took five years of planning before the exchange was transformed from a mutual association of stockbrokers to a company with a board and governance. The bourse raised KSh627m ($6.9m) by selling 31% of the equity at KSh9.50 ($0.10) a share in a heavily oversubscribed (764%, according to the CMA) offer that closed in August. It listed on its own main board in September 2014, and within a year had more than doubled the share price to KSh20.50 ($0.23), after a peak of KSh28 ($0.31).

The NSE reported profit before tax for the first half of 2015 of KSh219m ($2.41m), up 22% from KSh179m ($1.97m) a year earlier, boosted by improved levies from the equity market and increased income from data sales and post-trade services. Equity trading remained flat in the half year, and bond market turnover fell by 17%. Full-year income for 2014 was up 32% to KSh822m ($9.04m), on the back of a 39% increase in equity turnover to KSh431bn ($4.7bn).

Joseph Mwenda, senior infrastructure and product development officer at the CMA, told OBG that the demutualised and listed NSE would be competitive globally and open the way for technology and regulation change. Jacqueline Mwiti, senior officer for corporate finance at the NSE, pointed to new standards of corporate governance. “The new regulations will align corporate governance standards between listed and non-listed firms. Coupled with the better systems at the NSE and the new products, the new standards will also help the NSE add value to its shareholders following from its listing in 2014.” The NSE is upgrading its automated trading system and expects to complete in early 2016.


The NSE was licensed by the CMA in October 2015 to launch a derivatives exchange modelled on the Johannesburg Stock Exchange. Initially due by June 2015, deadlines were extended to allow for delays in the clearing house and settlement guarantee and investor protection funds. The bourse has also provided training for traders, asset managers, banks, risk managers and operations teams, and three banks and seven traders are registered.

The first instrument was to be a single-stock future, initially linked to the local currency, although going forward other currencies would be allowed. Other securities will include interest rate and foreign exchange derivatives, commodity futures, currency futures and an equity index. Ian Gachichio, research analyst at Kestrel Capital, said that currency and interest rate hedges are likely to be the most exciting instruments initially. According to the CMA, the regulatory framework has been aligned to the principles of the International Organisation of Securities Commissions and to Kenya’s status as a developing economy. Geoffrey Odundo, CEO of the NSE, told OBG, “There is great demand and appetite for the derivatives market in Kenya, from both investors and market participants. Derivatives will not only offer a wider range of investment channels, but also give individuals, corporates and farmers a view of the future prices of currencies, interest rates, minerals and agricultural products. We believe this market will revolutionise Kenya’s capital markets industry.”

Mobile Bonds

Another reform due in October 2015, delayed by market conditions, is a KSh5bn ($55m) tax-free five-year infrastructure bond that can only be bought by mobile phone. Minimum investment in the treasury’s M-Akiba bond will be KSh3000 ($33), down from the KSh50,000 ($550) minimum of other treasury bonds, to encourage public participation. Rates were not known at time of press, but Henry Rotich, cabinet secretary of the National Treasury, said it would pay more than commercial banks (rates were up to 5.5% on savings accounts) but less than Treasury bills, which had rates of 20.6% by October 2015. NSE chairman Eddy Njoroge said, “Our bond market is currently dominated by foreign and local institutional investors. M-Akiba is in line with the NSE’s strategy of enhancing financial inclusion by driving retail investor participation.” 27.7m Kenyans use some form of mobile money subscription.


The Growth and Enterprise Market Segment (GEMS) was launched in 2013 to attract small and medium-sized enterprises (SMEs). It started with bold plans to list five companies a year, but Nairobi builder Home Afrika was the only company to list in 2013 and it was followed in 2014 by manufacturer Flame Tree and Kurwitu Ventures, which offers sharia-compliant investment products. Atlas Development and Support Services, which provides oilfield logistics services, became the first dual-listing, with its stock also present on London’s Alternative Investment Market.

The slow start is not unexpected and is likely to change as awareness grows. Many Kenyan SMEs are family owned, and it may take time before public disclosure and sharing control become attractive. Some business owners feel banks are easier to deal with, but Vimal Parmar, head of research at Burbridge Capital, feels that the tide is turning: “Business companies are quite excited about GEMS for raising public equity, including family businesses,” he said. Although there are low listing costs and few barriers, corporate governance standards are high, as GEMS requires nominated advisors. Companies such as Genesis Analytics, Bourse Consult and Burbridge advise on new listings and help ensure a firm complies with ongoing listing and governance requirements.


Kenya’s vibrant property market has been introduced to the securities exchange through REITs. New rules allow for income-paying I-REITs, which pay 80% of earnings as dividends, and D-REITs, which are likely to prove popular for financing developments, as well as Islamic REITs. In October 2015 the CMA approved the first I-REIT, issued by Stanlib Kenya and named Fahari I-REIT. The fund planned an initial public offering for KSh2.6bn-12.5bn ($28.6m-137.5m). Meanwhile, stockbroker Burbridge Capital is advising on the listing of property firm St Paul’s, due later in 2015. St Paul’s says it will list on GEMS but invest in the UK commercial market. In addition, Mwenda said that the CMA is processing other applications.


In August 2015 the CMA put out guidance notes for exchange-traded funds (ETFs). This is a fund created by a sponsor to mimic the behaviour of another value, such as a stock exchange index or a commodity basket. Regulation is also being readied for asset-backed securities, with mortgage-backed securities likely to be among the first to apply.

Settlement Upgrades

In January 2015 cash settlement on equities and corporate bonds moved to the Real-Time Gross Settlement (RTGS) system, run by the Central Bank of Kenya (CBK). In August 2014 the CBK had introduced same-day settlement for Treasury bonds and bills through the RTGS system, fed by trading information received from the NSE every two hours. The RTGS reduces default and other risks, and shortens transaction times.

Settlement for equities and corporate bonds securities continues to be handled by the Central Depository and Settlement Corporation, which is also upgrading. New systems will advance from the current four-day settlement (T+5) and allow investors to buy and sell the same day (intra-day settlement). Fast settlement allows day-traders and other margin traders, and the new system will include a securities lending tool, opening the market for short-selling and other strategies, which may increase liquidity.

In March 2015 the NSE joined the UN Sustainable Stock Exchanges, becoming the 18th member worldwide and the fourth in Africa after the exchanges of Egypt, Nigeria and South Africa. Odundo said, “We continue to strive to deliver the best service.” He added that the NSE’s goal is still to broaden offerings and deepen capital markets while strengthening Kenya’s position as a financial services hub in East Africa.