Initial public offering to boost Kenya’s capital markets

The Nairobi Securities Exchange (NSE) is set to demutualise in the coming months and sell equity in an initial public offering, an important step in Kenya’s plan to grow its financial sector. The move sets the stage for the next steps of its capital markets master plan, which will introduce new alternative instruments, including derivatives, futures, and real estate investment trusts (REITS) in years to come.

The plan was first floated in 2008, and follows a common trend throughout the region, where Nigeria, Zimbabwe, Morocco and Ghana have all expressed similar intentions. The shift from a mutual structure to a corporate one not only allows for the sale of shares on its own platform but also paves the way for partnerships with other bourses, creating opportunities for cheaper access to more securities, cross listings and, in some cases, regional integration.   

Regional role

The push to expand the products and overhaul the structure of Kenya’s bourse is in line with efforts to raise the profile of the NSE among foreign portfolio investors.

Kenya’s exchange ranks as sub-Saharan Africa’s biggest, after South Africa and Nigeria with a capitalisation of $22.6bn at the end of 2013. It is targeting a fourfold rise in its market capitalisation by 2023, the head of Market and Product Development Donald Ouma told Bloomberg in an interview earlier this year.

“Diversification is a significant opportunity and will help to stabilise the NSE’s performance,” NSE’s CEO Peter Mwangi told OBG. “As an exchange we hold the view that foreign inflows will largely be determined by the performance of the listed companies. The fundamentals are thus right for us to expect increased foreign inflows in our market going forward,” he added.

The demutualisation process meant getting the exchange’s current 22 brokers, who are its existing members, to agree on a new ownership structure. Those allocations were made in 2012, when it was decided that the brokers would each get a 4% stake in the whole. Shares of 5% each went to the National Treasury, Kenya’s equivalent to a Ministry of Finance, and to the Capital Markets Authority (CMA) Investor Compensation Fund. The CMA is the regulator of capital markets activity in Kenya. The final 2% will be split amongst the NSE, the Kenya Bankers Association, and employees and members of the NSE and the Kenya Association of Stockbrokers and Investment Banks. As of May 2014 the group had not settled on a price for new entrants. The most recent addition to the membership list was in 2007, when Renaissance Capital Kenya paid $3m to join.

The next step of the plan is an IPO, and the NSE has said it would make a 38% ownership stake available through such a sale by the end of the second quarter of 2014 – roughly 81m shares at KSh4 ($0.05) each. That would imply a public float worth KSh324m ($3.7m), and an overall value of the company at about $850m. The bourse’s pre-tax profit more than doubled in 2013 to KSh379m ($4.33m), thanks to a jump in trading turnover after the presidential election in March 2012 came and went without political violence.  

New products

To complement the change, the NSE also underwent a rebranding in 2014 and relocated to a new trading floor in Nairobi’s Westlands neighbourhood. The next step is to work together with the CMA on bringing new products to the trading floor.

The exchange is set to launch a trading board for small and medium enterprises (SMEs) in June, which will open a new investment window and funding opportunities for start-up businesses.

Other products slated for introduction this year are REITs, which are expected to attract property developers to the capital markets to raise funds. There are already several applications to the CMA to start one and five investment firms have been licensed to manage them.

Later products potentially include single-stock futures, as well as financial and commodity derivatives. Currency hedging is in demand, as investors with currency risk can negotiate a forward exchange contract with a bank but cannot trade it with other investors on a regulated platform. The general strategy for futures contracts is to focus first on those that do not require the physical delivery of a commodity, as storage space is lacking for grains and other crops, although as activity grows, Kenya offers significant potential for price-discovery in agricultural products, given its status the world’s largest exporter of black tea and a major producer of flowers and coffee.

The demutualisation also opens scope for increasing regional integration within the East African Community (EAC). The EAC has in recent years sought to improve financial harmonisation among member states, which also include Tanzania, Rwanda, Burundi and Uganda. A common legal and regulatory regime would ease the flow of capital, but also allow for secondary and cross-listings.

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