Kenya’s blueprint for broad-based economic development is its Vision 2030 document, which outlines a series of long-term goals and how they will be reached. One of the key elements of the plan is turning Nairobi into a financial centre for the East Africa region. The Capital Markets Authority, the government regulator, has developed a Capital Market Master Plan, a detailed roadmap for the sector, with actions planned to 2023. The master plan aims to make Nairobi “the choice market for domestic, regional and international issuers and investors looking to invest in and realise their investments in Kenya, within East Africa and across Middle Africa”.
Withn Reach
The desire to be a financial centre within Africa puts Kenya on a growing list of other countries chasing the same designation, including South Africa, Morocco and Nigeria. In Kenya’s case several factors offer a compelling argument that the goal is comparatively realistic and attainable. As the largest economy among the members of the East African Community (EAC), and a regional base for large multinationals, Kenya already carries a significant amount of heft. The level of integration within the EAC also means that market access to neighbouring economies is already advanced.
Kenya’s Capital Markets Master Plan is organised around three key themes: supporting developmental and economic transformation, improving the operational infrastructure of capital markets, and addressing the legal and regulatory environment. Within those categories are specific goals such as introducing derivatives and other market instruments, developing expertise in infrastructure finance, and adopting international standards in governance, transparency and disclosure. The plan also includes short-, medium- and long-term mileposts to measure progress along the way.
Kenya wants to join the MSCI Emerging Markets Index by 2016, for example, and to grow total market capitalisation of equities from $21.52bn as of January 2014 to $93.72bn by the end of 2023. That would represent a jump in market cap from 50% of GDP to a hopeful 70%, according to the draft plan. Kenya wants the corporate bond market’s capitalisation to increase from 2% to 40% over the duration, and to have $50bn in derivatives contracts trading on the Nairobi Securities Exchange by 2020, then $200bn in overall contracts value by 2023. Furthermore, the country hopes to attain a ranking of 80 on the UK-based Z/Yen Group’s Global Financial Centre Index by 2016, and rise to 50 by 2023.
In Threes
The master plan’s three pillars each contain reforms grouped into a further three subcategories. The first pillar introduced in the master plan is to support developmental and economic transformation, and within that category the three areas of focus are improving domestic market accessibility and prosperity, providing a gateway for regional and international capital flows, and providing access to international financial markets.
Spreading economic wealth and investment beyond Nairobi and into other areas of the country is a theme that runs through current government policy and long-term planning, which necessitates establishing channels for financing infrastructure and nurturing markets in sub-sovereign bonds, as well as retail financial inclusion. Increasing access for small-scale retail investors would entail enlisting savings-and-credit cooperatives (commonly known as SACCOs in Kenya) to offer basic investment offerings, but Kenya is also in the process of studying the feasibility of offering them on mobile-money platforms such as M-Pesa.
Indeed, since the launch of Safaricom’s M-Pesa in 2007, the country has become a market of reference for mobile phone financial services. A number of other telecoms operators, including Essar Telecom (YuCash), Orange (Orange Money) and Bharti Airtel (Airtel Money), have since introduced similar products – as have operators in other countries around the continent – which has pushed prices down and boosted subscriber participation. Kenya counted 23.75m mobile money users as of June 2013, around 75% of the adult population.
The value of transactions has steadily increased over the past six years, reaching KSh152.5bn ($1.74bn) in June 2013, and an estimated 31% of GDP is now processed through mobile money services. These systems are used to pay electricity bills, school fees, and even to obtain agricultural insurance and microloans. The financial authority’s master plan also calls for the development of a policy for improving financial literacy across all income levels.
At the EAC, directives have already been issued to converge national laws and standards, but the master plan acknowledges that progress on compliance has been “very limited”, which could constrain benefits. The plan cites examples in the EU, where limited adherence constrained the advantages conferred. However, full implementation could result in lower costs for management, compliance and operating expenses on information technology.
The process to full harmonisation will likely be a long one, but the first step is already under way with the EAC Council of Ministers’ adoption in April 2014 of directives for the establishment of a standard for securities prospectuses, so that one prospectus approved in one EAC country would then apply to the whole zone. This is to be followed by providing brokers direct access to trading platforms across the zone, and then allowing them to serve clients in any part of it – all of which can be built on the newly adopted licensing standard.
New Options
Currently securities traded in Kenya include the basic package of equities and bonds, with the first real estate investment trust expected in the third quarter of 2014. The CMA plans continue with new options such as single-stock futures, including short selling, contracts based on interest rates or bonds, commodity futures and other products. All of these instruments are expected to be introduced in the next three years, according to the regulator. “Growing a financial hub is a matter of liquid assets, market depth and being able to invest on both the short end and the long end,” said Marcel Mballa-Ekobena, the head of equities research for the East Africa Region for Nairobi-based CfC Stanbic Bank. “The minute we’re able to short, we are increasing liquidity.”
Infrastructure
Existing warehousing infrastructure must first be upgraded for trades requiring one party to take delivery of physical goods such as agricultural produce, and a spot market for those products may see competition from one already set up in Rwanda. For Kenya, commodities that would be a natural fit for physical settlement and as a hub where a benchmark price could be set would start with coffee and tea, as the country is a major producer.
In the second pillar of the master plan, the focus is on the supporting infrastructure of the market, including trading mechanisms. To support headline goals such as an equity market cap at 70% by the end of 2023 (currently the global average is slightly less), increased sophistication in liquidity tools will be required. That means introducing market makers for equities and government bonds, establishing a securities lending-and-borrowing framework to allow for short selling, and the leveraging of opportunities arising from the recent completion of the demutualisation of the NSE and plans to vest it with the powers to set its own fees.
Needed Reforms
A prominent obstacle is that ownership of equities is capped at 75% for foreign investors as a group. However, according to existing plans, for all but a few publicly traded companies whose operations dovetail with national objectives, such as the flagship airline Kenya Airways, that cap may be lifted in the near future, although no date has been set for this as of August 2014 Other reforms include the establishment of a war-house receipt system for commodities to support spot trading, a central securities depository and the introduction of a junior stock market, which has already been established and is called the Growth Enterprise Market Segment. The master plan aims for 12 listings on this early stage bourse by 2016, 27 by 2020, and 39 by 2023.
In the third pillar, a key reform will be a move to integrate financial sector regulation. Kenya does not intend to follow the common single-regulator model, as bank regulation is likely to remain the responsibility of the Central Bank of Kenya, but functions for overseeing securities, insurance and pension funds are likely to be merged into one body. This third pillar also discusses moving toward principles-based regulation, the approach in which regulations are written to a lower degree of specificity and licensees are expected to comply with both their letter and spirit. The CMA is also planning an overall review of many other regulations to support greater industry innovation and mitigate costs of compliance.
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