How informal exchange grew into an automated stock market

A stockbroker at the Nairobi Securities Exchange. FILE

By Charles Mwaniki,


IN SUMMARY
Privatisation, new policies and technology have played a big role in the renaissance of the Nairobi Securities Exchange.


The journey of the Nairobi Securities Exchange began long before departure of the colonists.

At its dawn in the 1920s, the Nairobi stock market was an informal grouping of part-time traders meeting weekly over a cup of coffee. Share trading began on an informal basis, centred on a gentleman’s agreement that settlements and transaction commissions would be paid up.

Later, business was transacted by telephone and prices determined and exchanged through negotiation in a coffee-house forum at the exchange hall at The Stanley hotel.

Stockbrokers could buy or sell shares without consulting each other, provided such transactions were effected at the best possible price.

In 1951, Kenya’s first stock brokerage firm was set up by Francis Drummond. Three years later in 1954, the Nairobi Stock Exchange was formally constituted as a voluntary association of stockbrokers.

To facilitate the registration, the stockbrokers had gained approval and recognition as an overseas bourse from the London Stock Exchange.

The number of stockbrokers at independence stood at six, and they remained so until 1994 when seven more were licensed. In 1995 a further eight were registered, bringing the number to 20 (one licence was revoked).

Today the number of intermediaries, comprising of investment banks and stockbrokers, stands at 21. The intervening years have seen some of the established stockbrokers such as Francis Thuo and Partners, Discount Securities and Nyaga Stockbrokers fall on hard times and go into administration.

At the same time, commercial banks have ventured into the industry with several such as Equity, Cooperative, CFC Stanbic, NIC, Bank of Africa and ABC running stockbrokerage arms after securing trading licences.

At the dawn of independence, stock market activity was subdued as foreign investors faced uncertainty about the future of independent Kenya, coupled with limited resources and knowledge of capital markets by indigenous Kenyans.

The pre-independence stock market participation from indigenous Kenyans is estimated at five per cent by the Kenya Institute for Public Policy Research and Analysis.

Foreign investors were progressively edged out under the indigenisation programme put in place by the new government.

The regulations also put restrictions on foreign participation until revisions starting in 1995 allowed foreigners to hold 25 per cent of listed firms, rising to 75 per cent following further relaxation of the cap in 2002.

Today, stock market investor numbers have risen to about 2.3 million, helped by high-profile listings of companies such as Kenya Commercial Bank, Kenya Airways, KenGen and Safaricom.

Investor wealth at the NSE has also gone up, from tens of millions in the 1960s to close to Sh2 trillion today. As part of the growth strategy, plans have been put in place to bring in Futures Trading, which comes at a time when the country has discovered mineral deposits.