Stockbrokers to raise more capital in new EAC rules

Stockbrokers at the floor of the Nairobi Securities Exchange. Draft rules are seeking to harmonise regulations for EAC capital market intermediaries. FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• Draft rules seeking to harmonise regulations for EAC capital market intermediaries have proposed minimum liquid capital or cash requirement of at least Sh258 million or $3 million for an investment bank, Sh21 million for a broker or broker dealer and Sh10 million for a fund manager.
• The new rules could put brokers under increasing financial pressure as they set aside some of their earnings ahead of launch of the EAC monetary union in 2024.

Kenyan stockbrokers seeking to trade shares across the East African Community will be required to raise their minimum capital by nearly Sh200 million.

Draft rules seeking to harmonise regulations for EAC capital market intermediaries have proposed minimum liquid capital or cash requirement of at least Sh258 million or $3 million for an investment bank, Sh21 million for a broker or broker dealer and Sh10 million for a fund manager.

The current paid-up share capital requirement for Kenyan investment banks is Sh250 million, but liquid capital is set at a minimum of Sh30 million minimum or eight per cent of liabilities, whichever is higher.

The Sh30 million liquid capital will now rise to Sh250 million, meaning that any illiquid assets currently being considered as paid-up share capital will not count in the calculation.

The draft rules have proposed that brokers increase their cash reserves by at least Sh23 million annually for the next eight years.

The new rules could put brokers under increasing financial pressure as they set aside some of their earnings ahead of launch of the EAC monetary union in 2024.

READ: Stockbrokers face capital raise in EA regulation pact

Market players said it will be easier for Kenyan intermediaries to comply with the new rules since the timeframe given is adequate and they are already meeting the Sh250 million core capital requirement, which they could convert to cash.

However, they said it would be more difficult for the other countries because their capital levels are already much lower than Kenya’s.

“For Kenya it may not be a big problem because our capital levels are already at Sh250 million, so we can only grow it to cash if this becomes a requirement to operate in the region,” said James Wangunyu, the managing director of Standard Investment Bank.

An investment advisory firm, which is currently required to have Sh1million in liquid cash in Kenya, will under the new EAC rules have to hold at least Sh2.8 million ($33,000).

A fund manager will hold Sh10 million in liquid capital or $120,000.

The liquid capital is not part of working capital as it must be available at all times or the intermediary will be suspended from the market.

“The suspension or withdrawal of a licence shall be for a specified period or until the occurrence of a specified event or until specified conditions are complied with; and while a license is suspended the holder shall not carry out the business for which the licence relates to,” says the EAC proposed directive.

An intermediary may have to freeze paying dividends to its shareholders in order to preserve cash in the next 10 years to meet the cash requirement under the monetary union protocol. The union will see the countries in the region adopt a single currency.