Corporate bonds key in spurring investment and economic growth

The Central Bank of Kenya building. PHOTO | FILE 

By NDIRANGU NGUNJIRI

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Summary

• Through the local bond market, the corporate sector can borrow for longer maturity periods in local currency, which matches their investment needs and thus enables them to avoid balance sheet mismatches.
• To further develop and integrate bond markets, Kenya needs to promote bond issuers and investors from the region as well as outside the region.
• Well-developed bond markets can provide Kenya with alternative sources of financing and at the same time make the country more financially resilient by balancing the dependence on the banking sector.

Bond markets have positive externalities with respect to economic growth, financial inclusion, and financial stability.

They represent an important component of a diversified finance sector. On a macro level, financial development has been linked to economic growth and poverty reduction, roads have been constructed in far-off places like Wajir and Mandera, opening the areas for business.

On financial inclusion, the core factors that enable bond market development are the same factors that enable borrowing and lending within an economy.

Developing a sound, sustainable, stable, and liquid bond markets will reduce the dependence of the corporate sector on banks and foreign currency financing, Companies and even universities can list their own corporate bonds.

Through the local bond market, the corporate sector can borrow for longer maturity periods in local currency, which matches their investment needs and thus enables them to avoid balance sheet mismatches.

To attract investment through issuing local bonds, Kenyan firms have to adopt international accounting practices, and enhance corporate governance, thereby becoming more transparent. Most Kenyans companies have failed in this considerably.

To further develop and integrate bond markets, Kenya needs to promote bond issuers and investors from the region as well as outside the region.

This requires a legal and regulatory framework conducive to investors, a regional guarantee mechanism, harmonized credit and trading standards, a regional clearing and settlement system, and an enhanced local and regional credit rating system.

Central Bank of Kenya (CBK), with its specialist knowledge and financial resources, has been playing an important role in developing the aforementioned bond market infrastructure.

Well-developed bond markets can provide Kenya with alternative sources of financing and at the same time make the country more financially resilient by balancing the dependence on the banking sector.

Achieving a better balance between bank finance and bond markets requires a more planned, top-down approach by policymakers through required reforms and appropriate rules and regulations.

Kenya also needs to utilize its huge savings and international reserves to meet the large needs for productive investment in the country, particularly in infrastructure through bond market development.

Regional blocs such as the EAC and the Comesa, are important instruments for facilitating regional bond market development. There is an urgent need to strengthen, expand, and deepen these initiatives and to include other growing economies of Africa.

In this regard, multilateral development banks such as the AfDB have an important role to play in developing Africa bond markets.

New initiatives, such as developing a liquid corporate bond market and broadening the issuer base, may also prove useful.

Even though our bond market has witnessed considerable growth in recent years, it is still small and it is therefore essential to identify and deal with the challenges.