Different economies have registered varying degrees of success. FILE PHOTO | NMG
Kenya’s financial sector has in recent years been feted as one
of the most dynamic and resilient in Africa, buoyed by the country’s
mobile money inspired growth in financial inclusion.
Across the continent, different economies have registered varying degrees of success in developing their financial markets.
Last
month, Barclays Africa released its first annual financial markets
index, which will be evaluating developments in African markets and
offering investors a chance to benchmark the state of their local
financial markets against peers in Africa.
The index
evaluated 17 African economies along six pillars of market depth, access
to foreign exchange, market transparency/tax and regulatory
environment, capacity of local investors, macroeconomic opportunity and
legality/enforceability of standard financial markets master agreements.
South Africa tops
Overall,
South Africa is ranked top with an overall score of 92 per cent, with
Mauritius following at a distant second with 66 per cent, Botswana at 65
per cent, Namibia at 62 per cent and Kenya in fifth place at 59 per
cent.
Kenya performs best in the ability to enforce
agreements, which Barclays says is as a result of good enforcement of
netting and collateral positions.
The index ranks Kenya third in this pillar, just behind South Africa and Mauritius.
A
good legal system also helps, where parties entering into agreements
are assured of a credible fallback in case there is disagreement.
This also goes hand in hand with arbitration, an area where Kenya and Rwanda have been putting a lot of effort in recent years.
The country has done well to enact a large number of
international standards and market agreements, but the adoption still
remains wanting, pointing at gaps in auditors and regulators who are
supposed to enforce them.
For Kenya’s capital markets
though, the report serves as a wake-up call, showing the need for the
country to deepen the sector by expanding the number of listed firms in
the stock exchange, as well as the variety of products on offer at the
bourse.
Low capitalisation
The
index highlights the relatively low stock market capitalisation size to
GDP at 28 per cent, lagging far behind South Africa (358 per cent),
Mauritius (80 per cent) and even Botswana (269 per cent).
The
country also has very few outstanding corporate bonds (nine) which
means that firms are hardly using capital markets to raise funds.
As
such, the report recommends that the country should increase the number
of listed firms, which the Capital Markets Authority says it is
actively pursuing as part of its masterplan.
Increasing the capacity of local investors is also important, the report says.
Domestic
institutional investors hold about $12.6 billion (Sh1.3 trillion) in
assets, but are majorly the buy-and-hold type meaning that these assets
are not being actively passed around to help develop the liquidity and
vibrancy of the capital markets.
On the foreign
exchange market, Kenya has the second highest interbank foreign exchange
turnover at $34 billion (Sh34.1 trillion) on the continent after South
Africa, which bodes well for a foreign investor looking to do business
with and in the country.
The
index flags a weakness in the monetary regulator, saying that the
Central Bank of Kenya’s ratio of foreign reserves to net portfolio flow
is low and that it limits the apex bank’s ability to manage foreign
investor demand for the shilling.
Kenya maintains
official foreign reserves of about $7 billion (Sh721 billion), from
which the regulator meets the country’s foreign payment obligations, and
which are also deployed occasionally to calm volatility in the money
market.
Participation in the foreign exchange market is also largely dominated by about five banks.
Mixed bag
On the pillar of macroeconomic opportunity, Kenya once again
returns a mixed bag, performing the best among the surveyed economies on
transparency of monetary policy and provision of fiscal and budget data
while suffering from low export competitiveness.
The latter, says the report, is indicative of problems in education, transport and bureaucratic barriers to doing business in the country.
The latter, says the report, is indicative of problems in education, transport and bureaucratic barriers to doing business in the country.
As such, Kenya is ranked sixth in this pillar, falling behind Uganda and Nigeria.
The
transparency in fiscal and monetary policy is seen though as key in
helping attract foreign investment, given the importance attached by
such investors to getting the right information about a market or
economy before putting in cash, especially in a high risk environment
such as Africa.
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