A broker at the Nairobi Securities Exchange monitors online trading. The
bourse has failed to attract new companies, while its products have
failed to excite the public. PHOTO | SALATON NJAU | NMG
Kenya’s stockmarket is facing yet another challenge after
stockbrokers, investment banks, fund managers and investment advisers
applied for the cancellation of their trading licences, citing losses
and reduced profitability.
This is attributed to the
declining performance of the 64-year-old bourse, which has failed to
attract new companies, and whose products have failed to excite the
public.
The Capital Markets Authority (CMA) has said
that market intermediaries led by investment advisers have applied for
cancellation of their operating permits, citing poor performance of the
stockmarket, low uptake of new and existing products, the absence of new
listings and low trading activity.
According to the
regulator, fund managers, investment banks and brokers recorded huge
losses in 2016 compared with their performance in 2015, providing an
inference point on licence cancellation witnessed by CMA in recent
years.
“Despite elaborate strategies to introduce new
products and services in the Capital Markets, uptake has remained low,
and a few existing market intermediaries have applied for cancellation
of granted CMA licensees, with investment advisers bearing the bulk of
the cancellations,” the regulator said.
Applications to close shop
CMA chief executive Paul Muthaura confirmed that the authority
had received several applications from firms seeking to close shop but
he did not disclose their names.
“The main category we
are seeing licence surrenders because the business model is not working
is the investment advisers,” said Mr Muthaura.
Kenya has 14 licensed investment banks, 10 stockbrokerage firms, 26 fund management firms and 12 investment advisory firms.
Among
the products that have failed to excite investors are real estate
investment trusts (REITs), online forex trading, collective investment
schemes, exchange-traded funds, asset-backed securities (ABS), the
Growth Enterprise Market Segment (Gems), Global Depository
Receipts/Notes and initial public offerings (IPOs).
Kenya has not had an IPO from a corporate entity since 2008, except the self-listing of the NSE itself in 2014.
The
Gems market, the trading platform for small and medium-sized firms, has
only attracted five companies since its launch in January 2013. These
are Atlas African Industries, Flame Tree, Home Afrika, Kurwitu and
Nairobi Business Venture.
The poor performance of the
NSE has been exacerbated by the reduced activity among listed firms due
to a difficult operating environment.
For example, in the 2016/2017 fiscal year, 20 listed firms issued profit warnings while 14 posted losses.
According
to the CMA, the low market activity has seen market intermediaries, who
rely on transactions and advisory fees and commissions, realise reduced
profits, with some posting losses.
Several
stockbrokers have also divested from the struggling exchange, selling
their shares to sustain their operations — which have been impacted by
the low trading activity on the bourse.
Usually,
stockbrokers depend on commissions from levies charged on equity and
bond transactions and, in a booming market, they diversify their income
streams by offering advisory services in IPOs, rights issues and mergers
and acquisitions.
A survey conducted by the CMA on the
performance of the stockmarket revealed that Kenya’s securities market
has largely remained narrow and shallow, compared with other African
markets such as Egypt, South Africa and Nigeria.
The
NSE has been characterised by low liquidity levels, a small market size
dominated by a few large companies such as Safaricom, East African
Breweries Ltd (EABL), Equity Bank, KCB Bank and Co-operative Bank of
Kenya.
Its activities are dominated by bluechip
companies, with the top five companies by market capitalisation
accounting for 67 per cent of the total market capitalisation as at
February 2018.
Market vulnerability
These
are Safaricom, Equity, KCB, EABL and Co-operative Bank. Since three of
the five are banking institutions, this indicates vulnerability of the
market.
According to the survey, which was released two
weeks ago, Kenya’s stockmarket is also facing stiff competition from
other investments that seem to promise better short-term returns such as
real estate, mobile money products and sports gambling.
The survey report dated June 2018 shows that stringent listing requirements have put off potential issues from the bourse.
These
include a requirement that a firm seeking to list provides evidence of
past profitability prior to listing, audited financial statements for a
few years, minimum fully paid up capital, and suitability of directors
and management experience.
According to the report, the
regulator is expected to review and abolish the requirements for
minimum free float, profitability track records, paid up capital and
number of investors as required from time as a prerequisite for listing
approvals especially where they are unjustified.
The
CMA will also review the cost of participation in the primary and
secondary capital markets in terms of global competitiveness, in light
of stakeholder perception, and continuously review, identify and amend
restrictive provisions in the capital markets and laws that are
unattractive to capital raising and listing.
According
to the report, issuers of new products will be required to develop and
submit elaborate product launch strategies to the regulator, with
elements such as product sensitisation, customer experience and
marketing strategy.
Demutualisation
Meanwhile, low returns have also seen stockbrokers relinquish the ownership of the stockmarket to foreigners.
The
stockbrokers had a three-year grace period from 2014 to surrender the
control of the exchange to the Kenyan public as part of the conditions
of the demutualisation process (separation of ownership of the exchange
from the trading rights of the members).
The process was effected to improve transparency and governance in the trading of shares.
Of
the 20 stockbrokers who held a combined 59 per cent controlling stake
in 2014 when the NSE issued its IPO, 11 have either exited the
stockmarket or substantially reduced their shareholding.
Stockbrokers
held a 26.7 per cent stake on the NSE in 2017. Foreign investors now
control over 40.8 per cent of the bourse as at the second quarter of
this year, from 36 per cent last year.
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