Download - The Future of the Capital Market in Kenya
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NAIROBI STOCK EXCHANGE
BY: KIBUGA KARIITHICHIEF EXECUTIVENAIROBI STOCK EXCHANGE
Kenya Institute of Management Lecture Series7 April 2004
The Future of the Capital Market in Kenya
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TABLE OF CONTENTS
Key Performance Indicators 2003 – 2004 The Future The Challenges Regulatory Incentives Response of the Capital Markets The OTC Market Using the Capital Markets To Mobilize Domestic and
Foreign Capital Regional Integration The Future Of Capital markets Infrastructure Conclusion
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THEME
THE TIME TO OWN KENYA IS NOW.
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Capital markets Role in Summary
Corporate Governance: The market rewards the most transparent Institutions with higher valuations for their securities. This encourages:
– Efficient Allocation of Resources to the most productive sectors and competitive companies in these sectors.
– Enhances social corporate responsibility to stakeholders – customers, employees, the community.
Harnesses Long Term Savings: It encourages long term domestic and foreign portfolio investment as institutions and individuals invest in listed securities to enhance their returns. It increases long term savings : GDP.
Alternative to Bank Borrowing: Capital Markets lending is longer term in nature and therefore more affordable.
Democratization of ownership: Indigenous private individuals can own shares in privatized institutions.
– More company profits are distributed to locals and less is repatriated abroad.
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NAIROBI STOCK EXCHANGE
KEY PERFORMANCE INDICATORS 2003-2004
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2003 was a year of exceptional growth for the exchange, reflecting no doubt, the hopes and expectations of the Kenyan people in the NARC Government's commitment, to revive the economy.
The resumption of bilateral and multilateral support programmes with the IMF and World Bank also played a role in this newfound market confidence.
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Last year,
the total turnover in the equity market was Kshs. 15.2 billion, which is nearly 80% of the total turnover of Kshs. 19.3 billion for the previous five years combined. (January – April 2 2004 – Kshs. 8.546 billion)
The number of trades per day rose to almost 900 at one point, up from an average of less than 200 previously. (January – April 2 2004 – 42,893 deals)
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The bond market turnover as at the end of the year, showed similar growth at Kshs. 41.9 billion, which again was just over 60% of the total turnover for the previous five years combined.
(January – April 2 2004 - Kshs. 13.367 billion)
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STOCK MARKET INDICATORS:MARKET CAPITALIZATION & NSE INDEX
NSE 20-Share Index and Market Cap. for the Period Sept 2002-19 Mar 2004
1000
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et C
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sh. Billion)
NSE 20 -Share IndexMarket Capitalization
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INTEREST VS PRICE-EARNING RATIO
Jan 16, 2003 Apr 2, 2004
91 day T-bill 8.352 1.732
Kenya Airways 3.30 14.67
Nation Media Group 11.67 16.64
Barclays Bank 6.38 12.50
N.I.C. Bank 6.43 14.63
Standard Chartered 6.69 12.94
BOC Kenya 7.59 18.67
Carbacid 9.43 16.01
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INTEREST VS DIVIDENDS YIELD
Jan 16, 2003 Apr 2, 2004
91 day T-bill 8.352 1.732
Kenya Airways 9.7% 4.5%
Nation Media Group 2.8% 5.3%
Barclays Bank 13.7% 6.8%
N.I.C. Bank 3.9% 5.2%
Standard Chartered 13.6% 5.8%
BOC Kenya 10.6% 3.0%
Carbacid 49.7% 3.2%
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LOWERING INTEREST RATES: (91 DAY T-BILL INTEREST RATES)
Interest rates trend in the 91-day Treasury Bills
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2.00
4.00
6.00
8.00
10.00
12.00
Interest Rate
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SOURCE OF GROWTH Perhaps even more important than the figures
themselves is the source of all this new investment in the stock market.
The foreign fund managers, who departed from the market in 1998 after the ill fated bombing of the united states embassy in Nairobi, are yet to make a comeback;
all the growth experienced at the Nairobi stock exchange has been driven by domestic investment funds.
One of the heartening things that we have witnessed is the number of Kenyans in the Diaspora now investing in the Nairobi stock exchange.
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WHAT WILL WE ACHIEVE?
We must empower Kenyans through the transfer of ownership of the major economic players in the country, while providing honest money for the government's own programmes.
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The year 2004 is an important milestone for the NSE in many other ways, marking as it does the 50th year since authority was given by London Stock Exchange to Francis Drummond to operate a stock market in Nairobi.
We intend to mark the occasion in a manner befitting a golden jubilee of a national institution in the NARC era.
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The Exchange will at the same time be hosting the annual conference of the African Stock Exchanges Association (ASEA), which was in fact founded in Nairobi ten years ago.
We want to become the market of choice for raising and investing capital in this region.
How?
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NAIROBI STOCK EXCHANGE
THE FUTURE
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WHAT THEN DOES THE FUTURE HOLD?
The figures featured in this presentation amply demonstrate the capacity of our capital markets to mobilize domestic funds, for economic growth.
This should send a clear message to our government that the best route to take in the privatization of our state owned enterprises is through public offerings on the Nairobi Stock Exchange.
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NAIROBI STOCK EXCHANGE
THE CHALLENGES
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4 KEY DRIVERS OF CHANGE
Globalisation
advance of ICT
aging populations
evolving role of governments
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4 Cs
consolidation
convergence
connectedness
co-ordination
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GLOBAL ALLIANCES
HKSE
ASXSGX
EURONEXT(Paris,
Amsterdam, Brussels)
Nasdaq/Amex
TSE
NYSE
Tokyo
Mexico
Brazil
MOUs: Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Tokyo
Source: ASX
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Kenya CAPITAL MARKETS
RBA CMA CBK COMMISSIONER OF
INSURANCE
Retirement Benefit Schemes, Fund Managers, Actuaries,Custodians.
Securities Exchange, Stockbrokers,Listed Companies, Investment Advisors, Custodians,Investment Banks,Fund Managers,Collective Investment Schemes,Credit rating agencies.
Commercial Banks, Non Bank Financial Institutions,Forex bureaus, Micro finance institutions.
Insurance companies, Insurance brokers, Agents, Assessors.
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Duplication and Overlap: E.G. Fund managers regulated by the
CMA and RBA; Heavy costs of compliance; Increases opportunities for regulatory
arbitrage.
Result
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Monetary policy
Systemic
stability
Market integrity Disclosure Consumer protection Corporations Law
Prudential regulation of
- deposit taking - life insurance
- general insurance
- superannuation
Payments
system
Reserve Bankof
Australia
PaymentsSystemBoard
Australian Prudential Regulation Authority
AustralianSecurities and Investments Commission
Australia’s regulatory framework
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Regulatory Incentives
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Regulatory Incentives
Simplification of Regulatory Framework:
A consolidated regulatory framework encompassing retirement benefits, capital markets, and insurance.
An Information Technology Bill to Promote E-commerce
– We can only compete through deregulation of telecoms (vsat and large bandwidth connectivity for ISPs).
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Regulatory Incentives
Improving Access– Micro Finance Act– SACCO Act– Development Banks
Policy on Participation of East Africanseast African investors should be accorded the same treatment
as domestic investors.
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Response of the Capital Markets
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Our Aim: Improving market Accessibility
In 3 years, ensuring 6.0 million from the current 3.0 million Kenyans has access to financial services.
Becoming more relevant by establishing market segments for indigenous institutions – the Over the Counter (OTC) Market.
Banks serve the Top 5%
Cooperatives serve the next 15%
80% of Kenyans have no access to financial services
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CHALLENGES
Limited access of the public to Financial Services
Expensive Capital
Regulatory Environment is biased towards control rather than enabling
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WE ARE SAYING THAT
shareholders can be increased in the market through: – Listing of Co-operatives and SACCO’s on the
OTC– the use of collective investment schemes
(CIS’s), which will give individual investors an economic way to invest in the capital markets.
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OUR VISION OVER THE COUNTER (OTC) MARKET
We have taken up the challenge of working towards setting up an OTC market, that will provide an efficient and transparent mechanism to transfer shares for clients.
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OTC MARKET INFRASTRUCTURE
The use of the automated infrastructure for the OTC Market.
Provision of a market infrastructure for indigenous firms:-
Cooperatives;SACCOs;Micro finance;Farming marketing organisations.
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WHAT AN OTC MARKET IS An OTC market is A market that provides an
arrangement for transferring shares that are not listed on a stock exchange.
While it is desirable to have shares traded on a formal stock exchange for the most effective pricing mechanism to be effected, an OTC market acts as the next best alternative by ensuring transferability.
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AN INCUBATOR.
IMPACT CORPORATE GOVERANCE PRINCIPLES. SHARE OWNERSHIP VALUE CULTURE OF COMMERCIALISM EVENTUAL LISTING ON THE MIMS AND AIMS.
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CRITERIA FOR LISTING ON THE OTC
Paid up share capital of not less than Ksh. 5.0 mil.
At least One class of shares admitted.
Not less than 10% of paid up share capital held by not less than 7 shareholders.
Share capital:
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Adequate management capacity to maintain business.
Satisfactory track record.
If no profit history, good performance prospects for the business.
Track record:
Criteria for Listing on the OTC
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WHAT CAN THE NSE DO FOR COOPERATIVES
Provide a safe and secure trading environment (Automated NSE).
-The Automation of the clearing, settlement, registry and depository function of the Capital Markets has began.
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INTRODUCTION
The Co-operative Movement is a major player in our economy. There are:– 944 Agricultural Societies– 3,925 Savings and Credit Societies– 1,392 Other non-agricultural societies.
The Savings and Credit Co-operatives contribute substantially to the mobilization of domestic resources.
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NAIROBI STOCK EXCHANGE
USING THE CAPITAL MARKETS TO MOBILISE DOMESTIC AND FOREIGN
CAPITAL
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A New Way To Privatise
Instead of a Strategic Investor, privatization should involve listing of shares of former
state enterprises:For the following reasons:
Corporate Governance; Capital Markets Absorptive Capacity:
– The Capital markets can absorb Ksh. 20.0 billion per Quarter (as shown by the listing of GoK T Bonds).
Democratization of ownership: Indigenous private individuals and institutions can own shares in privatized institutions.– More company profits are distributed to locals
and less is repatriated abroad.
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FUNDING FOR INFRASTRUCTURE (1)
Social Investment Bonds:
Channeling investment byCorporate Entities into
Education,Healthcare, Housing,
Micro Finance, andEnvironmental Conservation
medium – long term funds to these sectors.
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FUNDING USING SECTORAL VENTURE CAPITAL FUNDS
Sectoral venture CapitalFunds (SVCFs):
A viable long term financingalternative
to Bank funds
public private partnership (PPP)to re-capitalize & reconstitute
as SCVFs,
Agric. Finance Corp. (AFC);Kenya Tourism Dev. Corp. (KTDC);Indust. & Comm. Dev. Corp. (ICDC);
Kenya Indust. Estates (KIE).
World Bank Funding
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ASSET BACKED SECURITIES
Residential mortgagesSpecial Purpose Vehicle (SPV)Takes title of the mortgages
one payment from one source, once a monthCoupled with book based custody system
The cash flows passed through to the investors in the form
of an asset backed security (Mortgage Bond)
Applicable to credit card receivables, automobile receivables balances
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REAL ESTATE INVESTMENT TRUSTS
Real estate assets – residential
and commercial property;loans secured by mortgages;
leases on property
Special Purpose Vehicle (SPV)Takes title of the assetsAnd issues shares to the
investors
•Current, stable dividend income;•High dividend yields that exceeds the rate of CPI;•Make previously illiquid real estate assets liquid by enablingtrading of shares of listed REITS so allows convertibilityof underlying assets to cash;•Allows participation by institutional and retail investors;•Professional management by skilled, experienced real estateProfessionals of the assets by the REITS managers - skill
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NAIROBI STOCK EXCHANGE
REGIONAL INTEGRATION
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VIRTUAL EAST AFRICAN STOCK EXCHANGE
Automated Broker Front and Back Office on a Wide Area Network.– Order receipt and
confirmation via the internet, 24 hours a day, 7 days a week.
• Virtual Linkage to Kenya, Uganda and Tanzania.
Information vendor – links to Global information using services distributors such as Reuters and Bloomberg.
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IMPLEMENTATION PROGRESSION: MASS CROSS LISTINGS IN AN EAST AFRICAN STOCK EXCHANGE
Kenya : • 52 listed companies (Kenya
Airways and EA Breweries already cross-listed in UG). 4 corporate bonds; 68 Govt. Bonds.
ADD
ADD
ADD
Uganda:5 listed companies (2 whose
primary listing is Kenya). 2 Corporate and 2 Government of Uganda bonds.
6 listed companies. • 14 Govt. Bonds.• 3 Corporate Bonds
61Companies;85 Bonds
An instant increase in Number of listed companies of 17.3 %.
An instant increase in Number of Bonds by 25.0%.
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THE FUTURE OF THE CAPITAL MARKETS INFRASTRUCTURE
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AUTOMATION
Technology drives growth.
the market automation project currently on going in the capital markets gives Kenya the opportunity to take a critical look at the current clearing and settlement environment and implement a robust and modern clearing, settlement and central depository and Automated Trading System environment for the whole East African region.
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TECHNOLOGY PATH
The NSE’s technology path in line with the overall market
automation strategy, has four sub projects, namely;
1. Central Depository System - CDS
2. Automated Trading System - ATS
3. Broker Back and Front Office System - BFO
4. Real time Information Dissemination
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BFO SYSTEM
Order Capture
Order Routing
Trade Confirmation
Market Dissemination
Risk Mngt
Portfolio Mngt
Client Acctg / Record Keeping
Corporate Actions
Back Office
Front Office
THE TRADING CYCLE
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Web Front-end
(Internet Explorer)
Web Front-end
(Internet Explorer)
BFO
Front/Back Office
BFO
Front/Back Office
BFO – Web Interface:Connection to Web-enabled BFO via callable APIs
BFO – Web Interface:Integrated Back Office and database functionalitySecurity capabilities to restrict access to BFO
Gateway
Internet
Firewall
Firewall
WEB INTERFACE
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NAIROBI STOCK EXCHANGE
CONCLUSION
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WHAT WILL WE BECOME?
Kenya will be the virtual centre of the East African Regional Stock Exchange
Over 500 listed companies in the region by 2012
At least 100 companies cross listed with leading equity markets in Africa, London and New York Stock Exchanges
Availability of venture capital from at least 15 funds, 5 of which are quoted on the exchange
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NAIROBI STOCK EXCHANGE
THE END