The main goal of capital markets is to facilitate the channelling of funds from investors, who could be individuals or institutions, to businesses and governments. The funds from investors could be channelled into the capital markets as either loan, whereby the investors are paid back by the businesses or governments their principal amounts plus interest after a particular period of time, or invested in businesses, whereby investors own a portion of the businesses and are entitled to any future earnings that the businesses will earn. Businesses then use these funds to expand their production capacity, improve their distribution networks, clear maturing loans and pending payments, conduct marketing and research, and also invest in other projects.
Over time, Kenya’s capital market has evolved and achieved a number of milestones which have catalyzed the growth of Kenya’s economy. Some of these milestones include:
i. Issuance of Real Estate Investment Trust (REITS), which are regulated investments vehicles that pool funds from investors and invests the funds in income-generating real estate projects such as Fahari I-REIT from ICEA Asset Management LTD, ASA-I-REIT and ASA-D-REIT from Acorn Holdings Africa, Local Authority Pension Trust (LAPTRUST) Imara I-REIT from LAPTRUST pension scheme
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ii. Launch of day trading, whereby investors can buy and sell the same company shares several times during a single day, capitalizing on the short-term changes in prices of shares,
iii. Introduction of Fractional trading allows investors to purchase less than a whole share of security. The move is aimed at increasing market activity by opening up access to stocks that would otherwise be out of reach due to high prices.
iv. Creation of Sandbox, which is a platform created by the Capital Markets Authority that allows people to test their Capital markets products and technology before rolling them out,
v. Launch of the Unquoted Securities Platform (USP) to facilitate the trading, clearing, and settlement of securities from companies that are not listed in the Nairobi Stock Exchange (NSE). The platform allows for the Capital Markets Authority to provide oversight on the transactions conducted, thereby providing safety to investors.
Read more: NSE Bond Turnover Drops 14% in Q1 Amid Challenges
vi. Establishment of the Growth Enterprise Market Segment (GEMS) to enable venture companies without a profit history as well as small and medium-sized firms. The move is aimed at encouraging more companies to source funds from the capital markets.
vii. Continued approval of corporate bonds which have seen companies such as East Africa Breweries Limited, Family Bank, Centrum Investments Company and Kenya Mortgage Refinancing Company (KMRC) issue corporate bonds
As much as there are significant developments in Kenya’s capital market, we still lag behind when compared to other capital markets of developed countries such as South Africa, which was ranked as the most active capital market in the continent according to African Capital Market Watch 2018 report by PWC, due to its strong financial market infrastructure and robust legal and regulatory framework. Some of the barriers that hinder the growth of Kenya’s capital market include:
i. Restrictive regulatory frameworks – Trustees play a very important role in Collective Investment Schemes (CIS) by ensuring that the other service providers perform their functions accordingly. Unfortunately, the current regulatory framework seems to lean towards qualifying banking institutions as investment funds’ trustees exclusively. The status quo is especially unideal given that banks compete directly with capital markets, bringing about possible conflicts of interest
ii. Hostile environment to private offers – Unregulated markets are governed by the prevailing contracts between the participating parties, and therefore they are not regulated by a specific regulator; however, the process of offering is usually regulated so that it follows a set of defined rules and guidelines. Unfortunately, the growth of unregulated products in the Kenyan capital markets continues to be curtailed by the lack of regulatory support, which has fueled the misconception that private offers are unsafe destinations. This has made investors shy away from private offers and also limited businesses from using private offers to source funds
iii. Obstacles to REITs capital formation – Based on the current regulations, the minimum investment amount for D-REITS is Kshs 5.0 million, which is quite high, considering that 75.0% of Kenyans earn below Kshs 50,000. Therefore, only a small number of Kenyans can invest in D-REITS, and this has hindered the growth of D-REITS
iv. Inadequate Knowledge – Inadequate knowledge among some investors and the general public has led to less participation in the capital market and overreliance on bank funding, which, according to the World Bank, has seen banks in Kenya provide 99.0% of the funding with other alternative sources of funding such as the capital markets providing only mere 1.0%
v. Past corporate failures – Some investors have in the past lost money in the capital markets, and this has led some to have a negative perception of the capital market, thus making it difficult for them to participate in new offerings if they are to come into the market.
vi. Complexity in issuers’ approval processes – The cost and complexities encountered by companies seeking to issue their securities in the Nairobi Securities Exchange (NSE), have led potential issuers to shy away from the capital market, evidenced by the fact that only 65 companies have been listed on the NSE since its official declaration.
In conclusion, the growth of the capital market is hinged on having supportive regulatory frameworks that will ease the process of approval of potential issuers and support the growth of private offers to encourage businesses to use the capital markets as an alternative to bank funding when looking for financial support, while at the same time ensuring that investors funds are safe and investors have a diversity of products to choose from, thuds propelling investors’ confidence in the capital market and thus making them more willing to put their funds in the capital markets
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