Ratio Magazine :: The Inside Track to East Africa’s Economies - Deepak Dave takes a closer look at the challenges that face Kenya’s Capital Markets Authority (CMA)

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Deepak Dave takes a closer look at the challenges that face Kenya’s Capital Markets Authority (CMA)

Tuesday, 15 April 2008

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Deepak Dave takes a closer look at the challenges that face Kenya’s Capital Markets Authority (CMA) as East and Central Africa’s largest-ever IPO is under way. The enthusiasm for the Safaricom IPO – Kenya’s largest mobile operator and the country’s most profitable company was barely dampened by Kenya’s protracted wrangling over the cabinet appointments after a violent start into 2008. And, in fairness, it should probably rank as one of the sturdiest transactions in the recent history of the world’s equity markets: It has overcome a fraught bidding process for the advisory role, court appeals, murky ownership issues, the absence of a Capital Markets Authority (CMA) boss and, of course, a government shake-up with a borderline-civil war before reaching the market. Realignments, partnerships and alliances between brokers, banks, fund managers and agencies continue merrily and every business remotely linked to finance muscles is trying to get a piece of this pie.

That the equity market excites such a degree of interest is excellent. It is in Kenya’s interest for a vibrant, liquid, well-regulated and well-run financial sector to develop. The key pillars for this are a decent-sized local investor base; a credible regulatory system and a support network for the market to function.

Given the size of the country and population, there is little chance the government can abandon other sectors and focus on one. The onus for development must then fall upon the body that has a key role and a clear self-interest. This body is the CMA and hence the expectations of its new leader.

The CMA needs a roadmap. A number of bodies have come up with the grand plans for how the capital markets in Kenya ought to look. And CMA dutifully signs up to all of these. Unfortunately, the body first needs to define and explain its own role in achieving those plans. Subsequently it would oversee delivery on the targets.

One of the first tasks CMA ought to set itself is getting a firm grip on the Nairobi Stock Exchange (NSE). At present, the authority of each of the two bodies in the regulatory arena is murky. Shockingly, the failure of two of the country’s most prominent brokerages, representing 10% of the seats and a considerable proportion of investors, has led to no regulatory sanctions. Buck-passing and mud-slinging aside, the failure of Francis Thuo and Nyaga Stockbrokers should amply demonstrate that there is a dire need for supervision as much as regulation. Examinations of trading patterns, rapid response to investor complaints and a robust rule on how CMA can take over control of a broker could have prevented a collapse that almost everyone in the industry admitted they knew was coming.

We need to recognise that in a country with a largely unsophisticated investor base, weaknesses within the judicial system and rudimentary capital markets, the major bodies in the financial sector need to co-operate, if not in fact collude, at times of major change or crisis. At present, however, I see little evidence of there being any deference to the CMA as the champion of the interests of the capital market. Indeed even the Central Bank of Kenya (CBK) has recently lost its primary position as supervisor of the banking sector, with treasury and the NSE having taken over this role. Banks’ share prices as opposed to either their loan book or liquidity seem to be more important. This is a fallacy and one we could all pay for dearly.

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