Ratio Magazine :: The Inside Track to East Africa’s Economies - Kenya: Where Are Retail Investors in Bond Issues?

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Kenya: Where Are Retail Investors in Bond Issues?

Monday, 12 October 2009

Encouraged by the Safaricom and KenGen bond issues, Deepak Dave finds that the CMA has gained new ground under Stella Kilonzo. However, retail investors have been left out of this comparatively safe investment opportunity.

It was encouraging to see the news of the highly successful recent placement of the KenGen and Safaricom corporate bonds: Given the decline of the stock market and the ongoing battle in the long-running war between CBK and the banking sector on interest rates, there is clearly a large pool of capital that believes in the Kenyan story and wants to invest.

There is much to commend Stella Kilonzo’s tenure at CMA and she has started to fulfil many of the hopes I expressed when CMA was searching for a CEO . So I lean towards an optimistic view of the new and improved CMA, finding it considerably more effective than its old incarnations. However, there has been sniping about the speed with which CMA allows bond issues to come to market and thus deepen the traded debt markets. This was an important criticism, and indeed not the only one in the context of the bond issuance. My key concerns mainly relate to the involvement of retail investors:

One of the useful contributions CMA could have made was to assert the right of retail investors with less than KES100,000 to participate in the bond issues, through collective purchases or community-organised investing. This would at least have given lower income Kenyans an opportunity to buy into a relatively safe investment with predictable return. I find it even more puzzling that the commercial banks did not open accounts one could place a deposit into, with a bulk purchase on behalf of that banks’ clients of the bond.

Given the wild enthusiasm then displayed to get small retail shareholders to pile into Safaricom shares, one would have hoped for equally vigorous efforts. I have previously criticised how the CMA failed to manage the Safaricom IPO process. It was a high-risk investment made worse by the share purchase loans from banks for the very people who could not afford the risk of share investing in the first place. In mitigation CMA was leaderless. And unforgivably, the Central Bank of Kenya (CBK) was as always inscrutably absent when it came to protecting consumers.

Also, I would question the tax free nature of the interest payments on the KenGen bond: Since the firm deducts interest costs from its tax bill, and that interest is not taxed at receipt, the exchequer loses out both times, which is hardly good news for development funding – or overall tax revenues, in fact, given that slow growth already acts as a constraint to public finances.

Overall, however, the bond issues have much to be commended for. Safaricom has layered its borrowing to prevent a liquidity pile forming on its balance sheet, KenGen has been able to access substantial funding for badly needed infrastructural development and Kenyan capital has played a key role in filling corporate financial needs. Kestrel Capital and Standard Investment Bank earned kudos as local brokers alongside experienced global players in placing the issues and there was strong local participation and awareness by investors, legal and transactional advisors and the like.

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Challenge for stockbrokers and others
written by Tom Minney, October 13, 2009

I think the challenge is for the intermediaries. In Namibia and many countries, the stockbrokers, insurance companies and banks run money-market funds or unit trusts and these channel retail funds into bonds, bills, bank deposits, etc. If they operate systems that work for large numbers of people, including minimum balance, easy transfer from and to current accounts, and maybe charges on more than 2 withdrawals a month, the system can work well and encourage more savings within a regulated environment.

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written by rob stangroom, October 28, 2009

Its not the intermediaries as they are not incentivised to engage retail investors. Retail investors are horrible things and there are a lot of them. It costs a lot to engage them just look at the cost of placing an ad in the press or the cost of radio coverage. The only beneficiary is the issuer. The issuer must come up with ways of engaging the retail investor. There is only one platform to use and thats the Internet which is only step one. Next you need the tools to communicate automatically with retail investors - but how do you find them overnight or within the 3 weeks you have to raise the cash. You cant. Its impossible. Thats why issuers need to engage their retail investors for the long term so that at any time in the journey of life the communication channel is there. Too much effort? Absolutely which is why retail investors will continue to be an opportunity only on paper.

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written by rob stangroom, October 28, 2009

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