Has the Nairobi Stock Exchange bitten more than it can chew? The number of complains coming from investors about the service they get from the NSE are overwhelming. The announcement that some of the KenGen refunds are yet to be received by the investors more than eight months after the IPO was concluded has opened a Pandora’s Box of what is happening behind the scenes. Gross inefficiency is written all over the KenGen refund issue.

Over the years, NSE has proven potential for growth. It has attracted a lot of investors, both local and foreign. Its growth is however uneven and has left many investors disappointed by the service they get from the market players. There are a lot of inefficiencies both from the stockbrokers and the CMA that go unattended to even after numerous complains.

Everyone is invited to the NSE to invest in IPOs, even overpriced ones like the recent Mumias Sugar Ltd . Over-enthusiastic investors join in the stock market wagon without due diligence and find themselves trapped with very little shares and a refund cheque they don’t know how to get back. After several fruitless calls to their broker, they throw in the towel.

The NSE’s problems are numerous and dynamic. We should deal with them by looking at the market’s structural problems and inefficiencies. At its inception, the capacity of investors that can be sustained by the market may not have been considered as it was initially meant for few strong corporate firms attracting equally large net worth investors. It was like a rich man’s club, with few investors who were, at times, directors of the listed companies.

With increased investor education and good economic conditions, more investors have been attracted to the market consequently shifting the paradigms of the market and  over-stretching the original market structure. The big, older and long term investors who have seen the NSE through the tides are now facing a run for their money. However, most of them are raking in huge profits as they capitalize on their patience, time preference and extensive market knowledge.

The entry of several small, short term investors with little knowledge about the market has created a near perfect market with competition, supply and demand factors that drive the market. Although small investors have come with their own speculative methods of trading, it works wonders in the short term but it is bound to break even in the long run.

Small investors cannot afford to have their monies held in refunds or any other inactive form. Some of them, whose disposable income is not large enough to allow for enough savings, borrow the money they invest. They are dependent on the short term returns made on these speculative investments to repay the loans and have some money left to speculate with.

Another form of inefficiency is the information imbalance that creates an advantage of some investors over others. Well versed investors have access to insider information. Devoid of this, the new small investors can’t trade competitively as they are always on the losing end. Take the case of Uchumi. Just before the company was declared bankrupt, some well connected large investors with insider information were able to sell large volumes of shares they held in this firm. Most probably, small investors bought them.

Cases of investors complaining of brokers who don’t listen to them; taking long to make requested transactions for their clients; giving the wrong information about client‘s accounts; or making transactions at worst bargains are common. These scare away many foreign investors and dumpens the investment spirit in the NSE. Out of frustration, one foreign investor from the US said that he can only invest in Kenya’s equity market only when it allows investors to transact for themselves directly {like they do in developed stocks markets}

What is the way forward?

The amount of investment in the NSE exceeds the structure put in place for investment in equity. The NSE, which is an emerging market, has more investors than the Johannesburg Stock Exchange {JSE}, which is the biggest and most efficient bourse in sub-Saharan Africa. There are just about 100,000 account holders in the JSE compared to about 600,000 cds accounts holders in the NSE. In Kenya, the appetite for investment in equity is higher than the amount of stocks offered in the market. The preconditions for a firm to be listed in the NSE have kept potential firms out of the market without an alternative of soliciting expansionary funds from the public. This has made the demand for the existing stocks in the market to rise, consequently pushing the prices so high that most of the stocks in the market at the moment are considered overvalued.

The CMA should consider making the requirements for a company to be listed a bit flexible to accommodate more firms in the NSE. Potential and willing firms that have a great growth propensity can be evaluated and allowed to seek public subscriptions of their shares. There should be mandatory listing of firms that provide basic services such as electricity, water, transport and telephony. Firms such as Safaricom, Telecom, Rift Valley Railways, Coca-Cola bottlers and Adopt-a-light should be listed. This will not only give the public a chance to share in the wealth of these firms but also have control over their management.

Alternatively, we can have an Over-The-Counter {OTC} market that allows small and emerging businesses to sell their shares to the public easily. Since most companies in Kenya are small to medium size, they are not able to fulfill the requirements for listing in the main equity market. This does not mean they should not be able to access funds from the public. Having an OTC trading system would help a lot to incorporate them  in the NSE and increase even further the available stocks to the general public.

For the brokers, having more stock brokerage firms incorporated in the market will help  ease congestion in the already existing 24 firms. It will also increase competition among the brokerage firms, which will go a long way to improve the quality of service delivery to their clients. Stock brokers and agents should also be subjected to stiffer penalties in cases of misconduct such as inattention. The CMA should tighten its rules on who ought to become a broker and how they are supposed to operate.

The NSE has a long way to go to achieve full efficiency such that all the market players shall be in harmony. As we tread this long road to optimality, which not even the developed stock markets can claim to have reached, let’s not leave the investor behind, disgruntled by the services provided. Let’s nurture small firms and encourage big ones so that we don’t burn our fingers, end up with bankrupt accounts and a have a collapsed market.