Can the Capital Markets Authority be Trusted?

Published on 3rd March 2009

Stella Kilonzo, CMA C.E.O, Photo:courtesy
The goings on at the Nairobi Stock Exchange do not startle many. According to a Mr. Ndungu, a long time investor at the bourse, “Haya yote tu ni mambo tumezoea.”(We are used to all these). Mr. Ndungu has witnessed the closure of Francis Thuo, and later on Nyaga Stockbrokers where he had transferred his shares.  He is not sure if his new-found love will meet his expectations. This is after recent rumors that a large investment bank might be facing fraud related financial difficulties.


Mr. Ndungu is not alone. The industry has been on a roller coaster ride for the better part of 2007 and 2008. That’s just one side of the challenges. On the flip side, we still have the safe investor who is still at pain over the declining NSE 20 Share Index from a high of 6000 points to the 2800 recording as at this week.  How further down his investment will plunge is the question on every investor’s mind.


Worry still grips many over high inflation rates and less credit access from banks. There was the unlucky lot that financed their share purchase through bank loans.  Whereas the bank still has 17 percent to reap from the Kenyan, there is the possibility of over 60 percent loss on the principal borrowing - a loss that is too much for many to bear.   


Majority of Kenyans are now caught in a catch 22 situation; frustration over the recoverability of the shares held through stockbrokers/investment banks which is a governance failure and the loss through declining stock prices.  The latter is as a result of rising inflation and the global economic meltdown.  Who should they run to? 


Kenya’s Finance Minister seems to have decisively taken the matter seriously. For once, he is speaking tough about dissolving the Capital Markets Authority (CMA) board.  Isn’t it soothing when this comes at a time when people have been waiting for someone to act?  I think so. But again, isn’t it true that we don’t learn from mistakes?  Isn’t it also true that Members of Parliament speak to gain political mileage but not in pursuit of solutions?  Is the Minister aware that one who decides to put down a fire starts with the place where it burns most viciously?  Will dissolving the CMA solve the prevailing challenges within a very powerful yet ‘independent’ system? The Finance Minister’s decision will win him political mileage but may not solve the crisis. This mileage will not last in a situation where the problem is deeper than it appears. Already there are rumors that three investment banks risk closure.


The bulk of the problem, I believe, lies with the Nairobi Stock Exchange.  The place that one would only describe as too secretive, yet too important for the economic growth.  It is at the NSE where the ownership of the largest companies changes hands, where the performance of the key sectors of the economy is monitored, where the confidence index of the best CEO’s and board chairs is dictated, where we all make money and lose it at the ring of a bell. 


It is this same powerhouse that has for decades been a rich man’s club, a club where 18 members can actually toast and decide who is worthy of joining them by payment of a heavy fine- for a course never clear of the market.  It is the same powerhouse that has had no explanation when one of their own does not meet the investors’ obligations of paying what is due when it is due.  While taking action, haphazard action will not get us out of the ‘closures and fall in confidence’ cycle.  A three stem approach is necessary to curbing the troubles with our market.  From the core all the way to addressing the public failures.


The most important step would be the demutualization of the Nairobi Stock Exchange (NSE).  This option has been mooted for ages yet it is just as simple as any company choosing to go public.  The team at CMA is capable of authorizing this, given the opportunity. Demutualization of the NSE would create the much needed governance and transparency in the place where the market needs it most.  Once that is achieved, both the CMA and the investing public will be in a position to tell when things are not right with any broker or investment bank owing to the accessibility of performance related information. 


If demutualized, there is better accountability and the action to be taken on ghastly players is reached at by a well chosen board. We have had suspect transactions that the public never gets to know.  I have in mind the Kes. 100,000,000 bail out of Nyaga Stock Brokers where it is alleged that some investment banks were awarded part of the money meant to pay the investors who had lost their money.    


The Minister’s recent statement should be taken seriously.  Reform in the CMA is long overdue.  The current team has done a lot in ensuring that compliance within the sector is maintained through regular monitoring.  Players are required to submit their performance on a monthly basis as a check on best practice.  They have also introduced surveillance that tracks daily activities during trading sessions. 


The CMA deserves credit for being the only licensing body that requires licensees to apply for a license on an annual basis- a process that involves a lot of screening and interviews. Perhaps they could go an extra step and ask the licensees to publish their accounts in the dailies as banks do.  If done, red flags would be raised in a timely. 


How possible is this to achieve?  CMA on its own cannot push the powerful individuals at the NSE and that has been well demonstrated in the past especially during the presentation of a proposal to split stock broking activities from investment banking.  A multi-step approach will first entail the demutualization, then a closer effort between the Finance Ministry and the current team at the CMA to ensure that stakeholders fully comply.  Once that has been done, players can collectively stage a campaign aimed at restoring CMA’s confidence in the market.


The first step would however entail acting tough on the goings on at the NSE.  That’s where it all starts, and from there it  shall  all come to an end. 


By Michael Musau

Chief Executive Officer, Emerging Africa Capital


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