Capital Markets Authority Indicted

Published on 13th June 2006

Calm is finally settling in after the panic selling caused by the collapse of Uchumi Supermarkets Limited.  The index, is gradually regaining points and the most active counters are picking up their positions.  At the close of trading on June 12th 2006, the bourse gained 4.93 points or 2.3% to close at 4194.59 points. Mumias Sugar Company, the highest traded company on the Nairobi Stock Exchange (NSE) gained from a low of Ksh. 55.50 as at 7th June 2006 to Ksh. 61.00 as at 12th June 2006.  

As the market slowly rejuvenates, it is important to note that the occurrences have served a good lesson to many equity investors, as they have realized that one can be a millionaire overnight (as witnessed in the KenGen IPO) or end up a poor man for the rest of his life- as was witnessed in the Uchumi collapse. But as with all speculative markets, risk takers will take positions when the market is at its lows. 

Even more important to note is the fact that we have a potential investment population that is almost equivalent to the number of Kenyan voters being served by only eighteen brokerage firms.  We are still struggling to cash in on all our funds on the few available options.  If you are an investor, you probably can’t remember the number of times you have issued a sale order and not executed until you had to call your broker reminding him that he still needed to buy or sell your securities.

Our market has only 18 players that have been registered since it was founded in the 1950’s.  Most of these have been in existence since then other than Sterling Securities Limited.  However, Sterling Securities was in operation in the 1980’s to 1990’s, closed down and revived in 2005.  This leaves the market with no new entrant for a decade.

With such a situation at hand, there is very little room for competition.  This has encouraged unprofessionalism in the industry.  You will be surprised at how many times you miss a good deal at the expense of someone with a bigger account than you do.  Frequently, brokers have told their clients that they were unable to execute their orders because on that particular day, they were ‘dealing for their institutional investors’.  When you are in such a predicament, you have no choice but to wait until the day when the stock broker goes ‘retail’.  Sad enough, this could be long after share prices changed tremendously.

The management of most brokerage firms stands a big test.  Notably, most of the brokerage firms are family owned and have adopted a very cyclic management system where the next of kin is always the person to take over.  This has attracted a traditional approach to trading where fundamentals do not apply.  It is not wrong to argue out that due to this, the same management has paved its way to control the regulators and the other players namely the Capital Markets Authority (CMA) and the NSE. The implications of this are increased protectionism when it comes to encouraging new players and sticking to old rules. 

The current family set up of the brokerage firms has also kept talent at bay.  You will perhaps agree with me that there has been very limited research and commentaries that come from brokerage firms and investment banks.  Contrary, the Fund Managers and Asset Managers have done limited research aimed at giving buy and sell recommendations geared towards their client needs.  For the many years that the NSE 20 Share Index has been the basis of investment for most of its users, there has been no research or proposal sent for approval to CMA.  Compare this to the United States that has over 10 Indices rating the performance of the overall market and at least one index rating every single market segment.  Being the market pros to their routing trading activity; stock brokers and investment banks are the only people who can steer growth as far as research is concerned.

Other than Dyer and Blair Investment Bank and Kestrel Capital, no other investment bank has invested heavily in research.  Early this year, Dyer and Blair released a comprehensive, unbiased report on KenGen.  Earlier on, the same firm did a valuation on East Africa Cables and Mumias Sugar Company.  Recently, and less than 3 months ago, Kestrel Capital, a stock brokerage firm released a report on the listed banks. After releasing the report that exposed the banking industry as very volatile, most banks have had a bumpy ride and may not recover.  Most affected was state owned National Bank of Kenya (NBK) whose share price has dropped from Ksh.46.00 to Ksh.36.00 in a period of less than one month.  The report exposed the NBK’s over Ksh.4 billion in bad and doubtful debts of which the current CEO, Mr. Marambii, is unlikely to recover from the government that has owed the bank for over a decade.  More and more research in all segments could drive the market to the right direction.

How much can a market be competitive if 18 firms serve a population that has to queue everyday for a Ksh.20,000 deal or a client has to leave office to have an account readied?  One has to spend so much productive time queuing when the procedure could have been handled faster were there more players in the industry. The outcome of encouraging more players is enormous because it will not only ensure speedier execution of service but pool in talent that the industry is thirsting for.

The CMA has a major weakness that is yet to be unraveled.  Unlike the Central Bank of Kenya (CBK) that has been on its toes in the regulation of Commercial Banks and the Monetary Policy, the CMA has been in hibernation.  The CMA has taken too long to offer incentives that would encourage more brokers and investment banks in the industry but it has also been unable.  Their weakness is also being demonstrated by their inability to allow the opening up of an Over The Counter (OTC) market which thrives in many countries.

Due to CMA’s weakness, there has been a huge retail market that has sprung up since September 2005 in the form of small starters who practice as agents at a commission ranging from between 20-50% of the brokerage fee.  Although this is a good starting point for practitioners in the industry, it denies many entrepreneurs the opportunity to receive full commission for the clients they serve very diligently and with a lot of professionalism.  Indeed, the agents also need their cover to limit underpaying by the powerful brokers who control the industry.

The CMA takes the blame for our underdeveloped equity market.  Whether they adopt an electronic trading system or not, nothing is likely to improve.  It goes without saying that real growth should start from the root- the brokerage firms.  My recommendation would be that the CMA encourages more players (brokerage firms and investment banks) to get into the industry. I would also encourage the CMA to get tougher on regulation. This will call for industry scanning and allowing for public scrutiny. I would propose quarterly publication of accounts in the dailies in the same way commercial banks do. This should be done with the help of external auditors to guarantee transparency. My justification for this is the fact that like commercial banks, they too are handling public funds and like a listed firm, it is of importance to know that a firm is not highly exposed and be assured of its credibility.  

With such measures, there would be no cases of losers in the stock market as was witnessed in the Uchumi collapse where shareholders could not even get the par value of the share. The CMA recently came up with the Investor Compensation Fund.  Let us wait and see if after that, there will be other innovative products geared towards helping the investors.

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