CMA: Are You Open for Business?

Published on 20th June 2006

Remember the East Africa Industries (EAI)? It was once a company that thrived in the post-independent Kenya whose operations perfectly fit the classical monopolistic theory. Being state owned the government took control over the price of all commodities in the market. An attempt to introduce new players in similar lines of production barely bore fruit. It served the direct opposite of what globalization brought along with it. EAI goods and services stretched far and wide from the cheapest toiletry to the components of the three major meals of a day. As its glory faded with the onslaught of globalization, with it went classicism in business. Unfortunately, the EAI concept has been in hibernation, only to unravel in some company called the Capital Markets Authority (CMA).

I am very disappointed with the current spate of events at our capital markets especially the existing cartel created by the CMA that bars new entrants in the equity market. Due to this, investors still cannot capitalize on the underlying benefits of the market to reap good gains. The market has turned out to be a place for only eighteen players making money through dubious accounts and rarely concentrating on client’s needs.

Early this year, Chris Mwebesa, the Nairobi Stock Exchange (NSE) CEO was upbeat, advising Kenyans to capitalize on the emerging stock market as an investment option. He however failed to mention the underlying need for more brokerage firms and investment banks to be awarded with operating licences and to get into the industry. As a result, the few players who exist have turned the business into a personal affair; transacting as they wish to on behalf of their clients and at many times delaying trades to the advantage of institutional investors. As a result, many small investors have ended up being even more frustrated in an activity that should be all exciting and benefiting

The CMA is wrong to fail the registration of more industry players. The regulators of the industry today comprise of the same people who own the existing brokerages and investment banks. In opening up the industry, they feel that they will be at a loss in as far as deals per day are concerned. This is locking out the enthusiasm, energy, and professionalism that characterize the U.S investment banks and other first world economies. The Securities and Exchanges Commission (SEC), the equivalent of the CMA allows the public to submit comments on all the rules that govern the industry in the US. Through the public opinion, rules are amended as often as possible for the good of the general public. It is due to this that they have many laws that govern almost every aspect of the market no matter how minor it appears to be. In addition, its website is online, and updated daily to enable investors file complains, ask questions and access other resources that are crucial to investors; both citizens and foreigners.

If you remember the KenGen share frenzy, then you realize the overwhelming task the brokerage firms are having and how much we need the CMA to open up to more willing players. A broker recently told me why even leaving work at 2100hrs has become a norm recently. Another one said that sometimes, they don’t close the office at all. To overcome the huge workload, some investment banks have had to subcontract part time staff to work overnight while the regular staff work during the day.

Who is benefiting from all this? Your answer is as right as can be. But concern arises over who loses from the same. Of course it’s you and I- the entrepreneur in you who cannot present a proposal and get a timely feedback from the CMA. The least that the CMA should do, if not to register more brokers is to allow the Over the Counter Market (OTC) to take care of extra deals in the market and cater for small clients who need quick liquidation of shares to keep their other businesses running.

Currently, the trading system is set up in such a way that trading takes place between 1000hrs and 1230hrs at the NSE trading floor. Afterwards, dealers are required to do allotment of shares purchased or sold on behalf of their clients at their brokerage houses/investment banks. However, there have been many instances where brokers swap purchase/sale orders of clients or allot the shares meant for clients to their own accounts or those of colleagues. Since most clients do not understand the reconciliation process of their CDSC Statement of Account and that of the broker, they hardly get to know what happened when they get shares that they did not ask for or at prices they did not expect- either too high or too low

At such instances, a client will call to enquire about his/her order. Even when activity was limited in the market, you are likely to be told that the market was not good therefore you have to wait until the next trading day. By then, prices will have probably soared by a huge margin, sometimes even by more than 10%.

This raises the question: which rules govern the operation modalities of the brokers? Besides that, do they have what it takes to practice in the industry? If they do, are necessary measures being taken to ensure that investors, especially those with little investment funds are concerned? Do they have an ethical duty to act diligently on behalf of their clients? According to the CFA’s Standards of Professional Conduct, a member must deal fairly and objectively with all clients when providing investment advice and taking investment action. However, this is a body that probably only 1% of our brokerage firms are members to. It thus translates to the fact that none of our member firms is party to this. And just to point out why it is worse than you think: please find out what is driving the National Bank of Kenya (NBK) prices upwards even after the report that exposed the inability of the CEO to get back the Ksh.4 billion ($55m) of bad and doubtful debts. This is absolute market manipulation that no one is willing to point out. According to the same standards, this is transaction based manipulation in prices as they are being artificially distorted. Later the same brokers will dump the stock at a higher price which will then drive the prices downwards.

We don’t need a governing body that exists by a virtue of the name. I recommend that:

  • More brokerage firms and investment banks be registered

  • An OTC market operates in the industry

  • A body that is out to protect the small investors- people with an investible income of not more than Ksh.20,000 ($270) of which they invest in shares be formed

  • The CMA website be relaunched hence allowing people to seek advice and report flaws in the market.

  • A parallel stock market that caters for more willing investors be set up. (There is a lot to learn from Egypt Stock market ( which already had a parallel stock market (Cairo and Alexandria). The US also has a similar model with the NASDAQ and the NYSE playing a very crucial role and the underlying competition providing required industry strengths) and

  • Research in the industry be encouraged. How come we only have 2 indices for a market that is over 50 years old? The AIG 27 Share index and the NSE 20 Share index have already stood the test of time and there is need for more.

CMA has had its doors closed for too long. I believe that it is time they opened up because entrepreneurs, scholars, investors and the foreign investors are out there knocking. CMA should realize that before one goes to the market, he must be sure that he will not be welcomed by rioting vendors and idlers. In the same way, an investor eyeing the US market will first see what the SEC says about international investors before trying out at either the NYSE or the NASDAQ. This is because the regulator always determines how the market performs. A bad regulator translates to a bad industry.

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