The popularity of the stock market has gained momentum in the African markets in the recent past.  According to the African Investor, the Ai 40 Share Index was up by close to over 4 percent in June and July, recovering some lost ground from the global emerging market earlier in May. Nigeria still ranked the best performer, producing five of the 8 best performing stocks in the region.

There has been development in terms of capitalization and systems. Three African stock markets moved from the open shouting system to the Automated Trading Systems (ATS) the latest being the Nairobi Stock Exchange that follows Egypt and South Africa.  Others are already making great strides in being part of the global village. The latest development so far comes from Kenya’s stock market, Nairobi Stock Exchange, which adopted the ATS on September 11, 2006. 

With automation and efficient market development, room for market manipulation is sealed and chances for quick gains will fade.  This pushes the market into other investment options that could be more promising unlike shares.  Of much attention is the fixed income securities that includes the corporate treasury bills and bonds, debentures and asset backed securities, the most popular being the mortgage-backed securities (MBS).   

Treasury bills and bonds are already popular in many African markets with the risk adverse investors opting for them in place of shares that are not guaranteed of return.  The latter, mortgage backed securities are less popular.  With the construction boom that is being experienced in the country, such a product comes in handy.     

Asset backed securities are securities which are based on pools of underlying assets such as credit card, receivable mortgages or automobile loans.  Their performance depends on the underlying assets. The cash flow from the underlying assets are the primary source of payment on the asset backed securities. 

In Kenya, the most typical securities that can be explored are MBS and revenue-bonds backed by levies and mortgage repayment streams. Compared to the other fixed income securities, mortgage securities are priced at a higher yield than treasury and corporate bonds of comparable maturity but their opportunities for profit (and loss) are also greater.  They may be sold at par, at premium or at a discount to their face value.  As with other fixed income securities, MBS prices fluctuate in response to changing interest rates. If interest rates fall, prices rise and vice versa.

In the US, where fixed income securities are most developed, they are traded Over The Counter (OTC) and not at the exchange.  They are offered in minimum amounts ranging from $1,000 to $25,000 depending on the issuer. They are bought and sold between dealers and investors much like other debt instruments.  Dealers trade the security at a net cost which includes their own spread or profit on the transaction. However, the United States, other than the age advantage of its capital market, enjoys a very vibrant Securities and Exchanges Commission (SEC) that is always on the forefront to the development of the markets.  This is in contrast with the African markets that are characterized by absence of vibrant market makers (investment banks and underwriters).

In addition, the short term view by the few market makers and the majority of investors makes it impossible to add any new products into the market.  Most investors walk into investment banks/brokerage firms with the view of making short term returns. 

It is not only the investing public that is a misnomer to the development of these instruments, but there is also the ‘crowding out’ effect by government instruments and borrowing. Excessive borrowing by the government from the public suppresses the need for other financial instruments in the market because excess supply of money is absorbed by the government.

And of more importance is the lack of knowledge exhibited by players, intermediaries and regulators.  The dormancy exhibited by the Capital Markets Authority is a sign that they lack a proper formulation and implementation team in spite of the underlying potential of the African markets. Moreso, there is no regulatory framework for such instruments which makes it hard to implement them.  

If implemented, such instruments will herald a new era of investment within the capital market, in a scenario where there are only traditional instruments like bonds and shares.  This is possible, but it requires the existence of market makers who are able to bring together willing buyers and sellers, a knowledgeable base of primary and secondary dealers, including investment banks, products which take into account liquidity surges and troughs and finally, a vibrant regulator.