How can we turn around a fast declining listing trend?


Experts say that Kenya has possibly the most developed security market in East Africa.  The Nairobi Securities Exchange (NSE) is ranked fourth in economic size, behind Johannesburg (JSE), London (LSE) and Lagos (LSE).  But why do we have alternative markets, like derivatives, in South Africa but not in Kenya?

There was robust activity at the stock exchange with a number of companies listing at the market in the push for privatisation, especially in the 1980s. The most notable companies listed were Kenya Commercial Bank and National Bank of Kenya. Then there was a lull until the 2007 when Safaricom Initial Public Offering re-ignited the market.

Alexander Owino, a financial consultant, was secretary to the 2013 Isaac Awuondo-Abdikadir Mohammed Taskforce on parastal reforms which, among other things, proposed the establishment of a holding company known as Government Investment Corporation (GIC) to exercise ownership, investment and oversight roles for all state firms.

He spoke to Victor Adar, reflecting on gaps in capital markets.

What are your thoughts on the Safaricom’s Initial Public Offering (IPO) that took place11 years ago?

Safaricom listing gave us two things; it showed that the state of loading stakes in significant business in public enterprises is a major source of development in the capital markets.

What would be the main indicators for success that a company like Safaricom relied on? Was the IPO a windfall to Kenyan investors?

It’s a significant listing. Safaricom listing gave us another aspect of ‘bananas coming to the market’. It was good to see retail investors piling into the market, and Kenyans queuing to buy stock. It was socialisation of capital market. Every small man could own a stake in the company. Sadly, Safaricom’s IPO was just like the mythical beast.

The retail investor (Wanjiku) was led by very rosy, optimistic projection of massive return, which did not materialise. Then an element of disillusion set in such that the small investor has largely exited from capital markets, coupled with poor performance of the economy especially since 2014.

The Capital Markets Authority comprises two wings: one being corporate debt otherwise called corporate paper and the corporate bond market  division that deals with IPOs. You can also issue equity securities at the CMA. But what has stopped private sector players from taking up the opportunity?

It is sad that the last three major corporate bond listings by the private sector have all gone up in smoke. Once, Chase Bank listed a bond and essentially defaulted. Imperial Bank also issued a bond and collapsed soon after. Troubled retailer, Nakumatt, collapsed after issuing two corporate bonds under private placement amounting to Sh5.3 billion in total. The last successful private corporate bond is 10 years old, the Safaricom one and that of Airtel in 2005.

So clearly, the market for corporate–commercial paper, which are basically unsecured, short term debt instruments issued by corporations– has structural challenges, especially regulation.

Why did the CMA give its approval to issuance of corporate bonds by companies that collapsed soon after? Is it a failure of regulation or is it corporate fraud?

With scenarios and structures like that the private sector will not buy your bond, and the capital market will not develop. As a result, Kenya remains saddled with a bank-led capital market instead of a capital market-led financial sector.

It has been tough for the NSE to make private sector regain appetite. Ideally, blame can be laid squarely at corporate governance weaknesses and the fear of public transparency and accountability to shareholders.

Kenya’s private sector is largely dominated by family owned companies such us those of Karume, Manu Chandaria, Chris Kirubi, Bidco, Devski Steel, Doshi Group and Tuffsteel.

Founders who have since passed on started many of these companies and they are not being managed successfully. They have not engaged succession. As a result the younger generation at the helm have descended into a nasty and ugly family disputes and boardroom battles as well as court cases. The Popat family business in which siblings are fighting for stakes is a case in point. These families also fear loss of control that would come with listing.

In addition, the private sector despite the loud noises, has never embraced the capital markets for structural reasons. Essentially, the private sector has gone AWAL (absent without leave). The State is also missing in action.

What’s the best way to move forward?

A very clear separation of commercial from non-commercial corporations is needed. To achieve that purpose, the blue ribbon task force recommended establishment of a government investment holding company (GIC) that would take over the ownership stake held by Treasury and own the shares of commercial state corporations on behalf of government.

The transformation reforms recommended by your taskforce failed, in which countries have such reforms worked?

The radical recommendations sort to conform to best global practices, which is exemplified by leading government investment companies like Temasec in Singapore, Khazanah of Malaysia, and China Investment Corporation of China.

In Africa, the closest equivalent is public investment commissioners of South Africa, and a similar GIC (Government investment Holding Company) in Senegal – which has been there for about four to five years. There are many more others (state investment companies) across the world. These shareholders play a critical role in the development of the capital market.

What did you hope to achieve with the 2013 blue ribbon taskforce?

In deed, the task forces’ objective in establishing the GIC could have by now resulted in as much as 30 state corporations being listed, four years down the line. This would have comprised state corporations that are established as companies like Kenya Pipeline Company. Another could have come from corporatising state corporations with a significant private enterprise component such as Kenya Airports Authority and Kenya Ports Authority. Away from Kenya is the British Airport Authority, which is listed.

Are there other ways to make things happen?

Looking at Government linked corporations like KCB and National Bank of Kenya, the government could have seen a lot more sales in the Capital Markets Authority by embracing GIC. For example, there are many stakes we own that could have been offloaded into capital markets. In every respect GIC could have operated like a fund manager managing a portfolio of assets with sole objective of maximising the risk adjusted returns over the long term.

This makes a GIC identical to a sovereign wealth fund. Across the world they have same objectives. That could have seen 100 companies listed by now, which could have made our stock market one of the most vibrant in the continent. Listed companies at the moment are actually 54 in number.

Do you think the government investment holding company would have paid off?

Yes. It would exercise all the rights of a shareholder and ensure the sole objective of managing on a commercial basis is achieved. It would separate commercial state corporations from ministries, which are channels for political interference, nepotism and corruption. We need to resist the culture in which chief executive officers or directors are appointed by government.