Kenya still dominates financial markets in East Africa

Even though in recent years Kenya has lost its grip on the title of king of East Africa, the country has continued to retain her position as the most advanced financial market in the East African region. 

According to the Absa Africa Financial Markets Index 2019, Kenya has retained the same overall ranking of 3rd out of 20 economies as it did in the previous year. 

Kenya was able to garner a score of 65, with only South Africa and Mauritius above it, with 88 and 75 respectively, leading in the East African region, followed by Tanzania, Rwanda, Uganda and Ethiopia which scored 55, 53, 52 and 27 respectively. The Index was based on six pillars; market depth, access to foreign exchange, capacity of local investors, legality and enforceability of standard financial markets master agreements, macroeconomic opportunity, and market transparency, tax and regulatory environment.

In terms of pillars, Kenya registered its highest score in the pillar of legality and enforceability of standard financial markets master agreements. It was ranked second with 96 points trailing only Mauritius, which scored 98. The pillar examines how well countries have adopted internationally accepted legal standards based on their recognition of master agreements, the enforcement of netting and collateral positions, and the adequacy of insolvency regimes.

Kenya also registered a high score thanks to insolvency law it enacted in 2015. The law has encouraged rehabilitation through the administration of companies facing financial difficulty. Through amendments, the law has also offered companies going through insolvency procedures more flexibility to be able to continue their business. In addition, the law is also under review to encourage lending to recovering insolvent companies.

Other individual pillars where Kenya has managed to top her neighbours in East Africa include; market depth where the country scored 55 points thanks to the increase of the value of its listed sovereign bonds. However, due to the rate cap, the business environment has been challenging leading to the reduction of credit creation and the expansion of firms. 

The other pillar focuses on capacity of local investors where the country scored 39 points while three quarters of the countries scored below 50 points. According to the index, the pillar looks at the size of pension funds relative to their local stock market capitalisation to indicate how much potential there is for institutional investors to propel capital market growth and market liquidity in terms of turnover. 

Despite a growth in pension assets in Kenya, government securities and real estate account for a large number of these thus hampering the funds contribution to capital market development. However, in terms of savings, innovative products such as the M-Akiba infrastructure bonds, which were issued earlier this year, have increased investment options and financial inclusion by enabling retail investors to access the bond on their mobile phone at a minimum investment of Sh3, 000. 

With the rest of the pillars, Kenya played second fiddle to her neighbours. For instance, when focusing on the access to foreign exchange, Uganda and Rwanda were able to surpass Kenya, which had topped the overall list last year. Kenya managed a score of 65 due largely to the international monetary fund reclassifying its exchange rate from floating to other managed arrangement. This was after the IMF through its October 2018 Article IV consultation with Kenya, determined that there was an overvaluation of about 17.5% of the real exchange rate. 

On the pillar which focuses on macroeconomic opportunities, Kenya was second in East Africa with 67 points trailing Uganda with 69 while on the pillar which assesses countries’ regulatory and tax environments for financial markets, Kenya was third in East Africa with 71 following Rwanda and Uganda which had 85 and 73 points respectively. Despite better relationships between financial institutions and the central bank, which has improved reporting standards, the introduction of taxes such as the increased levy on mobile cash transactions has discouraged investors.

Kenya has retained her position for the year although several east African countries are catching up. Uganda and Rwanda are on the rise especially with their current reforms. Kenya needs to improve if it wants to retain its title come 2020. 

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