The Kenyan capital markets are crying for disruption
Structured well and enabled the capital markets can be a great catalyst for economic growth and employment in Kenya and indeed the region. Picture this, in 2020 the US federal government earned US$ 170 billion in form of capital gains taxes from trading in securities and properties, that is approximately 3.0% of the US government budget in that year. By contrast in 2019 the government of Kenya earned Ksh 2.9 billion or the equivalent of a paltry 0.1% of the government budget in the same year! Furthemore it is estimated that over 270,000 people were employed in the US securities trading industry in 2021. These are well paying jobs with the average stock brokerage base salary estimated at US$ 58,000 or Ksh 6.4 million a year while it would take you several years of service to earn 20% of that in Kenya.
Questions must be asked as to why the capital markets have remained a muted contributor to the economic fortunes of the country. Why is it that only a small propotion of Kenyans participates in the capital markets anymore. Recently is was revealed that over 97% of NSE accounts remains inactive. That is over 2.2 million Kenyans who had interest to particapate in the capital markets but which interest has waned. Only a palty 66,000 accounts are actively trading which is suprising in a country with over 17 million actively employed adults, over 6.0 million membership in Savings and Credit Co-operatives (Sacco). Over the past decade banking deposits in Kenya have grown from US$ 15 billion to over US$ 37 billion as at the end of June 2021. Prima facie the issue then is not availability of investible funds.
A recent article by Cytonn provides a consice highlight of recent developments to re-invigorate the capital markets and the challenges impeding that growth. As with any marketplace the challenges can be classified into two — supply side and demand side challenges. I will venture to argue that alot of effort has gone into tackling the supply side challenges (policy frame work, product diversification, funding etc) and little towards addressing demand side challenges which i briefly point out below.
Three key challenges that hamper the growth of capital markets and which create prime conditions for disruption. Players who move fast to drive the disruption stand to create a sustainable advantage and reap a tidy sum. The strangling triad of challenges are; a general lack of awareness on the ins and outs of investing in capital markets, poor availability which raises barriers to participation and affordability barriers that make it costly to participate.
Lack of Awareness On How To Participate
Scant investments have been made over the past 5–10 years to raise awareness of the existence of the capital markets as an alternative investments class — not in the media, not in CSR programs, not in educational programs, not even in political rhetoric.
Recall the euphoria that greeted the IPOs of the 2002–2010 era, scenes that may be long forgoten to many Kenyans. In that glorius decade when news of IPOs was all over our faces and we saw the common mwananchi warm up to this new investment vehicle that was hitherto the preseve of the rich and the ‘informed’. That is when the bulk of the 2.3 million trading accounts poured into the market.
Photo: Business Daily Africa
Growing up in the 1990s rain soaked green hills of Nyamira county i was exposed to the stock market at an early age. My father (i must ask him how he started) owned shares in NIC bank, Uchumi and KCB. Back in the day listed companies sent a physical copy of their annual reports, nice glossy pieces of work that filled the void of magazines to a village boy. Nestled between copies of Hamlet, Julius Ceaser and the grossest skin deseases book i have ever set my eyes on, these glossy pieces of art were an easy read and i would pore over them without making much of what the numbers meant or what monumental decisions one would make from them. Daily pricing data was only published in the newspapers (unless you could walk yourself to the trading floor) and financial performance
Contrast that with the situation today, If i was a betting man i would wager that less that a handful of the 1.2 million kids who just completed their KCPE (Grade 8) exams have ever heard of the capital markets, the NSE and what it does. If politicians are to be believed, these kids will walk into high paying jobs in 8 years time when they graduate college or will plunge into entreprenuership building the next unicorns. Unfortunately for them the choice assets class of their fathers’ generation — land and buildings — will be out of reach (as we are told, real estate prices never depreciate) leaving the capital markets as a VERY viable investment alternative — competing with Banks and Saccos. But how will these Kenyans — full of cash and tech savvy — participate if they don’t know about capital markets.
Although we live in the information age with multiple channels to reach the investing public at a very small fraction of the cost it took to reach me. Inertia still persits amongst the market makers in driving awareness in order to recruit new investors and re-recruit lapsed users of their platforms. This inertia is a suprising development considering that market players have been experiencing dwindling profitability over the past 5 years — both the NSE and brokerage firms.
Lack of information is not only on capital markets as as an assets class, but all includes information to maked informed decisions on one’s investments. The whole information value chain must be reformed if the NSE, CMA and their intermediaries hope to pique the interest of potential investors. To engender confidence information availability should be predictable and reliable. Take for example a seemingly simple matter of the corporate calendar, approximately when companies will release their financial results. It is a cat and mouse game with many firms seemingly without a calendar (i dare you to put together one for 5 firms), many announcing results late or issue profit warnings days before announcing the results (what is the use of a warning). It intrigues me that multinationals like Unilever or Bank of America can issue results within 1 month of their year end while the likes of Flame Tree Group or CIC insurance at the NSE take 3–4 months. Furthermore some companies only do annual reporting while best practice suggests quarterly results announcements.
Quality reporting should be the corner stones of providing investors with adequate information so they can make sound decisions. Reporting at the Kenyan capital markets looks more of a tick the box exercise vs. meant to inform investors and potential investors on how the business is run, its risks and opportunities. The standard of reporting has not improved from what is used to read in the early 90s. Compare the reports of Prudential Plc and Britam Plc, you will see that NSE reporting is designed around presenting the numbers with giving enough context to interpret those numbers.
The Capital Markets Are Not Available
I will make an assumption that if you are reading this article, you know where and how to participate in the capital markets. Now cast you eye to that cousin or aunt of yours in the village back from the market selling milk or vegetables, do they have simmilar access to the capital markets. Today Kenyans have access to the worlds capital markets through online platforms and apps, a situation that has proven hard to replicate for a country that prides itself with standing up the Silcon Savannah. The securities exchange should an efficient market place that brings together buyers, sellers and issuers of securities and that will not happen if market players don’t knock down barriers by embracing technology, simplifying pariticipation rules e.g. KYC
Availability for supply side (issuers) primarily driven by stringent rules of listing e.g. 5 year profitability has kept many potential issuers out of the market. Contrast this with leading markets in the world, from the shores of New York to those of Mumbai anything in between, where companies built on ideas and unproven financial models go to IPO everyday. Risky as it might apprear these events drive price discovery and provide necessary capital for these businesses to improve and finese their models and turn profitable eventually.
I dont know which is worse, the fact that the NSE somehow is not an attractive capaital raising and price discory option for household names like Bidco ,Menengai, Western Sugar, , Keroche, MRM (CPG), Naivas, QuickMart(Retail), AO Bayusuf (Logistics), APA, AAR (Financial Services), Auto Express, KVM (Auto) or that even plothera of stock brokers (Financials) or that even the plothera of market intermediaries like Dyer and Blair, Ghengis, Sterling Capital Kestrel Capital have not found it worth to list their shares.
Another example of the availability issue is market information. Investors need two sets of information — day to day security price and historical information (security prices, financials, corporate actions,etc) to make informed decisions on their investments. What exists in the market is at best a mosaic of facts, rumours and opinions. The NSE and market intermediaries generates and receives so much data in a day. You will be forgiven to think they will structure and monetize it but lo and behold they sell it in raw form. Your best source of well organized and structured historical data is Reuters.com — which lucky is available for free. The best repository of investor relations documents remains African Financials.
Securities Trading Is Not Affordable
Affordability remains a cardinal barrier to entry for most people into the stock markets. The 1.78% fees charged by market intermediarias on each trade are exhorbitant (easy for me to say). The market regulators take 0.32% in fees leaving approaximately 1.5% to a brokerage house. The current brokerage pricing model is the silent killer of the stock market activity and potential. Consequently, what should be a vibrant market place has turned into a fixed investment vehicle where the brave dump their monies and wait for dividends.
Questions must be asked on what value the broker adds to an investor on each trade. By virtue of their license the broker executes the order on behalf of the client . Few brokerage houses actually provide value added services like research, infomation (tackled above), financial planning, etc. The best retail investors do their own research and make their own decisions. The lazy ones receive tips from a broker of what to buy or sell, 5 minute phone calls driven by the need to generate the 1.5% fees than the value they add to the investor.
Take the example of a brave investor with a capital of Ksh 500,000 who chooses to invest in the stock market. Assuming an active year (a rarity at the NSE these days) and the investor ends up making THREE trades. The first a +10% gain of their first investement (nominally a very decent return), then another +10% gain in their second trade but now faced with a -10% value decline on their third purchase. That investor will suffer a combined real return of -23% on their capital at the end of the year largely on account of the brokerage fees and capital taxes. On the first 2 trades the investor makes a net return of 3.9%, loosing the equivalent of 3.5% to fees and another 2.5% to taxes each time.
Factor in the opportunity cost of investing in the stock market, for example other assets classes are returning about 10% for a good Sacco, 11% for Infrastructure bonds, 4% for fixed deposit accounts not to mention shylocking and sports betting. It is easy to see why many are staying out of the stock markets. Indeed the CMA has identified these competiong alternatives but worryingly little is being done to tackle the situation.
On the other hand if brokers charged a fixed fee per trade say Ksh 2,500, that would make the loss more tolerable. It would halve the loss in real terms while being marginally profitable in nominal terms up +3.6% for the year.
The current brokerage pricing model is the silent killer of the stock market activity and potential. Consequently, what should be a vibrant market place has turned into a fixed investment vehicle where the brave dump their monies and wait for dividends. Markets world over have automated securities trading giving rises to ZERO or FIXED trading fee platforms, which has seen many Kenyans pour into online trading from commodities to stocks to forex to cryptocurrencies. These platforms make money from providing value added services and have driven the growth of both liquidity and receruitment of new investors into capital markets. Reforms in the brokerage pricing model are long overdue.
Akin a three legged stool, these challenges must be address together and toto for the turnaround efforts to succeed. Addressing only one e.g. awareness as recenty proposed by the NSE will only make a stool standing on one leg which will eventually collapse to the ground — a waste of time and effort. If the sum of these reforms/disruptions induced the 2.2 million dormant accounts to transact once a year at say a fixed fee of Ksh 2,000 per trade (which is high by world standards); this would inject an additonal Ksh 5.0 billion into the pot for capital market players. imagine if they could TRIPLE the volume of transactions on those accounts
