Recent Developments in the Kenyan Financial Markets
mandated to invest only in the real estate
2013 had been a roller-coaster of events:
Kenya Ltd, Fusion Investment Management
Westgate attack, general elections, Lupita
Ltd and CIC Asset Management Ltd in April,
Nyong’o’s Oscar nomination etc. 2014 is off
2014.
to a relatively good start. Lupita won her
Venture capital (VC) has been brought to
Oscar afterall. Interestingly, 2014 is also
the media limelight recently with the well-
promising for the financial markets which
documented success of HeshanDeSilva,
are poised to be robust in many aspects.
Kenya’s youngest billionaire. What most
Kenya has an established futuresmarket.
people have failed to realize is that VC has
The market is yet to embrace the concept
been existence for a while and the Capital
and so we shall have to wait and see how
Markets
this will play out.
Regulations 2007 clearly defines a VC.
The Nairobi Securities Exchange (NSE)
More and more VCs continue to spring up
recently marked its 60th Anniversary with a
though they need not be registered with
proclamation that it will list on the same
the Capital Markets Authority (CMA).
exchange. In an environment where recent
One of the revelations has been the private
IPOs have failed (Safaricom, etc.), it will be
equity (PE)sector that continues to gain
interesting to see how the NSE will tackle
prominence in Kenya. To understand how a
it.
PE fund operates, just picture a show like
The adoption of Real Estate Investment
Shark Tank or Dragons Den. The difference
Trusts (REITs) is set to take root later in
is that instead of funds being invested in a
the year. These are basically unit trusts
stake of a start-up, it is invested in an
sector. These securities have been applied globally and successfully in developed countries and in African countries such as South Africa, Ghana and Nigeria. The CMA has approved certain REIT managers: Centum Asset Managers Ltd and UAP Investments Ltd in December, 2013; Stanlib
(Registered
VC
companies)
established company that needs growth.
More often than not, PE funds invest in
Deals that were in the pipeline but did not
small and medium enterprises (SMEs) for
succeed
about five years, gaining returns of 30%
manufacturer Tiger Brands buyout of
and above on exit (IPO, acquisition,
Rafiki Mills and Magic Oven Bakeries, and
management buyout, partial exit via re-
that of KenolKobil by Puma.
financing).
Transactions by PE funds include Fusion
The Kenyan PE market has for a long time
Capital Sh245 million acquisition of a 45
been dominated by Centum, Trans Century
per cent stake in GAL Baking Services, and
and Actis but other PE funds have emerged.
the entry of German based DEG’s in
There are currently about 45 PE firms in
reinsurer Zep-Re. French based Amethis
the country with more setting up shop.
Capital and DEG also bought into mid-sized
Some PE firms double up as VC firms since
lender Chase Bank.
they basically do the same thing but VC firms prefer start-ups. However, Kenyan companies prefer to be bought out by cash-rich corporates rather than cede shareholding to private equity funds that would pressure for returns. Some of the buyouts in the Kenyan markets include
that
of
Paul
Kinuthia’s
Interconsumer Products by French-listed cosmetic giant L’Oreal last year at an estimated Sh1 billion. Other recentlyconcluded deals include the purchase of motor dealer CMC Motors by Dubai based Al-Futtaim and that of Access Kenya by Dimension Data of South Africa. Unga Group is
in talks
to
buy
Ennsvalley
Bakery in a share swap estimated at Sh446 million.
include
South
African
Bottom line So, what do these developments mean for the market? Well these developments reflect a need for modelling of securities and markets that have been successful in other countries to fit the Kenyan sector so as to incorporate phenomena unique to Kenya. Can you imagine taking a long position on a futures contract by using your mobile phone? The development of the futures market will most likely lead to more efficient use of forward contracts. Forward contracts are already in use (KQ on oil prices, etc.) but the exchange futures will provide a proxy for the forward prices. Hedge funds are likely to
spring up since they use
derivatives for arbitrage, hedging and
evidence that aid has helped in job creation
speculation.
and reduction of poverty in Africa.
There is also limited regulation and legal control. There is no law governing PE in Kenya, for example, but the CMA has authority to issue necessary regulations. The new products will need development of laws by legislators in conjunction with finance specialists. In a pre-dominantly accounting-based economy, there will be need for persons with financial expertise. The future seems bright so we have to be prepared!
Aid should therefore not be seen as a solution but the problem to African countries.
It
has
various
negative
incentives as it discourages investment and entrepreneurship Africa
as
accountable.
the It
and
disenfranchises
governments also
are
makes
not
Africa
governments take a back seat and wait for help in addressing all their problems rather than actively addressing their problems.
Solomon Maonga BBS-Financial Economics
She believes time is ripe for Africa to stand
DEAD AID: WHY AID IS NOT WORKING AND HOW HERE IS A BETTER WAY FOR AFRICA
on its feet as an equal partner on the global stage. Some of the solutions she offers include drawing up a five year plan whereby the aid to Africa will be systematically reduced. She adds that the governments can raise funds through the capital markets e.g. by issuing bonds. Moreover, more focus should be given to having an environment that will encourage an increase in foreign direct investment.
By Dambisa Moyo Dambisa
strongly
She argues that it will be better for the talks
against
government to government aid. She argues that aid doesn’t necessarily make a country better off. For instance, there has been no
donor
countries
to
give
money
to
entrepreneurs to start up or grow their businesses rather than the governments to avoid the money flowing to a few greedy individuals.
Focus on Quality
Quality is one word that is rarely used in the same phrase as most African produce. I believe it is time for us to rethink our
Each one of us is ingrained with the
approach to quality. I look forward to the
capacity to achieve greatness. We can all
day when the phrase“African� will be
be great and it is only the size of your
synonymous with High Quality. But to get
dreams and the strength of your beliefs
there, some of our ideas have to be turned
that will define you. It is on this note that I
on their heads.
have to express my dissatisfaction with how most people let their dreams fade into nothing more than mere fantasies. I am disheartened to think of the dreams that would have changed the world but did not. The people who would have left a mark in the world but, sadly, did not. I look forward to the day each of us will seek to live their dreams. I look forward to having less dreams being found at cemeteries and more being lived. To live our dreams, we need to be driven by more than just fantasies. We need to believe in what we do and what we can be. I think that we will achieve more than our wildest imagination when we are ready to shed our misguided misconceptions and adopt more enlightened ideas. The most important idea we should embrace first as people, and even more importantly as Africans, is that of Quality.
In seeking to achieve quality, we must seek to continually improve. The simplicity of this statement belies its importance. Quality should be an overriding objective. We should not limit our attempts at attaining quality to merely just one field but rather we should apply this philosophy to every aspect of our lives. Every single moment should
be driven with the
intention to attain the highest quality. The first thing one should focus on is to set objectives. The objective should not be impossible to attain as this would cause disillusionment.
However, the objective
should at least have the capacity to stretch you beyond your comfort zone. Once one has set an objective, one should not rest until the target is attained. This would set you on the course of attaining high quality. This article is by no means exhaustive but is rather intended to start you thinking of how do build quality. Quite essentially, the
first step is usually the hardest and it’s
not want to remember. Many Wall Street
easier once the journey has started.
analysts
referred
to
it
as
“Shambles.”
Facebook’s stock prices plummeted for weeks
One step at a time, we can attain
immediately after the IPO. Three weeks after
quality. The onus of responsibility rests
the May 2012 IPO,Facebook had lost $35
with each one of us. Challenge yourself
billion of its market value.
because that is the only way you can know the limits of your ability.
The sudden decline of the share prices is attributed to analysts’ actions; they reduced their revenue estimates for Facebook just
Kigen Chelimo
before the IPO which of course had an effect on
Information
the market. Investors’ confidence in Facebook
Power
they held leading to a price decline.
reduced and people started selling the stock
They went on a ‘damage-repair’ mode and their stock price rebounded to $32 which
Ever since the whooping $16 billion whatsapp
translates to a market capitalization of around
buyout by Facebook Inc., I have had quite some
$66
bit of interest with social media valuation. The
messaging
interest actually started with Facebook’s IPO.
Inc.signaled growth prospects which are likely
The dynamics of social media company
to giveinvestors’ confidence about the future of
valuations
the company.
are
different
from
those
of
‘traditional companies’. There is revenue for both of them but a significant difference when
billion.
Their service
acquisition of company
online
Enter Twitter
it comes to costs. Social media companies’
Twitter Inc. is the latest social media to be
main value driver is user growth which is
listed though the company is now succumbing.
complex to value. For instance, what is the
At the time of listing, Twitter’s IPO prospectus
value of having one million users (of the social
pointed out two metrics which are of
media) to the company? I find the absence of
particular importance in evaluating it.
no
definite
valuation
structurequite
fascinating.
One was its number of monthly active users and the other was timeline views. However, in
However, how the Facebook IPO performed, I
February 2014, it told investors not to worry
believe is something Mark Zuckeberg would
about the number of monthly active users
because it was no longer an important
All the fluctuations and trends in the stock
measure of engagement.This statement came
prices of Facebook Inc. and Twitter Inc. are
at a time when the number of their ‘timeline
brought upon by changes in information and
views’ was decreasing and the company’s rate
the information that is available to the public.
of adding new members was decreasing. The
This is consistent with the economic theory
statement did not go well with investors as the
that stock prices are reflective of information
information
that is in the market.
contradictory.Consequently,
seemed its
stock
startedplummeting hitting a record low of??? sinceits IPO.
Comparing that with our local market though, I doubt whether our securities exchange is as sensitive as the NASDAQ or the Dow Jones. This
Though its closing priceon 8th May, 2014 was
shows that we still have a long way to go in
$30.66, the trend is not encouraging for
terms of developing our market especially with
Twitter as major securities companies and
regards to information availability. This is a
brokers havea sell rating on the stock.
challenge posed to the policy makers and market players. Author: Daniel Kalya
Investing in the Money Market: Yes or NO?
I
f you are a risk averse investor with a conservative amount of money with the intention of investing in the short
term,
your
investment
opportunities are quite extensive and diverse therefore a perfect fit is non-existent. However a proven investment vehicle is a money market fund.
A money market fund involves investing in
money
interest bearing assets
managed
such as
fixed
fund
is
therefore
professionally relieving
an
deposits, commercial paper, treasury bills,
investor the burden of carrying out
bills of exchange and treasury bonds to
extensive research orbearing the
provide a steady growth of income and
consequences a random portfolio
stability in the capital invested especially
selection. Fund managers constantly
during times of volatile market performance.
monitor the portfolio based on
The key benefits ofinvesting in such a fund
research information.
include:
Despite the fact that the money market is
Low initial investment requirement
most suitable for investors who require
of between Ksh 50,000 to Ksh 500,
regular income and for whom capital
000, according to the Capital Market
growth is not a prime objective, large
authority. This therefore caters to a
corporations invest as well. The money
wide array of investors.
market allows corporations with a
Liquidity
and
flexibility
as
an
investor can easily withdraw funds on short notice without incurring penalties.
start moving upward, money market fund yields quickly adhere to the same trend unlike those of bank savings accounts. It offers an average net rate of return
of 7%-8% p.a. which is clearly higher than any bank deposits for a minimum investment. presents
delegated
term securities such as treasury bills, cash deposits call accounts, commercial paper, corporate notes and treasury bonds.
Historically proven that when rates
It
temporary cash surplus to invest in short
an
can utilize the money market to secure short-term loans to meet their working capital requirement. In spite of money market funds being the lowest risk variety of mutual funds, they are not risk free. Loss of purchasing power can really harm money market fund returns due to inflation. Similarly,
opportunity
decision-
By the same token, large corporations
making.
for A
persistent low rates as well as the
variability of rates have made money
In his model of crime and punishment, he
market funds relatively undesirable.
looks at criminals as rational individuals
Whether it is a conservative investor or a
who seek to maximize their own well-being
large company looking to utilize the
but through illegal means. This came to him
money market, a thorough assessment of
while driving to an oral exam with PhD
the opportunities and drawbacks of a
students and was in a dilemma on whether to
money market fund must be taken into
park closer to a spot that was illegal or to
consideration. It is guaranteed that the
park in a lot which was somewhat farther
money market will always offer the
away. This probed his curiosity to derive a
lowest risk investments. Thus, to invest
solution for crime.
or not to invest; it all depends on your
In his model, he comes up with various
preference.
mind-blowing solutions. He proposes that
Author: Charles Miano
punishments should be limited to fines. This is because it becomes a win-win situation
MAKE THAT CHANGE.
for both the government and the criminal in that, the government gets compensated while the criminals won’t be imprisoned
With the high level of crime in Kenya today, it makes me question the government’s aim to not only promote safety to its citizens but also to improve the current state of unemployment
in
the
country
which
thus saving the government the resources of having to employ guards to look after the criminals. This may only work in various kinds of crime like over-speeding but in cases of murder, this may not hold.
currently stands at 40%. We are all living at
He also proposes the legalization of drug
a time of uncertainty with terror threats
dealing. In as much as this may flatter the
being sent every other time and also the
Black Disciples organization, the aspect of
negativity currently in the press.
social welfare and moral responsibility will
A great economist, Gary Becker, is known as the great social scientist to have lived and worked in the 21st century. He used economic models to solve social problems.
be thrown down the drain. The health of drug users will deteriorate and it is not an assurance that the level of crime will diminish. Therefore, a solution to the drug
menace would be to engage the youth in
student’s abilities and students. Echoing
activities like sports so as to act as an
MJ’s words, “Let us realize that a change
incentive to channel their energies to
can only come when we stand together as
positive activities.
one.”
However, of most interest to the Kenyan
Author: Grace Kamau
scenario, is the proposition that we need to reform the education system as a solution to crime.
By transforming
the
education
system, we can promote a culture of entrepreneurship across all generations so as
Global Banking: The Regulation Question by Cyril Wandanje O.
to create and appropriate value in society.
Ever since the collapse of Herstatt Bank in
The transformation of the education system
1974, global banking regulation has
will also develop talents of the young by
always been top of the political and
providing a platform for them to show case
economic policy agenda.
their talents and will also help them achieve self-actualization. By introducing technical learning
institutions
as
a
form
of
transformation of the system, it will provide students with skills that will help them appreciate blue-collar jobs instead of only relying on white-collar jobs.
Of course, the actions of regulators after the collapse have ended up defining the world of banking as we know it today: the formation of the Basel committee for banking
supervision;
the
subsequent
coining and definition of a new term: Herstatt Risk to denote cross country
In order for it to be a reality, our leaders
exchange
need to take up their roles of policy
developments.
rate
risk
among
other
formation and implementation to change the current state of education in the country. It is
The formation of the Basel Committee was
also up to the smallest unit in society, the
expected to improve global regulation and
family, to encourage their children, whether
supervision of banks, especially focusing on
male or female, to go to school. It also takes
Globally
Systematic
a group of dedicated and motivated teachers
(GSIBs).
What
to impart knowledge and nurture each
establishment of accords: Basel 1 and Basel
Important
followed
was
Banks the
2 developed from the shortcomings of the
coordinated is the fact that most of the
former; and currently, Basel 3. Each
regulation is still at the national level. For
subsequent
the regulation of multinational banks,
accord
provides
stricter
regulatory provisions.
Basel of 2 had set out the regulatory
Enter 2007 and the global financial crisis starts,
exposing
the
acute
capital
inadequacies of many GSIBs, particularly in their
operations
economies
of
in
Europe
the
advanced
and
the
US,
occasioned by participation of the banks in risky derivative-instruments transactions. What followed has been well documented: the collapse of several banks and other financial institutions, the largest of which – Lehmann Brothers – nearly brought the entire world economy to its knees. The collapse highlighted some of the deficiencies of Basel 2 and most of these were considered and incorporated in the creation of Basel 3, which now promises a global system of more resilient banks and banking systems.
responsibilities for their home country regulators
and
their
host
country
regulators. The aftermath of the financial crisis however saw host country regulators stepping
up
regulation
and
on
multinational
imposing
the banks
certain
operations within
of their
economies, which would traditionally be under the mandate of the home country regulators,
for
example
introducing
guidelines of holding independent capital for the specific country’s operations. This
is an
obvious
setback
to
the
Committee: an erosion of the measures put in place so far to promote global regulation coordination. In addition, there is
and
increased
misunderstanding and
amount
of
enmity among
individual country regulators, especially
Typically, the Basel accords are meant to
from the side of home country regulators
be guidelines for the prudent regulation of
who feel that host country regulators
banks, the adoption of which is often at the
should not impose regulation on their
discretion
national
country’s banks foreign operations in the
authorities. As such, studies done have
host countries (case in point are the
found out that part of the problem making
European regulators after the US decided
global
to impose capital requirements foreign
of
regulation
individual
of
banks
more
banks operating within their economy;
environment hence raising the incidences
American regulators had for a long time
of bank failures.
allowed the banks to operate with no capital trusting on their home regulators to ensure that their parent companies are adequately capitalized. The European banks however took advantage of the situation. Borrowed heavily in the US short term money market and repatriated these funds to their parent banks, in the process building up very huge liabilities. At the advent of the financial crisis, the short term market suddenly dried up, worsening the situation of such lenders). The question therefore is: what do we do to enhance the global coordination of banks? An interesting approach is seen in Europe, where the EU is in the process of establishing a banking union such that all banks
within
member
countries
are
regulated by a single regulator. In the arrangement,
the
individual
national
regulator becomes less significant. The disadvantages of such an arrangement might be that the regional regulator may focus too much on regional uniformity in regulation and neglect country-specific circumstances. This may translate into a weaker and generally less robust banking
On
the
implementation
of
the
arrangement, the EU has an obvious advantage of being a Monetary Union and hence arrangements to establish uniform regulatory measures are clearly quite easier. It is yet to be seen which methods, if any, will be applied for the rest of the world. Twitter: @Cy_RilW