Kenya’s asset management industry is the second-fastest growing industry of its kind in Africa.

Domestic institutional investors like insurance companies, individuals and foreign investors all want a return on investment that outpaces inflation, currency depreciation, and other risks — exactly what the industry provides.

Our research, published recently in Africa Asset Management 2020, compares Kenya’s financial services sector with its GDP growth to inform predictions about the growth of assets under management. As the financial services sector grows in relation to GDP, the sector will have more assets to invest in.

Strong capital markets together with macroeconomic stability also point to significant potential. Voluntary pension schemes and investment product innovation, together with improving financial literacy and a strong savings culture, complete a virtuous circle of better returns that will encourage more investment.

In Kenya, investment funds are known as collective investment schemes and the most common type are unit trusts. According to our analysis and publicly available information, unit trusts’ assets under management grew from Ksh17.6 billion in 2010 to Ksh38.1 billion in 2014, a compound annual growth rate of 21.2 per cent.

Pension funds’ asset growth has increased 15.6 per cent from Ksh451 billion in 2010 to Ksh806 billion in 2014 with most pension fund assets invested in government securities, listed equities and property.

Insurance industry assets increased 18.9 per cent from Ksh233 billion in 2010 to Ksh435 billion in 2014. Banks’ assets are by far the largest in Kenya, growing 18 per cent from Ksh1,374 billion in 2010 to Ksh2,521 billion in 2014.

Given their large assets, we expect many of Kenya’s banks to open asset management subsidiaries and to leverage their well-developed distribution networks.

We anticipate significant growth in assets under management, particularly those that are invested in real estate investment trusts (REITs) and private equity funds. Kenya is the leading market in East Africa for alternative investments largely thanks to a booming real estate sector.

Reits provide a broader range of investment opportunities and support growth in the real estate sector.

In Kenya, mobile access to financial services may very likely leapfrog traditional brick-and-mortar distribution channels for asset management products.

Insurance companies host the majority of asset managers and assets under management, and although insurance penetration in Kenya is still very low, there is strong potential for growth.

Technology is a clear game changer for insurers, other financial services providers and the asset management industry as well as consumers of their products and services.

Demographic shifts will also have a positive impact on Kenya’s asset management industry. As governments and families dedicate more resources to education, the productivity per worker will also increase.

Job creation will reduce the dependency on each worker and lead to increased savings and investment. Institutions and individuals alike will demand savings and investment products that suit their appetite for risk, their time frames for investing and improve their confidence in these products.

Financial reach

There is good reason to expect both financial sector deepening and greater financial literacy between now and 2020. The financial services industry has shown a keen interest in developing financial literacy as well as servicing remote areas.

Recent proposals to develop an alternative market with real estate investment trusts and private equity funds, as well as ongoing plans to establish Islamic Sukuks and Sharia-compliant mutual funds, will further deepen the financial market and serve the needs of more Kenyans.

Kenya’s regulatory framework is currently not well developed for global asset management products like money market funds or hedge funds. Regulatory changes like allowing pension funds to invest in a wider range of assets and the establishment of a three-tier pension system can be implemented in lock-step (or preferably a step ahead) of growing demand.

One of the most worrisome risks to investment is security. Addressing Kenya’s security risks will contribute directly to investor confidence. Asset management is a complex industry. However, many of Kenya’s most talented asset managers have worked in developed markets.

Their exposure to global asset management products and regulatory frameworks contributes to confidence among their investors. Skilled management of assets has a demonstrable impact on returns.

Some skills will need to be developed further but our research shows that Kenya’s financial services sector will invest in those skills, anticipating the demand for them.

Overall, Kenya’s asset management industry shows great promise. The quality of institutions and infrastructure supports the expansion of the financial services sector relative to GDP and Kenya’s position as a hub for financial services in the region will have far-reaching effects in East Africa and beyond.

Kang’e Saiti is a PwC Kenya partner and an asset management industry specialist