Blue chip firms’ dominance could destabilise bourse - Central Bank

Sunday December 22 2019

Nairobi Securities Exchange chairman Samuel Kimani (left) with Central Bank of Kenya Governor Patrick Njoroge. A CBK report has cautioned the NSE about risks from dominant firms at the market. PHOTO | FILE | NATION MEDIA GROUP


The Central Bank of Kenya has warned that dominance of a few large firms at the Nairobi Securities Exchange could destabilise the market in the event of sudden selloffs.

In the Kenya Financial Sector Stability Report 2019, CBK warns that the NSE is vulnerable to “concentration risks” arising from having only a handful of firms dominating trading at the bourse.

CBK also cites other risks as dominance by foreign investors, and the high concentration of Treasury securities in the Bonds market.

“As at December 2018, the top five companies accounted for 65.82 per cent market capitalisation from 64.83 per cent in 2017, of which, Safaricom accounted for 42.31 per cent. Secondly, foreign investors accounted for 63.28 per cent of total equity turnover in 2018 compared to 63.23 per cent in 2017. While this is positive news, abrupt sell-offs by this investor category can lead to excess volatility, as noted in the first half of 2018 following an interest rates hike in the advanced economies and emerging markets and the consequent search for yield,” notes CBK in the report, prepared jointly with four other financial sector regulatory agencies.

During the period under review, government bonds trading accounted for more than 99 per cent of the fixed income market segment.

The banking sector regulator cautions that the shocks could either originate domestically or from foreign economies.


The top five NSE companies by market capitalisation are Safaricom, Equity Bank, East African Breweries Ltd, KCB and Co-op Bank.

According to CBK, the bourse also faces the risk of low liquidity in the equity market, limited issuance of corporate bonds, low uptake of new and existing products and services (Exchange Traded Funds, Real Estate Investment Trusts and Asset Backed Securities) and crypto-assets related challenges.

Other threats include market infrastructure failures, cyber risks, political and economic risks.

Last year, the NSE 20-Share-Index, equity turnover and market capitalisation was largely influenced by foreign equity outflows in search of higher yields, profit taking, and adverse domestic and global policy pronouncements, said the CBK report.

According to the Capital Markets Authority, new listings of state-owned enterprises and plans to roll out a product uptake and market deepening strategy targeting “large cap” private companies to list on the NSE could rejuvenate the markets.

“On concentration by five companies, only a large issue by some state-owned enterprises such as Kenya Pipeline, National Oil Corporation or private firms such as Bidco or Airtel can mitigate the risk. Otherwise it is risk we have to live with,” said Luke Ombara, the CMA director in charge of regulatory policy and strategy.

“We have discussed with the National Treasury the need to have some of the parastatals divest and list, and have also signed a memorandum of understanding with the Kenya Association of manufacturers to get private firms to come to the market. These are all ongoing initiatives,” he added.

Small and retail investors are said to be hesitant to put money in stocks largely due to trading malpractices by some market intermediaries, high transaction costs, volatility of the equities market and poor returns relative to other alternative investment options such as Bonds and real estate.



The East Africa Venture Capital Association and I&M Burbidge Capital in a joint report released early this year said the major challenge facing East African stock markets is low liquidity levels with the bourses dominated by a few blue-chip companies.

In Kenya, this is partly attributable to stringent listing requirements that discourage potential issues from the bourse, and high listing costs.

A survey by global financial and investment advisor RisCura last year shows that East Africa runs some of the most expensive stockmarkets in Africa due to high brokerage fees, clearing and settlement fees, and other charges.