The outgoing CEO of Kenya’s Capital Markets Authority, Paul Muthaura, spoke to Julians Amboko.
How will Kenyans will remember your tenure as head of the Capital Markets Authority?
I’d like to imagine that I’ll be remembered as someone who balanced the twin mandates of the authority effectively. Not only is CMA a regulator, it is also a market developer. In the period that I have been CEO, the authority has not only focused on transparency and integrity of the capital markets but also putting out a spectrum of products which offer investors diverse opportunities to deploy their savings. Through this period, we have also given issuers an opportunity to mobilise capital towards support of business growth.
The demutualisation and self-listing of the Nairobi Securities Exchange are some of the key landmarks of your tenure. Five years later, what is your assessment of the progress made?
The core basis was to shift the perception from viewing the NSE as a club, to start looking at it almost as a public utility that plays a pivotal role in supporting the wider economy. It was about strengthening governance such that we have a clear separation of ownership and management to ensure that long-term decisions taken.
On self-listing, we must appreciate that the NSE was only the second exchange to self-list on the continent. Through self-listing, we moved NSE from an entity that was owned by about 18 or 19 individuals to one whose shareholder base is now in the thousands, and more importantly one that can claim substantial shareholding by Kenyans. Being self-listed has ensured that NSE holds itself to a much higher governance standard because it must at all times be fully compliant.
Capital markets in Kenya and East Africa are often criticised for failure to offer a diversity of asset classes. Under your tenure we have seen efforts to address this such as the derivatives, real estate investment trusts as well as Exchange Traded Funds. Are you content with what you have done on this front?
Over the past six years we have diversified products significantly. We have seen all manner of evolution including green bonds and online foreign exchange trading.
Unfortunately, what we have not seen moving with commensurate speed is the level of uptake by the market. Maybe that has a foundation in the underlying macro environment because we have seen government borrowing aggressively domestically and offering attractive risk-free returns to investors. What this has meant is that investors have very little incentive to look at alternative asset classes. What must not be lost is that as far as the available scope of products goes, Kenya is second only to South Africa on the continent.
On your watch, two banks, Chase and Imperial, were placed under receivership while having issued corporate bonds. Many have since argued that, as the watchdog, CMA should have done its due diligence before giving the green light to these issuances. Is this a fair assessment?
What the Imperial and Chase Bank episodes did was to flag the need for a better understanding of the role of a market regulator in terms of a listed product. Both Chase and Imperial had a primary regulator, which was the Central Bank of Kenya, and it was the one involved in the hands-on assessment of the operations, transparency and reliability of their financial reporting. The primary regulator is charged with front-line oversight. What CMA was taking on was making an assessment as to whether the financial information was being made clearly and transparently available to all the investors.
So, if you look at the public disclosures that were made by both Imperial Bank and Chase Bank before their collapse, there was a high level of compliance as far as transparency is concerned.
There was a fundamental underlying issue of the said financial statements being fraudulent. Providing assurance as to the validity of financial statements is not the role of the capital markets authority, that is the job of auditors, the board and the primary regulator. Unfortunately, we have investors who feel they were let down and that’s why today you see CMA doing a lot around strengthening corporate governance.
What has concerned you most as chief executive of CMA?
The level of inconsistency in judicial intervention as far as enforcement action is concerned. We have been fairly aggressive as an enforcement agency, but we’ve found that many of our cases have been held up in courts for years. The courts have been used to raise minute technicalities just to postpone applicability of accountability. This is something that really needs to change.
What is your comment on manipulation in Kenya’s capital markets?
With regard to the legal framework around insider trading and market manipulation, Kenya actually has one of the most robust frameworks globally. What must be appreciated is that the enforceability of these robust frameworks is a function that isn’t wholly within the purview of the CMA. Court interventions can see enforcement action postponed for as long as five years. The other side of market manipulation is that as the market deepens and becomes more complex, we need appropriate systems such as multi-asset surveillance systems to identify these anomalies. It is a case of incremental progress being made.
On the enforcement action taken in light of insider trading around the takeover of KenolKobil, some have argued that it amounts to a slap on the wrist. Is this a fair assessment?
Our approach to enforcement first takes regard of the scope of sanctions that are within our mandate. The authority needs to consider what can be done internally and what needs to go to the Director of Public Prosecutions and other external entities. That said, you would be hard pressed to find a good number of regulatory agencies in this country that have recovered in excess of Ksh1.3 billion ($ 12.8 million) in fines, sanctions and surrenders. So maybe when we speak of slaps on the wrist, that context is needed.
What should top the agenda of your successor?
First, product development. So much has been done towards market diversification and now I think we need to boost uptake.
The second is how to leverage technology to take this market to the next level of efficiency, transparency and vibrancy. I am glad that, effective October 14, we commissioned a new equities trading system that has contributed to the vibrant market activity we have seen lately.
Chief executive, of the Capital Markets Authority, January 2016 - December 31, 2019
Advocate of the High Court of Kenya.
Emerging Markets Advisor with the General Secretariat of the International Organization of Securities Commissions (IOSCO).
Senior commercial associate with the law firm of Daly and Figgis Advocates.
Bachelor of Laws degree (University of Warwick); Masters in Banking and Finance Law (London School of Economics); Masters in Philosophy (Maastricht School of Management).