Investors in the Kenyan stock market will start lending their shares to brokers at a fee, in a scheme that allows them to diversify incomes beyond company dividends, for which they have to wait for a year.
The profit on the shares an investor lends out to a stockbroker will either be cash or the shares lent out plus interest, after an agreed period.
This form of trading, called securities lending and borrowing (SLB), will be guided by a contract between the borrower (stock broker) and the lender (investor).
This scheme was among the recommendations by the World Bank to boost liquidity and efficiency on the Kenyan stock market.
Usually, in this arrangement, the lenders are long or medium term investors such as institutional investors like pension funds, insurance companies and high net worth individuals.
The regulations for SLB transactions were gazetted in January and the Nairobi Securities Exchange (NSE) and Central Depository Settlement Corporation (CDSC) are upgrading their systems to accommodate it.
Stockbrokers hope to use this new form of trading to turn around their financial fortunes and boost activity on the bourse.
“Various players are evaluating this proposal but the whole idea is that there is comfort or trust that your stock is safe. We are working towards drafting an agreement to cover these transactions,” an industry source told The EastAfrican.
In 2017 Kenyan investment bankers and stockbrokers posted losses or reduced profitability due to lack of lucrative corporate deals such as initial public offerings (IPOs) and rights issues and slow recovery of the stock market.
The brokers posted either reduction or marginal growth in brokerage commissions and consultancy fees, their key sources of income.
In a booming market investment bankers usually expand their income streams by offering advisory services in key transactions such as IPOs, rights issues and mergers and acquisitions.
In 2017 CDSC said it would lock stock accounts that remain inactive for two years in a bid to protect investors against fraud and no transactions will be allowed on the accounts declared dormant.
The share custodian said it would declare an account dormant if there has been no activity in that account for a continuous period of 24 calendar months.
According to the capital markets masterplan, introduction of securities lending and borrowing would give rise to selected firms that play the role of market makers by quoting buy and sell prices in certain stocks to ensure liquidity in the market.
For market makers to buy and sell stock they will need to borrow shares from time to time to meet their obligations.
A report by Citigroup shows a majority of securities lending transactions take place in developed markets and in many emerging markets, securities lending volumes are initially accounted for by domestic lenders providing liquidity for local markets.
For these local lenders, the key risks generally stem more from operations and settlement than from counterparties.