By JAMES ANYANZWA

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Kenya’s stockmarket is facing yet another challenge after stockbrokers, investment banks, fund managers and investment advisers applied for the cancellation of their trading licences, citing losses and reduced profitability.

This is attributed to the declining performance of the 64-year-old bourse, which has failed to attract new companies, and whose products have failed to excite the public.

The Capital Markets Authority (CMA) has said that market intermediaries led by investment advisers have applied for cancellation of their operating permits, citing poor performance of the stockmarket, low uptake of new and existing products, the absence of new listings and low trading activity.

According to the regulator, fund managers, investment banks and brokers recorded huge losses in 2016 compared with their performance in 2015, providing an inference point on licence cancellation witnessed by CMA in recent years.

“Despite elaborate strategies to introduce new products and services in the Capital Markets, uptake has remained low, and a few existing market intermediaries have applied for cancellation of granted CMA licensees, with investment advisers bearing the bulk of the cancellations,” the regulator said.

Applications to close shop

CMA chief executive Paul Muthaura confirmed that the authority had received several applications from firms seeking to close shop but he did not disclose their names.

“The main category we are seeing licence surrenders because the business model is not working is the investment advisers,” said Mr Muthaura.

Kenya has 14 licensed investment banks, 10 stockbrokerage firms, 26 fund management firms and 12 investment advisory firms.

Among the products that have failed to excite investors are real estate investment trusts (REITs), online forex trading, collective investment schemes, exchange-traded funds, asset-backed securities (ABS), the Growth Enterprise Market Segment (Gems), Global Depository Receipts/Notes and initial public offerings (IPOs).

Kenya has not had an IPO from a corporate entity since 2008, except the self-listing of the NSE itself in 2014.

The Gems market, the trading platform for small and medium-sized firms, has only attracted five companies since its launch in January 2013. These are Atlas African Industries, Flame Tree, Home Afrika, Kurwitu and Nairobi Business Venture.

The poor performance of the NSE has been exacerbated by the reduced activity among listed firms due to a difficult operating environment.

For example, in the 2016/2017 fiscal year, 20 listed firms issued profit warnings while 14 posted losses.

According to the CMA, the low market activity has seen market intermediaries, who rely on transactions and advisory fees and commissions, realise reduced profits, with some posting losses.

Several stockbrokers have also divested from the struggling exchange, selling their shares to sustain their operations — which have been impacted by the low trading activity on the bourse.

Usually, stockbrokers depend on commissions from levies charged on equity and bond transactions and, in a booming market, they diversify their income streams by offering advisory services in IPOs, rights issues and mergers and acquisitions.

A survey conducted by the CMA on the performance of the stockmarket revealed that Kenya’s securities market has largely remained narrow and shallow, compared with other African markets such as Egypt, South Africa and Nigeria.

The NSE has been characterised by low liquidity levels, a small market size dominated by a few large companies such as Safaricom, East African Breweries Ltd (EABL), Equity Bank, KCB Bank and Co-operative Bank of Kenya.

Its activities are dominated by bluechip companies, with the top five companies by market capitalisation accounting for 67 per cent of the total market capitalisation as at February 2018.

Market vulnerability

These are Safaricom, Equity, KCB, EABL and Co-operative Bank. Since three of the five are banking institutions, this indicates vulnerability of the market.

According to the survey, which was released two weeks ago, Kenya’s stockmarket is also facing stiff competition from other investments that seem to promise better short-term returns such as real estate, mobile money products and sports gambling.

The survey report dated June 2018 shows that stringent listing requirements have put off potential issues from the bourse.

These include a requirement that a firm seeking to list provides evidence of past profitability prior to listing, audited financial statements for a few years, minimum fully paid up capital, and suitability of directors and management experience.

According to the report, the regulator is expected to review and abolish the requirements for minimum free float, profitability track records, paid up capital and number of investors as required from time as a prerequisite for listing approvals especially where they are unjustified.

The CMA will also review the cost of participation in the primary and secondary capital markets in terms of global competitiveness, in light of stakeholder perception, and continuously review, identify and amend restrictive provisions in the capital markets and laws that are unattractive to capital raising and listing.

According to the report, issuers of new products will be required to develop and submit elaborate product launch strategies to the regulator, with elements such as product sensitisation, customer experience and marketing strategy.

Demutualisation

Meanwhile, low returns have also seen stockbrokers relinquish the ownership of the stockmarket to foreigners.

The stockbrokers had a three-year grace period from 2014 to surrender the control of the exchange to the Kenyan public as part of the conditions of the demutualisation process (separation of ownership of the exchange from the trading rights of the members).

The process was effected to improve transparency and governance in the trading of shares.

Of the 20 stockbrokers who held a combined 59 per cent controlling stake in 2014 when the NSE issued its IPO, 11 have either exited the stockmarket or substantially reduced their shareholding.

Stockbrokers held a 26.7 per cent stake on the NSE in 2017. Foreign investors now control over 40.8 per cent of the bourse as at the second quarter of this year, from 36 per cent last year.