CMA: Positioning Kenya as a Competitive and Attractive Destination for Capital

Interview with Paul Murithi Muthaura, Chief Executive of Capital Markets Authority

Could you give us an overview of the capital markets sector in Kenya?

Certainly. Capital markets in Kenya, although not that large, are actually among the oldest in the continent. While the Nairobi Securities Exchange has officially been in place since 1954, informal trading on the exchange has been conducted in Kenya since 1920, through a link with the London Stock Exchange. So, we are fairly old capital markets, but I believe that we continue to very aggressively try to look for ways to deepen and grow them. We currently have around 65 listed companies and a market capitalisation in the order of USD 25 billion. When we compare this to GDP, we are still a little below 50% of national GDP, so we see that there is significant upward room for growth and development. We have a fairly developed bond market, where the government has been a very active issuer since the mid-90s, and corporate issuance has also become quite common, at least from the early to mid-00s. Most of the country’s financial institutions, both banking and insurance, have been either repeat or significant issuers, especially in dealing with convergence towards rising capital requirements, as we strengthen overall banking and insurance sectors oversight in the country. We have also seen very positive engagement from the infrastructure sector, where the electricity-generating company has for instance been among the most consistent and significant capital raisers in the market. There is also the country’s largest mobile network operator, Safaricom, which is both listed and has also issued a number of bonds to the market, which draws a very strong link between capital markets and the funding of long-term infrastructure development. We have seen something similar at work in the housing sector, with the Housing Finance Corporation also being a regular issuer. Therefore, we have certainly been able to position capital markets as being a proactive and effective tool in supporting the country’s long-term financial and economic growth. But we continue to work with many companies with listing potential, especially considering the SME sector, in terms of how these small to medium sized enterprises can better understand how they can diversify away from traditional bank-based financing and look towards public financing, and how this can support not only their more effective financing, but also strengthen their governance environment, unlock long-term transparency and independence in how they run their businesses.

The Capital Markets Authority is a regulating body charged with the prime responsibility of supervising, licensing and monitoring the activities of market intermediaries, including the stock exchange and the central depository and settlement system and all the other persons licensed under the Capital Markets Act. Could you give us an overview of CMA’s history and main areas of attribution?

The 10-year Capital Markets Masterplan is designed to set the course in ensuring that Kenya emerges as being at the heart of African capital markets, by looking critically at the various components of the market that need to be streamlined and strengthened.

The Capital Markets Authority has been in place since 1990, i.e. quite a few years after the exchange came into place, but I believe that it was very well founded upon the understanding that in order to support long-term sustainable growth in the capital markets sector, we needed to promote greater transparency and more efficient supervision in this sector, while also endowing the regulator with a dual mandate. Therefore, as the Capital Markets Authority, we are not simply the regulator and supervisor of the capital markets sector, but we are equally charged with the primary responsibility of supporting its development and deepening. This creates very interesting challenges for a securities markets regulator, in that when considering new rules, new products and new programmes to put in place, we need pay close and continuous attention to the need to balance both transparency, sustainability and robustness on the one hand, with deepening growth and supporting economic development. But we have received excellent support towards achieving this goal. We are an independent agency, but we fall under the National Treasury, i.e. the Ministry of Finance of the Government of Kenya, and through them we have received very consistent and strong support in ensuring that we are able to play a successful role as a robust and effective capital markets regulator. Our board consists of 6 independent members, together with an independent Chair. We also have representation from the National Treasury, the Attorney-General’s chambers and the Central Bank ok Kenya, just to make sure that as we develop policy, it is well aligned with the broader financial sector. As an Authority, we are also represented on the boards of the insurance regulator, as well as the Vision 3030 board, which again reiterates the important link between capital markets and the financial sector in general and the country’s wider economic growth story.

Now, when you look at our scope of activity, we have in excess of 100 licensees, cutting across the Securities Exchange and the Central Depository and Settlements Corporation, together with a number of investment banks, stockbrokers, fund managers, collective investment schemes, real estate investment trust managers, as well as real estate investment trustees and authorised securities dealers – essentially a very wide spectrum of license classes, in order to make sure that there are appropriately skilled and qualified people out there to offer the right kinds of services in the market, which goes from investment advisers, to help with the almost retail or ‘one-on-one’ level engagement to enable people to make informed investment decisions, right up to fund managers, involving large-scale institutional and corporate investors, including the pensions management sector, all of which feeds into the trading activity seen on the exchange, which is through licensed investment banks and stockbrokers.

Considering some of the key areas that have been evolving in the capital markets sector, we have seen new licenses being introduced for real estate investment trusts, identifying the central role that infrastructure development is playing in the country as a whole and then designing a product that actually responds the nature and size of infrastructure funding needs in our market. As such, we have real estate investment trusts catering not only to existing income-generating properties that can be pooled together to provide something akin to a fixed income-type return, based on rental returns; but also very much designed with Kenya specifically in mind, which is why it is called the ‘development’ real estate investment trust, since it is helping to unlock the capital markets, in order to use public finance to support the construction and development of new real estate, in the widest sense of the term, i.e. cutting across residential real estate to commercial real estate, to hotels and potentially certain forms of infrastructure, so this is a very flexible instrument. As such, we are looking forward to the really broadening the role that capital markets can play in financing the country’s infrastructure.

On top of this, we are in the process of finalising a new asset-backed securitisation framework, once again looking at how we are going to be able to facilitate not just traditional banks, by unlocking their balance sheets through mortgage-backed securities, but also considering the country’s development needs – which, for instance, may involve future greenfield cash-generating projects that do not yet exist with the possibility of being appropriately structured, and raising the capital required to get these up and running, and then servicing the resulting debt or equity returns that went into their building. We have traditionally been an equity and debt capital market, so we are now seeing the introduction of instruments such as derivatives, and we are now in the final stages of working with the Nairobi Securities Exchange as they implement a number of new derivatives and futures contracts to operate in our markets.

We are also introducing exchange-traded funds, to once again create a new platform for increased liquidity in the market and create opportunities for commodities to become tradeable on the exchange, but also existing indexes and counters on the exchange to be packaged together and become and exchange-traded fund.

I think environmentally, we are very conscious that we need to look beyond just the new products and development side, and we have progressively tried to strengthen the environment for supervision and oversight, so we are now in the 7th year or so of implementing risk-based supervision of our market intermediaries; we have significantly strengthened the corporate governance framework, which applies not only to the licensed community, but with effect from this year, there is a new corporate governance code that is being introduced for public security issuers, so as to bring the overall governance, accountability and transparency framework for the country’s public issuers and public-interest entities very much in line with global best practice standards that we have seen, be it King 3-4 in South Africa, the new code that has been rolled out in the UK, as well as India and Malaysia, which are some of the key jurisdictions that we engaged with in making sure that, as we work to position capital markets in Kenya as a competitive and attractive destination for capital, we are in fact well aligned with the expectations of both our domestic and international investors, in terms of what they expect to see in a well-functioning and transparent economy.

Kenya Vision 2030 is a national long-term development blue-print to create a globally competitive and prosperous nation with a high quality of life by 2030. It aims to transform Kenya into a newly industrializing, middle-income country providing a high quality of life to all its citizens by 2030 in a clean and secure environment. The vision is anchored on three key pillars: economic, social and political governance. Could you tell us a little more about this Kenya Vision 2030 programme and possibly explain CMA’s role in this context?

Very simply put, Kenya Vision 2030 is the economic blueprint for the nation. It has set out a very clear direction on how we are going to transform our overall economy, with everything from the social and political to economic pillars of this economy, in order to place us in a position where we can become a middle-income jurisdiction by the year 2030. Now, within the context of the wider Vision 2030 and within the economic pillar of that instrument, the Authority has been working very constructively with our industry to put together a 10-year Capital Markets Masterplan, which has actually been elevated into a Vision 2030 flagship project for the second medium-term period of the Vision 2030 overall plan. This 10-year Capital Markets Masterplan is really designed to set the course in ensuring that Kenya emerges as being at the heart of African capital markets, by looking critically at the various components of the market that need to be streamlined and strengthened, from fundamentals around making sure that capital markets are really playing their proper role at an economic level, as well as supporting devolution as the new direction we have taken under the country’s new 2010 constitution, but equally playing a proactive role in supporting infrastructure financing and certain aspects of market development, investor education and investor protection. The next pillar has to do with issues around the market environment, such as the types of products we have in place, the market infrastructure in operation and the legal and reporting environment in operation, so as to make sure that there is sufficient transparency, accountability and credibility of the overall regulatory environment in the country. The final pillar then really looks at how those markets fit within the wider context of the African continent and global capital markets, i.e. how is Kenya going to really evolve in moving beyond its current role as a financial hub jurisdiction for the East African community towards becoming a far more effective conduit jurisdiction for what we now see as ‘Middle Africa’. We have identified about 18 countries in East, Central and Southern Africa, which either do not have capital markets or do not have sufficiently developed capital markets, in order to effectively support their own economic development. As such, with some of the reforms and developments that are being targeted under the 10-year Masterplan, we hope to make sure that Kenya is able to really play an effective role as a conduit. For instance, if you are in Zambia and need to build a new port, you are able to raise that money through Kenya, as we are fully integrated with global capital markets; or if you are in Congo and you need to build new roads and new rail, you can raise that money through Kenya and we act as a consolidating platform for funding into the wider middle and central Africa region. Therefore, as we progress with the implementation of that 10-year plan – and we are approximately a year and a half into it -, we see very significant strides forward, such as the demutualisation of the exchange, the self-listing of the Nairobi Securities Exchange, the introduction of the new corporate governance code, the significant overhaul of our legal and regulatory framework, and the introduction of many new and far more responsive products, such as derivatives, real estate investment trusts, exchange rate funds, along with the significant broadening of the bond market in the country and support for corporates to be able to access the bond market; and if you consider the wider spectrum of sustainable and inclusive growth, there is even the introduction of the GEMS (Growth and Enterprise Market Segment), which is a dedicated segment at the Nairobi Securities Exchange targeting either venture companies, i.e. companies with good prospects but no history or SMEs that are established but really need a new injection of capital, new vision and new governance, in order to move forward to the next level. The appropriately named GEMS market segment really provides them with the platform to be able to access markets, unlock value that has already been built, bring in new governance structures, and the ability to tap the market in a long-term and sustainable manner when they need additional funding.

Previously you talked about educating investors. Concretely, what types of actions do you take to educate investors?

Investor education is a challenge, and I believe it is a very real challenge for all entities that have a developmental mandate. We have taken a somewhat tiered approach towards investor education, where we carried out an in-depth investor analysis and identification exercise, so we could effectively segment the various targets for out education initiatives, by on the one hand looking at companies that are potential issuers, in order to help them to understand the nature of the opportunity when they come to the market, as well as targeting institutional investors to help them understand what are the appropriate products available to them, especially when considering the pensions and insurance sector, which have grown very significantly in recent years. Our pension sector is now worth close to a KES 1 trillion, which is around USD 10 billion. The insurance sector is now close to USD 5-6 billion. All of these sectors are looking for a home for their investments that is long-term, sustainable and reliable. We are looking at our retail investors and building their understanding of how they can make use of collective investment scheme products and direct investment in the market, to be able to unlock long-term wealth creation for individuals, for small groups and community-based organisations. We are looking at county businesses and county government, given the new environment we are in with the implementation of devolution, which involves the simple critical need to build 47 new capitals in the country. Traditionally, we had 8 provinces and each had a capital, but beyond this, the level of development in some of the more rural towns is limited. But now there are 47 counties encompassing the entire countries, each of which needs to be able to operate fairly independently to deliver value to their constituents, and we are working very critically with them to understand how they can use the capital markets to support infrastructure development, as well as their county-level companies and being able to raise money to grow beyond their counties and become national, regional or continental businesses, all of which becomes far more possible if you are able to unlock the capital markets. We are also looking at our international institutional investors, in order to better understand what their outlook and expectations are for Kenya as an investment jurisdiction and make sure that we can align ourselves, ensure ease of investment across borders, as well as the overall achievement of East Africa as a whole emerging as a single investible class, so that you would not be looking purely at Kenya or Uganda or Tanzania in isolation, but together as the EAC, and through the increasing interlinkage of our infrastructure and harmonisation of our laws, you are able to invest seamlessly across the whole of East Africa and be able to gain exposure to the different quality of assets within this whole region.

Based on this, we partner very proactively with entities such as the NSE, the CDSE, the KNCCI and with County governments, in order to roll out different products and programmes, targeting different investor classes across the country; we work with the Kenya Private Sector Alliance, the Kenya Manufacturers Association, even the Vision 2030 board, in order to constructively engage and identify fundamental needs, and then develop solutions to respond to these needs in a meaningful and participatory manner.

What is your vision for the future of the sector and the Capital Markets Authority in the next 2/3 years?

I am slightly more ambitious, so when you look at the 10 year vision, that is precisely why we developed the masterplan, so that we would not be looking simply at the short term, but could have a very clear view of the short, medium and long term targets for the development of the market. At the end of that plan, our goal is for Kenya to emerge as the heart of capital markets investment on the continent and for capital markets to be able to play a very effective role in supporting Nairobi to emerge as a global financial centre. When you bring that into the middle term, i.e. within the next 5 years, our goal would be to see at least 10-15% of county financing flowing through the capital markets. We would expect to see our national infrastructure, our trading and settlements systems really arriving at a globally-competitive level, in terms of depth, quality, robustness and reliability. I would expect to see very significant stride in the inter-connectedness of East African capital markets, so that you will start seeing both capital and services flowing seamlessly across the borders of the East African Community, along with a significant increase in the number of listed companies in Kenya. We currently have targets of 4 new listings per year, but certainly as the economic environment continues to improve and deepen, we expect to exceed those targets quite substantially. In 2015, which was a comparatively slow year in terms of capital markers activity, size and growth, we did achieve 4 new listings, and now half-way into 2016, we have seen 2 new companies coming on board. We hope to see at least a few more in the course of the year, and that will certainly set the tone for many other companies that will be looking to understand how they can use the markets to grow and grasping that it is indeed possible to do so; where the market is not just for a few exclusive blue chip companies, but actually provides a reasonable solution for domestic companies with a very clear vision and regional companies looking to support regional diversification to use the market, continue to grow and further deepen their solutions.

What would be your message to the international business community and investors considering Kenya as a destination?

That would be a very long answer (laughs), but I think that speaking for capital markets, as opposed to the country as a whole, I would say we are well on our way to emerging as the heart of African capital markets, in line with the 10-year Capital Markets Masterplan. We have global-standard corporate governance in place, we are on our way to having global-standard market infrastructure, and we are already a financial, infrastructure and transportation hub on the continent. With the work we are undertaking – both at the capital markets level and at the national level -, Kenya is really set to emerge as one of the most attractive and competitive destinations for capital in the world, let alone on the African continent.

I believe it’s worth noting Kenya’s advantageous geographical position, as well as our strong historical roots [with the Middle East], having a strong Muslim community in the country, Kenya is actually on its way to emerging as a regional Sharia financing hub. We have actually established a dedicated project management unit within the Capital Markets Authority, but bringing together all of the country’s financial regulators, together with the National Treasury, to set a very clear strategic path towards the emergence of Kenya as a very attractive destination for Sharia financing, whether from the Gulf, i.e. the GCC or from Malaysia, which is currently the world’s largest Sharia market, and we remain confident that as Sharia finance evolves, it will help to further position Nairobi as an international financial centre, with the visibility this would provide, but it will also play a very constructive role in supporting real economic development, be it through infrastructure, through supporting actual business trading activity, which is fundamentally at the core of many of these Sharia principles on risk-sharing and development.