Kenya Capital Markets: An Interview with the Nairobi Securities Exchange

Interview with Geoffrey Odundo, Chief Executive of the Nairobi Securities Exchange (NSE)

What is your overview of the economy in Kenya and what are the most relevant sectors boosting this economy at the moment?

Kenya is currently at a very transformative state in terms of economic development. We are seeing accelerated growth in many key sectors. Our economy is projected to grow by 5.9 percent in the next financial year, from 2016 to 2017. A key driver for this economic sector will be telecommunications. We have a very robust telecom sector, largely driven by a growing population, especially among the youth. The penetration rate in the mobile telephone sector is in excess of 23 million Kenyans who are currently using their mobile sets. The biggest story for Kenya in the telecom sector is mobile money. Under the M-PESA platform, we have had a huge e-commerce evolution, especially with making utility payments, and transactions for business and products. This payment system has become a way of life in this country now and is supporting our growth in the telecom sector. Coupled with that is our infrastructure development. We are now in an advanced stage of the standard gauge railway running from Mombasa to the west side of the country. The standard gauge railway will be a major transmission line for goods and services. We will be able to save time. There will be quick delivery not only to Kenya but also to the hinterland surrounding the country. It will save us in infrastructure costs that are currently going towards road maintenance. Even the cost of time for people to move up and down will be greatly reduced. So within the telecom and transport sector we are seeing major growth and very aggressive development. Another sector that is driving the economic growth is the building and construction sector. Walking around Kenya and Nairobi today, there are a number of cranes and construction and buildings coming up. Much of this is being driven by private equity investors that are coming to build commercial and residential properties. Mall developments are also coming up very aggressively. Given the county structure of Kenya today, there has been a lot of urban-rural migration. Normally we have rural-urban migration, but we are seeing now that many people are going to live and work in the counties. This is calling for the development of residential properties and middle class income properties. In the mainstay sectors, such as agriculture, our tea horticulture exports have been growing fairly well. Tourism is also picking up now, even though there were insecurity challenges early and late last year. Today, there is an improvement in security levels. In summary, there has been a general shift upwards in economic growth which is why the predictions are very strong. Kenya is not a commodity country in terms of minerals and oil. So the impact of the oil price reductions are benefitting us because we are a bit insulated. It is our key import so that is why our figures are a bit higher compared to other markets in Africa.

Why should international companies choose Kenya to set up their business over other African countries? Is it easy to do business here?

The number of private equity investors and investors talking to us who would like to cross-list their companies into our markets are increasing day by day. This presents a great opportunity for anybody thinking about investing in Africa.

Yes. Kenya is currently one of the key economies in Africa. Kenya is a regional leader in eastern Africa from top leadership to economic leadership. If you want to invest in east Africa, Kenya is the place to start because we are the largest economy and the largest market in east Africa. We have a very good capacity for people skills. We have a better infrastructure network. The ease of doing business Kenya has improved greatly in the ranking index in terms of how quick you can register your company and do your business. We have a very good ecosystem in terms of banking in the financial sector. We have extremely strong multinational and local banks that can advance you credit and place your deposits. In east Africa, the per capita income is higher in Kenya than the rest of the region. We have the market and we have the people. In Africa as a whole, Kenya has better macros compared to other current markets today. We have a more stable currency. We have a relatively predictable interest rate environment. We have a very advanced securities market. Today we have a market that not only offers traditional equities and fixed incomes products, but we also introduce new products like real estate investment trusts, exchange ready funds and the derivatives market which we are about to introduce. These are really internationally recognized products and opportunities that investors are looking for. We have a very huge foreign trading client base. The stock market today has a turnover of 70 percent, mainly foreign traded. If you put your money here, you have a global view of global investors who are looking at our country. Ranking among our peers, Kenya is a very good opportunity for you to establish your business. There is also a more stable political environment in the region with a very new and very progressive constitutional framework. Those factors help stability and are a key attraction for anybody who would like to set up a business in Kenya.

What is Kenya’s ease of doing business ranking at the moment?

Kenya has moved up quite a number of places, which has positioned us as a leading market for investors. There has been a very large foreign direct inflow coming to our country because of that. The number of private equity investors and investors talking to us who would like to cross-list their companies into our markets are increasing day by day. This presents a great opportunity for anybody thinking about investing in Africa.

The Nairobi Securities Exchange is the principal stock exchange in Kenya and you also have an automated platform for the listing and trading of multiple securities. What are the kind of services that you provide?

The Nairobi Securities Exchange is 62 years old. Historically the NSE has offered stocks and a platform for trading equities and bonds. We have a market cap of almost 20 billion dollars which positions us among the top five exchanges in Africa. We also have over 65 companies trading on our markets today which have been segmented into main investment market segments, alternative market segments and growth and enterprise market segments. We have been able to segment companies by the sectors they come from, such as the agricultural, manufacturing, commercial services, banking, energy, telecom, building and construction sectors. There is a very good product offering. Anybody who has an interest in any of those sectors is able to see the companies that are trading, compare the multiples they are trading at, and compare the businesses and make a decision whether or not to invest. There is also a very robust trading platform. We are currently upgrading our platform to the latest version of the Millennium IT System so the front end trading environment will continuously provide quick execution of trades. We also hope to provide faster online trading and low latencies. Those are things that anybody looking to invest in the market will consider. We are also in the process of introducing new products. We have already introduced a real estate investment trust, the first of which came through last year, and a second one is in the market right now. We are at an advanced stage of completing and launching our derivatives market which will also be a very nice, attractive product for the market. We also have the exchange traded funds. We have finalized the rules and we are expecting the first application to come to the market. We have a very good range of products that trade internationally. The NSE will be no different from any other international exchange once those products are all able to take off. We also have a very good platform on the back end. The platform we are running on provides good access to our markets and a wide area trading opportunity for brokers both here and internationally. We have one trading member who is currently plugged in to trade on our market from South Africa. We are the secretariat of the Africa Securities Exchange, and that positions us towards having a global view of what is happening in all the Exchanges in Africa. We are a full member of the Institution of Future Markets. We are in the process of applying for full membership in the World Federation of Exchanges, of which we are currently an affiliate member. When you are looking at the key investment considerations of any securities exchange, the Nairobi Securities Exchange is really there with all those aspects you might be considering and that makes us quite an attractive market for the foreigners and even for the local and retail investors.

What kind of criteria do companies have to meet to be listed on the NSE?

There are three different application segments: the main investment market segment, alternative and the growth and enterprise market segment. There are certain key requirements to meet in order to list in the main investment market segment. The minimum number of shareholders should be about one thousand. There must be an asset base of no less than 100 million shillings. And companies must show three years profitability out of five years of operation. In the authority investment segment, the threshold is slightly lower. There must be 100 shareholders, 50 million in asset base, and three out of five years profitability. Then there is the growth and enterprise market segment which targets small and medium sized businesses. There does not need to be a profitability record. The only requirement is to show one year of cash flow. There does not need to be a minimum number of shareholders at launch, but within three months, there must be 25 shareholders in the company. The asset size of the company should be 10 million shillings. This is supposed to attract the majority of the small and medium sized companies who would like to come to the market. There are currently two ways of listing a company. First is by introduction, which means bringing in the register and bringing the company straight to the market. The second way is to list the company and raise money through an IPO. The eligibility requirements are very accommodating for companies who would like to come to the market. We also allow cross listings. A company could be listed on our exchange and be able to cross list into Kenya through the Nairobi Securities Exchange as well.

What are some of NSE’s most significant listings and success stories?

There are many, but the most significant to date is Safaricom. Safaricom came in 2008 and with that brought in well over an additional 1.8 million new potential investors into the market. It was a huge IPO of 50 billion Kenyan shillings. We saw a subscription of five times what they were looking for. It has continuously performed very well. From the offer price of five shillings, today Safaricom is trading in excess of twenty shillings. It has perennially paid very good dividends to its shareholders. And if you look at the company, it is not leveraged in a big way. They are really growing and have penetrated our markets. We are able to share a piece of this success with every Kenyan in a big way with a very large IPO. Safaricom currently occupies our largest market capitalization on the Exchange and it has a huge composite shareholding both foreign and locally, and the company has continued to perform extremely well. Because of its global appeal, Safaricom provides us with a good showcase when we go to international roadshows and talk to investors. Everyone already knows about M-PESA globally and that was a Safaricom initiative.

What are some challenges that you have to face on a daily basis and what do you do to overcome these challenges?

The challenges to the Securities Exchange are not particular to us but are common challenges affecting other markets as well. Today, the bigger challenge in our markets is reduced trading volumes. This is likely added to by more macro issues. For instance, the effect of the global oil prices has affected the view international investors have on frontier and emerging markets. When an investor is looking at Africa and they look at their portfolio and have taken a view across Africa, we are not left out. If they lighten their positions in Africa, we are equally affected. The macro issues are a big challenge for us. We are very conscious and will keep watching what is happening on the global scale, because that has a direct impact given that our market has almost 70 percent foreign client turnover. The other challenge we have is a low retail base. Only about five percent of the local retail does trade on the market. There is the challenge of apathy and financial literacy. We have to continuously educate the public on the benefits of the stock exchange and the benefits of investing in the capital markets. The retail investors tend to like IPOs. When there is a long absence for a big IPO, then you find them going into other forms of investments, especially real estate which is traditionally a very attractive investment for Kenyan retailers. We have seen a reduced impact from our local investors as well, but they are affected by what is happening with the local macros. For instance, when interest rates rise in our country, the local investors tend to go towards deposits and government paper and leave the stock market, and vice versa. We have to remain competitive. When investors look at Kenya, Nigeria, South Africa, they look for where the multiples are good. We have to remain very attractive because the competition is extremely intense given that we are taken together at the same level in terms of market analysis and reviews.

Your aim is to be the leading securities exchange in Africa and provide a world class securities trading facility. With stock markets like South Africa, what is your strategy?

Our strategy is transformative. We try to position our markets differently. In Kenya today, there is a lot of interest from global players who are looking at which markets are driving value now. Kenya has not given quite the surface in terms of value. Other markets are approaching maturity. Kenya has a very diversified economy. Our economic mainstay is not commodities or minerals; it is services, agriculture, banking services and telecom. Our strategy is focusing on increasing the number of companies in our markets, converting a lot of the government entities into listed companies, bringing in companies that can tap into these untapped sectors like minerals, oil and gas through the stock exchange and through distributing part ownership to Kenyans. We do not have the same numbers of stock brokers and investment banks as the other players so our opportunity has yet to come. We have yet to see growth in terms of the numbers of those advisors coming to the market. The region that we operate in has an extremely low penetration of investors investing in this market. As more financial literacy takes place, as people become aware of the value of investing, as the youth population change the investment attitude from real estate to investing in real estate through products like real estate investment trusts and futures tradings, the markets will scale up. We are very optimistic about this becoming a very big market. Certainly, JSE will remain a big market. We are focusing on beating the rest of the Exchanges in Africa in terms of compounded annual growth rate, revenue and turnover.

Where do you see NSE in five years’ time?

In five years’ time, NSE should be able to have well over 100 listed companies in Kenya. Our futures market should be up and running with many contracts and many types of contracts trading on it. We should be able to have all these new products. The real estate investment trust product is really going to be the drive for infrastructure development once the market starts to appreciate it. It is a way of bringing together property owners and money through the market and that is going to be very transformative. ETFs coming into our market will provide opportunities for people who have wanted to invest in other products such as gold. This market in the next five years will be very advanced and sophisticated with a leading number of investment banks playing. The retail investment growth will come through mobile trading. We are working on a mobile trading platform to enable youth and anyone else to invest through their phone. We see a very robust market in the next five years, certainly.

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

Kenya is very well positioned in Africa and in the frontier markets to provide international investors an opportunity to get attractive yields. The yields we offer in this country, both on the fixed income and equities space, outweigh what international investors would get in more mature markets. We have a very good infrastructure. Our infrastructure on the cash markets is very advanced and it has been running for many years. We are setting up a very good infrastructure for the deliveries market. We will have everything that they are looking for. We have a very stable macro environment. Today we have a very freely trading currency with no controls on it. There are no controls on any key economic factors. Our inflation rates are very low at the moment. We have a very stable political environment. These are key investor considerations when you are coming into a market. We have a very advanced domestic pension sector worth well over 1 trillion Kenyan shillings which is equal to 10 million dollars and growing. We have everything a global market has and the only thing we need to work on now is scaling up. Right now is the right time to come to Kenya. We have had many conferences such as the Japanese African Conference (TICAD – Tokyo International Conference on African Development), the United Nations Trade UNCTAD Conference and issues of sustainability and corporate governance were all discussed. We have hosted many leading heads of state in Kenya. All this should send the message that something is going on and it is going on right.