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New regulatory changes inspire confidence in Kenyan capital markets

Interview - November 30, 2015

Paul Muthaura, Acting CEO of Kenya’s Capital Markets Authority, explains how Kenya’s new investment framework puts it on a level pegging with the world’s major investment centers, its capital markets’ competitive advantages, and how it will become the market of choice for many to raise large amounts of capital.



To what extent do capital markets in East Africa play a pivotal role in the continent’s growth?

When you look at the wider continental story, the majority of the countries are thriving, with financial entities that started 20 years ago with as little as several thousand US dollars-worth of loans that are now worth over several hundred million dollars. This transformation has been led by growth in the manufacturing of consumer goods, a burgeoning middle class, and sprouting infrastructure. The rate of growth and demand is significantly outstripping the ability of the traditional bank structures to finance further expansion; that’s where ultimately we see the capital markets playing such a critical role in the transformation of the continent as a whole.


How is the Capital Markets Authority (CMA) in Kenya creating a friendly and convenient trading environment while increasing the nation’s competitiveness in the region?

In the East African story, the number of IPOs during the last few years has not been as high as expected, which has led us to establish several critical initiatives in order to accelerate the number of companies that are going to come forward. First and foremost, we have introduced a new Companies Act in Kenya that revolutionizes and modernizes the framework for companies’ operations, public listing procedures, directors responsibilities, and establishing much more explicit liability and responsibility for corporate governance and risk managment for the board of directors.

The Companies Act is complimented by the new Corporate Governance Code for Public Listed Companies, which was developed by the Authority in collaboration with industry stakeholders and is currently awaiting publication into law by Kenya’s National Treasury. It was benchmarked against South Africa’s King III, the new code in the UK, the Malaysian and Indian codes, as well as a number of others. We are very confident that the framework will put us at par with any other financial centers, whether regionally or internationally, when it comes to transparency, accountability, and clear allocation of responsibility at board level.

In Kenya we have taken much further strides that will compliment the new Corporate Governance Code with a new Stewardship Code for institutional investors. The primary intent of the code is to encourage responsible management and oversight of assets by institutional investors through engagement with listed companies in order to ensure a more sustainable growth. If you look at comparative markets that have stewardship codes, closest to us is South Africa, which is significantly larger and more mature. This is the progressive direction we are committed towards. We believe very strongly the new regulatory changes are going to create the necessary space for confidence in issuance and in the growth opportunity.

We also note that there have been significant developments in strengthening market infrastructure and operations with the move to settlement of equity and corporate debt transactions to central bank money, the introduction of more stringent corporate governance and conduct of business standards for market intermediaries, the implementation of risk-based supervision, the introduction of international certification standards for market players in conjunction with the CISI out of the City of London, and the demutualization and self-listing of the Nairobi Securities Exchange.


How is the CMA set to compete with more sophisticated markets in the region such as South Africa?

South Africa (SA) is quite a significant market, but when you look at its impact beyond its borders, other than the jurisdictions that directly have borders with it, it has not been able to play an effective role as a funding centre into the rest of the continent. SA is a great destination for capital, however it is not as effective a conduit for capital. That’s where Kenya really has a very strong competitive advantage. When you look at the scope of countries we’re looking to target, we’re conscious that the continent is ultimately going to be divided into four. You have Nairobi, Lagos, Johannesburg, and Egypt/Morocco.

“we aim to meet our ambitions over the next 10 years. We have no delusions; you don’t wake up today and become the best.”

How is the CMA strategizing to become the conduit for the rest of Africa’s financial sector?

Kenya already stands out as financial center for the East African Community, but it is true that we are more ambitious and are aiming to become a competitive financial center able to cater to the whole of Africa, and in particular Middle Africa is our current target. Looking at the continent, the Master Plan has identified approximately 18 countries in sub-Saharan Africa that are ultimately not being adequately catered for in terms of market based financing. There is a significant growth occurring; corporate growth, infrastructure development, but no jurisdiction has emerged that can channel funds into all these countries in an effective and scalable manner.

The CMA and the wider Kenyan industry is conscious as these markets in the continent grow and with less traditional financing from banks in the context of Basel III convergence, Kenya’s Capital Markets through its 10-year Capital Market Master Plan will become the market of choice for many of these jurisdictions to raise large amounts of capital.

We are looking at the bigger picture, and this is where our 10-year master plan comes in to inform the innovation and reform of Kenya’s capital markets. Through the implementation of this blueprint we will not only be developing Kenya, but creating mechanisms for funding mining in Congo, funding dams in Ethiopia and funding new railways across Tanzania all through this single market.


Bearing in mind you were recently voted the most innovative capital markets regulator in Africa, how close is the CMA to achieving your vision of becoming “The Heart of African Capital Markets”?

We are only beginning, with 2015 being only year one of the 10-year master plan which was launched in November 2014. Within such a short time, the CMA has already been recognized the most innovative regulator. We have a global benchmark corporate governance framework in place, a new Companies Act, and new products coming in such as Real Estate Investment Trusts, Exchange Traded Funds and Derivatives. Our ambition is targeted to be achieved over the 10 years; we have no delusions. You don’t wake up today and become the best. It is a very clear and sequential growth pattern, but when you look at the plan, what was critical to us is we identified absolute clear milestones, so that even from an external perspective, you can assess whether the master plan was just a piece of paper, or if it’s actually a committed blueprint for growth and development. We have already exceeded the targets for year one.

By the end of 2016, we expect to be reclassified into an MSCI emerging market, as opposed to a frontier market. Which means underlying work around growing market capitalization, and creating greater flexibility for foreign investors. To this end, in July 2015 we amended the law to remove the 75% cap for foreign investors to come into our listed companies.

All of these are very conscious and sequential actions to make sure that we’re going to achieve our goal of becoming an international financial center and the heart of African capital markets.

We further note that implementation of the Master Plan has been embraced at the highest levels of Government with the Steering Committee including 4 Cabinet level representatives including the Chairman who is the Cabinet Secretary to the National Treasury.


How would Nairobi-London dual listing play an increasing role for foreign investment, and also domestic reinvestment into the Kenyan capital markets?

When we look at dual-listing, we see it from two different perspectives. At one level where you have domestic Kenyan companies that realize with some of their growth parameters and aspirations, the size of our local capital markets are not going to be adequate to raise the kind of capital they need. They have an opportunity to dual-list so capital can be raised both in Nairobi and in London. By the same token, we see dual-listing as an opportunity for companies looking to enter into Kenya. As with many countries, there is a local content expectation for companies coming into Kenya, be it a 30% or a 20% local ownership, and we want to make it very clear that if they use dual-listing, they can effectively raise their local participation through the markets as opposed to identifying and negotiating with a particular investor.


What would Prime Minister David Cameron’s visit mean for CMA and Kenya?

The visit itself is a strong message, almost like a stamp of assurance. One, it is a statement of interest by the UK business community; secondly it is a commitment to partnership between governments. When you look at the historical links between Kenya and the UK, this serves as a reinforcement of what we already have. Timing-wise it is also very much in the interest of the UK especially when they look at the increasing role of the East on the continent, to make a statement. We’re here, we are in, we’re committed.