Kenya has continued to score poorly on the Absa Financial Markets index’s (AFMI) fourth pillar of capacity of local investors. This pillar measures local investor capacity based on the amount of pension fund assets available in the country relative to the population and market capitalisation.
Broadly, pension funds and other institutional investors can play a significant role in capital market development. Not only do they become large sources of capital, their long investment horizon allows them to move away from government bonds and bank deposits towards investments such as equities and corporate bonds, providing local markets with liquidity.
Since the launch of the index in 2017, Kenya has continued to score below 50 points (the best score being 41 points in 2020), with 100 points being the best possible performance. Instead, that pillar has been dominated by South Africa since launch. This speaks to two issues. First, it speaks to the low savings rate in Kenya.
Latest statistics by the Kenya National Bureau of Statistics (KNBS) on national disposable income and savings shows that net savings, as a share of gross domestic product (GDP) stood at 1.1 percent in 2020. This means that consumption of fixed capital formation has to be financed through borrowings or importation of capital. Kenya’s per capital pension fund assets is still under $500. Further, retirement benefits assets under management, as a share of GDP, has only moved by 100 basis points over the past six years, reflecting a weaker savings momentum.
South Africa, on the other hand, has seen its savings surge to 18 percent in 2020, reflecting a change in spending patterns among households during the Covid-19 pandemic.
In Kenya, where household liquidity was already too tight pre-Covid, the pandemic has exacerbated the situation. Indeed, a significant number of households resorted to unorthodox means to survive. For instance, the FSD Kenya/FinMark Trust COVID tracker shows that 13 percent of households nationally had begun to sell assets to generate liquidity. Another significant portion of households survived on credit from suppliers, especially shops, digital lending apps, Chamas and even friends.
In a post-Covid environment, there has to be a conversation around how to increase national savings rates in Kenya. Second, it also speaks to asset allocation by the managers of pension funds.
Kenya Investors Allocation
According to Retirement Benefits Authority (RBA) disclosures, pension schemes continue to invest heavily in government securities with the asset class accounting for 44.12 percent of the total assets under management at as June 2021 while equities and property investments accounted for 16.9 percent and 16.7 percent of allocation respectively.
This allocation profile presents two constraints in as far as market development is concerned:
(i) pension funds cannot provide market liquidity in the form of underwriting any debt or equity issues (especially in initial public offers), a role which can enhance retirement returns; and
(ii) they also cannot participate in securitized products, especially real estate-backed securitizations, a phenomenon that enhance product development as well as market deepening. In essence, the Absa Financial Markets index provides a platform for introspection on various aspects of our financial markets.
READ; Kenya’s Position Drops in Absa Africa Financial Markets Index 2021
