Increased competition from other sectors is one of the factors contributing to low uptake of capital markets products and services according to the Capital Markets Authority’s (CMA) recently released a research paper.
The paper reads:
“Kenya, like many emerging markets, offer a favorable return on certain instruments such as infrastructure bonds that offer a double-digit return compared to other products considered high risk such as equities. Given the commercial nature of capital markets players, return earned from investments play a significant role in determining where to put their monies.”
Kenyans are redirecting their savings towards other investment opportunities such as betting as opposed to capital markets investments that are more long-term.
The limited activity in secondary trading has contributed to low liquidity in the market. Most institutional investors use the buy and hold investment strategy which has limited activity in the secondary market.
“A liquid market is one where there are many bids and offers and participants can easily enter and exit it for minimal transaction cost, the absence of which results to high transactional costs as bid offers are likely to be unmatched by offers,” reads the research paper.
Currently, there are a few active counters in secondary trading such as Safaricom and EABL.
During its study on low uptake of capital market products and services, CMA found that regulation was partially a contributor.
These barriers include the cost of compliance in accordance with the Corporate Governance framework requirements and restrictive regulatory requirements prohibiting investors’ involvement.
For instance, the minimum amount one can invest in a DREIT is Sh5 million. “This is considered a key hindrance to the uptake of the product as the target investors are not willing to put in this minimum investment, due to comparisons with direct investment in real estate.”
In addition, the Nairobi Securities Exchange discovered through its analysis that some companies have delisted from the exchange so as to relinquish “regulatory costs to other investors able to meet the costs of the same.”
Other contributing factors are macroeconomic, lack of coordinated market strategy towards introducing new products and services, the reluctance of market intermediaries such as stock brokers in developing their niche, and structural problems from the demand side where investors’ understanding of capital market products and services is limited.
On the macroeconomic factor the CMA observes: “Given that capital markets activity in Kenya is mainly characterized by foreign investors and the fact that trading is only done in the local currency (Kenyan shillings) adverse changes in macroeconomic factors such as GDP, inflation and interest rates pose exchange rate risks to foreigners depending on whether the currency depreciates and appreciates,” the research paper states.