By Standard Correspondent

The use of financial guarantees and other types of underwriting is becoming increasingly common in corporate debt market as financing deals become more complex.

If borrowers have available to them only a narrow range of instruments, they can be exposed to significant mismatches between their assets and liabilities.

The risks entailed by such mismatches have to be managed and the ability to do so will often depend on whether certain exposures can be adequately hedged. Liquid markets help capital market participants to hedge their exposures.

For instance, if a bond market is not well developed, firms may have to finance the acquisition of long-term assets by incurring short-term debts.

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As a result, their investment policies may be biased in favour of short-term projects.

controversial

The relationship between intermediation through banks and disintermediation through capital markets is controversial. It is of concern the role commercial banks can play in developing our bond markets.

The view that increased corporate bond issuance only takes away profitable business from commercial banks is oversimplified.

One implication often drawn from developed market experience is that a key prerequisite for the development of a corporate bond market is the existence of some form of independent credit risk assessment.

Can independent credit rating be reconciled with provisions that allow some regulators of institutional investors like Central Bank (CBK), the Commissioner of Insurance or Retirement Benefits Authority to determine credit ratings of the debt instruments "their" firms invest in?

budget deficits

CBK has multiple interests in the development of bond markets. At a fundamental level, the Government Treasury bond helps to fund budget deficits.

It is important to note that CBK has increased issuance of long-term Treasury bonds, currently with 12-year tenure, thus increasing the maturity period of Government debt.

Though Kenya’s financial sector is well diversified, it needs to be developed further.

The banking sector is dominated by ten large commercial banks, which account for more than 77 per cent of all deposits held by banking institutions.