Most regulatory agencies pull in different directions, affecting rollout of new products

CS for National Treasury Henry Rotich (second right) lead in launching the World First Mobile Traded Bond at Nairobi Securities Exchange (NSE) offices

NAIROBI, KENYA: Kenya may be on record for selling a mobile bond for just under three months when M-Akiba closes on September 11. Normally bonds are traded within a week.

However, in one-and-a-half months, the mobile bond has just netted Sh170 million against the targeted Sh1 billion with a green shoe option of Sh3.85 billion.

This raises questions whether Kenyan investors are eager to make cash from the capital markets. While the global markets are astounded by the efforts to revolutionise the Kenyan market, little activity is seen at home, which has seen retail investors left behind.

“In the last two years, the Capital Markets Authority (CMA) has received international awards and recognition as an innovative regulator and has in this context continued to act in this capacity to support the sustainable growth of Kenya’s capital markets,” CMA said in an emailed response.

“The launch of the M-Akiba mobile retail bond this year was welcomed as a first on the globe, just as M-Pesa which has been a promising tool to democratise access to investment in Government securities for the retail market.”

In the recent past, Kenya has launched the mobile bond, derivatives market, asset-backed securities, the Barclays Gold Exchange Traded Fund, Stanlib’s Real Estate Investment Trust and Fusion’s Development Real Estate Investment Trust with little success after their launch.

Analysts say a cocktail of factors have worked against CMA’s masterplan - including a stock market depression, Government appetite for domestic borrowing, poor timing and little marketing when launching the products.

“New products need knowledgeable buyers and sellers to be correctly incentivised. In many of these products, there was insufficient market knowledge to buy into the products,” said Deepak Dave of Riverside Capital, a risk management firm.

“Further, regulatory and tax matters must also be understood. Given the volatile nature of policy making in the last four years, conditions were unstable to bet on new products.”

Rich Management Chief executive Aly Khan-Satchu observed that underlying conditions remain relevant when launching new products at macro level, adding that at a micro level, there were individual challenges with the various products.

“The first overarching point is that until May this year, we were slap-bang in a long entrenched bear market. We need to look at investor education and outreach,” he said.

 

M-Akiba

The mobile bond was touted as the next M-Pesa, so radical that the Central Bank of Kenya (CBK) Governor Patrick Njoroge said he was highly sought after by fellow central bankers who were inquisitive at the global decision making get-away meeting in Davos.

Head of debt at the Ministry of Finance Wohoro Ndoho says a counter during an East African meeting saw Tanzanians, Ugandans and Rwandese so blown away by the Kenyan product that they were expressing interest in getting a piece of the cake.

However, while the initial test offer of Sh150 million was oversubscribed, the current offer has been given a wide berth despite the bond offering a better return of 10 per cent than any deposit savings account at banks that currently average seven per cent.

“The challenge of liquidity and market-making stalled the roll-out and I feel there has been no real oomph! in the marketing push,” Mr Satchu said of the jinx that crippled the offer.

CMA believes that the slower performance of the second offering was a culmination of uncertainty over  election and the timing of the issue, noting that the mwananchi, being the key target, may have been inclined to hold investment decisions pending the outcome of the major event.

“This resulted in an extension of the offer period from the initial July 21, 2017 to September 11, 2017. Noting the significant market rebound immediately after the elections, it would only be reasonable to await the offer’s close to speak with certainty about its overall performance,” CMA said.

 

I-Reit and D-Reit
Despite getting a tax break, Kenya’s first Real Estate Investment Trust (Fahari I-Reit) which was issued by Stanlib Kenya Investments only managed to raise one-third of the targeted Sh12.5 billion. The firm raised just Sh3.6 billion through the IPO offering.

Shortly after, private equity firm Fusion Capital attempted a development of real estate investment trust (D-Reit) in June, targeting wealthy investors. It only managed to raise Sh873 million, well below the 50 per cent threshold. “Both the I-Reit and D-Reit were mis-priced as a number of the recent issues and initial public offering (IPOs) have been,” Mr Satchu said.

CMA says that at the time Fahari I-Reit came live, the Government was desperate for money and was paying top dollar for the Treasury Bills, further diverting investment from the instrument.

“It may be recalled that during the offer period for the Fahari Reit, Treasury Bills were offerings returns of up to 22 per cent, significantly higher than the Internal Rate of Return (less than 20 per cent) of the REIT product thereby creating a crowding out effect and hence the undersubscription,” said CMA.

“Furthermore, the policy decision by the Jubilee Government to aggressively fund Kenya’s development agenda through local long-term bond markets, particularly for infrastructure projects, has resulted in significant liquidity crowding out for private sector capital raising,” it added.

 

New Gold Exchange Traded Fund (ETF)

Last week, the Barclays New Gold ETF sold zero units at a time when gold is rallying globally and considered as the safest bet.

When it was launched, the ETF was lauded as the largest in Africa with a value of about $1.4 billion (Sh144.4 billion) and has made 400,000 units available to investors in Kenya.

It allowed investors to indirectly own gold at a minimum trade of 100 shares and is expected to help diversify portfolios from equities and bond markets. The ETF was launched at a price of Sh1,250 and is tax exempt.

“When even 100 units are sold, I feel happy because once we appreciate the product and given the rally in the gold market this is going to be a good thing,” said Nairobi Securities Exchange (NSE) Chief Executive Geoffrey Odundo.

He pointed out that the products have established a proof of concept and that they can work. He however called for more local issues, saying Kenyans respond to their own products more than those introduced by outsiders.

 

Asset backed securities, global depository receipts and derivatives

The NSE boss said that after 60 years trading equity and debt, the Nairobi bourse was ready for the high octane product that will distinguish it in the region as a financial hub.

In the pipeline are plans to roll out a derivatives market dubbed Next, issue asset based securities and global depository receipts.

Mr Deepak said regulatory authorities are partly to blame for mixed results since they are working at cross purposes - sometimes inadvertently crippling each other’s initiatives.

“Government needs to coordinate the regulatory agencies. Central Bank of Kenya (CBK), CMA, Kenya Revenue Authority (KRA), Insurance Regulatory Board (IRB) and Retirement Benefits Authority (RBA) are still all pulling in different directions.”

For example, you cannot launch ETFs and yet have a rule preventing shorting; you cannot launch derivatives and have capped interest rates on debt instruments; ABS cannot work if underlying assets have a different capital charge than the securitised package. A lot of these rules are internally contradictory, and thus preventing uptake,” he said.

Mr Satchu says that for asset backed securities (ABS), it is technical while derivatives need more work.

“For ABS, I am sure this is making progress and is just not yet ready for the market. For derivatives - this is an important reform that we need to now move along with purpose,” he said.

He noted that for CMA, the problem has been compounded by a bear run at the NSE which fell to its lowest levels at the beginning of the year and has been depressed since 2015.

“The Kenyan market, though resilient, has experienced a persistent bear run in the last one year which slowed down investment and trading activity,” said CMA.

“Additionally, inflation rates were relatively high in the first half of 2017, from 6.99 per cent in January 2017 to a high of 11.70 per cent recorded in May 2017. These factors coupled with the introduction of interest rate capping law in September 2016 negatively affected investment appetite and investable fund in the capital markets.”

The market authority said the resultant flight to safety saw substantial institutional funds redirected to both short and long-term Government debt instruments.

This was because they are offered at competitive rates and are perceived to be risk free instruments with guaranteed returns.

“Looking at the bigger pictures as has been detailed in the last three quarterly issues of the Capital Markets Soundness Report, there are undeniable underlying issues that have had broadly sloweddown uptake of new capital markets products in Kenya,” CMA said.

Gambling has also been fingered for pulling away investors in search for overnight riches especially the youth.

“At the small retail investor level, and particularly among the youth, the surge in mobile based betting and the promise of significant short term returns has also been seen to re-direct substantial amounts of small savings that might otherwise have found their way to the capital markets,” the capital markets regulator noted.

Kenyans might also fear debt instruments and invest only in land, lacking basic information on the boundless opportunities at the capital markets.

“We are a small economy and under-developed financial sector. Let’s not treat that as a shameful thing. Instead, patience, consistency and stability will breed confidence and knowledge so uptake will sharply rise,” Mr Deepak said.

“We have a small pool of ultra-sophisticated players looking for instant gratification when they launch products. When it doesn’t happen, it’s all declared a failure and we move on to the next shiny object. Let the market do it’s job, don’t give up and walk away,” he added.

CMA also noted that the two-year crisis in the banking sector had a role to play in the inability to boost investment activity in the diversified options.

“A look into the recent past notes that the market challenges created by Imperial Bank in October 2015 and Chase Bank in April 2016 are yet to be resolved,” noted CMA.

As at June 2017, a total outstanding amount of Sh6.82 billion in relation to corporate bonds is still subject to payment and performance moratorium affecting Imperial Bank and Chase Bank.

“Further, and additional Sh4.95 billion worth of industry deposits were held in Imperial Bank. This constitutes a significant amount of investible funds that may otherwise have found their way into the Fahari I-REIT in November 2015 and the Fusion D-REIT in June 2016 which was further compounded with the winding back of investor risk appetites for new products,” CMA said.

 

Remedy

To remedy this sorry state is to get the market back on track. Deepak says Kenya should move with speed to implement the Nairobi International Finance Centre law to bring in players who are already used to handling these complex kinds of investments.

Kenya should also ensure rules are clear and predictable with all authorities working in tandem.

“If rules become clearer, the investors will engage provided the market has two important characteristics. First, liquidity through buyers and price-givers of last resort i.e. market-makers.

Second, a stable regimen for issuance of the products will encourage diverse issuers. This diversity encourages price discovery, thus yield comparison, and therefore more investment,” Deepak said.

CMA says it has been working to put in place initiatives that avert similar occurrences in the market by on-boarding legal consultants to review the insolvency legal framework affecting the capital markets.

This is with a view to identifying necessary amendments to provide for insolvency netting and settlement finality within the financial markets in Kenya. The move will allow for the timely unlocking of custody and trust holdings in financial institutions.

To address operational challenges, the Authority is working closely with industry stakeholders; and potential issuers to ensure that operational aspects of new products are well addressed before launch, including more robust assessment of the potential risk environment.

CMA is also working with experts and consultants in developing regulations based on international best practices to avoid having limiting regulatory requirements for issuers in areas such a securities lending and borrowing to support market liquidity.

Global depository receipt and the pool of available instruments will allow the capital markets to support infrastructure financing as well as galvanise corporate debt markets.

Through its investor education and public awareness initiatives, CMA is promoting workshops and round table discussions with industry players to identify areas of refinement and optimisation on new and existing regulations and products.

Not all is looking gloomy according to CMA, considering the market bull-run in the months prior to the election which has only continued to surge post-election, hitting a two year high of 4,013.71 up from last week up from 2789.64 at the beginning of the year.

“This positive sentiment is expected to spur market growth and deepening. Previous similar surges have operated as catalysts for new issues. The Authority will seek to ensure that new products are adequately packaged and marketed to prevent the possibility of product withdrawal from the market,” CMA said.