CMA banks on reforms to restore sanity

By James Anyanzwa

The Capital Markets Authority (CMA) is pursuing major reforms to strengthen its regulatory framework.

The ambitions move is aimed at transforming the struggling local bourse into a leading regional financial hub.

In its quarterly publication, the market regulator says the grand plan will ensure a robust and facilitative regulatory framework, which is critical to maintaining investors’ confidence.

CMA’s eight-point reform agenda include reviewing of the current legal and regulatory framework and the setting up of dispute resolution mechanisms.

"The agenda also aims at facilitating cross-border transactions and harmonizing the region’s legal and regulatory framework to give more confidence to firms listed on two or more stock exchanges," reckons Stella Kilonzo, the authority’s chief executive.

In the short and medium-term period, the authority in consultation with stakeholders plan to formulate prudential guidelines akin to those used in the banking sector so as to ensure that all licensees publish their accounts.

Mandatory guidelines

It will also ensure that all market intermediaries that collect funds from the public must secure professional indemnity insurance to cover liabilities arising from cases of negligence or omissions.

Other critical reforms include, among others, making corporate governance guidelines mandatory for licensees handling public funds and a requirement that will see all licensees fully automate their back offices.

Kilonzo says the authority would also introduce new financial products to allow organisations to raise cheap and long-term capital.

"This will be achieved by deepening the existing products, developing new products and advocating for privatization through the Nairobi Stock Exchange," says Kilonzo.

Kilonzo views the proposed review of the market structure would accommodate different classes of issuers and investors, a move that is critical to the review process.

The CMA was established through an Act of Parliament with a mandate of regulate and facilitate the development of an orderly, fair and efficient capital markets.

"The potential of the local capital markets is great as has been witnessed over the years where some of the counters have realized very impressive gains," explains Kilonzo.

Investor awareness vital

She was, however, cautious to point out that investor awareness is vital, since market abuses and malpractice target the unsophisticated investor.

"The best way to protect such investors is to raise their knowledge base and skills on issues related to investment in equities," she says.

The Kenyan capital markets offer an array of investment products in the form of shares, bonds and unit trusts.

The type of products chosen by the investor to commit his or her capital, however, depends largely on financial goals, timeframe and amount of capital available.

Unit trusts have grown popularity in recent years. Official data from CMA indicates that the number of approved unit trust funds have grown from virtually zero in 2001 to 11 in 2008.

Unit trusts have since proved to be an ideal investment vehicle for small investors to diversify their investment portfolio without the limitation available cash for investment.

"As a market becomes sophisticated and more volatile, unit trusts become safe havens for less, sophisticated and less capitalised, conservative individuals in the market," says Kilonzo.

A unit trust fund is an investment scheme that pools money together from many investors who share the same financial objective to be managed by a group of professional managers.

The managers invest the pooled money in a portfolio of securities such as shares, bonds and money market instruments or other authorized securities to achieve the objectives of the fund.

The CMA acknowledges that institutional and market infrastructure reforms already initiated has enabled the capital markets to play a pivotal role in the country’s economic recovery effort.

These include among others automation of the authority’s processes through development of a workflow system, which is currently underway, and the adoption of risk-based supervision to ensure that CMA’s resources are channelled to areas posing greatest risk to the market.