Challenges Facing Capital Markets in Kenya

  

Date Posted: 11/19/2012 11:22:56 AM

Posted By: linken  Membership Level: Bronze  Total Points: 58

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Capital markets is an equity and bond market where companies and the government can raise long term funds i.e. for longer than one year. The government recognizes the potential of using the capital markets to mobilize funds to finance long term investment and development projects in key areas such as developing the transport system. This has led to the setting up of the Capital Market Authority(CMA).

The Capital Market Authority was established in 1989 through the Market Authority Act to assist in the creation of an environment for growth and development of capital markets in Kenya. The CMA is charged with, among other responsibilities, to oversee that investors are protected from fraud and that they are compensated in case the brokers fail to honor their obligations. It does this through operating a compensation fund. The authority also regulates and license stockbrokers, investment advisers, security dealers and the depositories. It is also involved in the process of listing of new companies in the Nairobi Stock Exchange. It acts as a channel through which the foreign exchange finds its way into the Kenyan market.

In line with Kenya’s Vision 2030, there is need to provide funds to start new businesses and to expand existing businesses and industries. The capital market provides companies and the government with an avenue to raise capital through the sale of shares to the public. The capital markets bring together those with surplus funds and those with a deficit and facilitate the exchange of the monies. This has however not gotten to its optimal level due to the following challenges facing the capital markets.

First, there is a limited number of companies listed in the Nairobi Stock Exchange (NSE). Compared to the well established stock markets in developed countries like The United States of America and Europe,

the investor in Kenya has limited options. The companies listed in these developed economies are many and with a large base, hence the options are unlimited.

Next, the investors have little confidence in the Kenyan capital markets. This is due to losses that have been experienced in the past. Take for example the Safaricom IPO; many who invested are yet to recover the funds they invested. Another example is the losses that resulted when a brokerage went under. These unpleasant occurrences make investors to opt for other investment options.

The third challenge is the limited access to long term securities. The government bonds and corporate bonds are in short supply hence demand is high. This favor the large companies which have unlimited funds to invest leaving out the small and medium sized businesses from benefiting from this source of financing. As the capital markets grow it is expected that the supply of the long term equity securities will also increase.

Another challenge is the costs a company has to undertake in order to be able to trade in the capital markets. For a company to trade in the NSE it must be listed in the stock exchange. If it meets the requirements set by the CMA, then it has to incur floatation costs. Many companies find this process cumbersome and expensive that they consider other methods of raising funds, e.g. borrowing for commercial banks.

Lastly, there are the effects of changes occurring in the country i.e. in the social-political environment. The political climate will have a great impact on the capital markets. For example, during the 2007-2008 post election period when violence broke out, the capital markets came to a standstill like every sector and this also scared away potential investors. Lack of awareness by the public on the services and benefits from the capital markets is a challenge CMA has to deal with.

The capital markets have a great role to play in the developing countries’ economies. This means that the authorities charged with the responsibility of controlling them have to come up with solutions to make them work more effectively and play their role in these economies.

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