It is now apparent that low activity and dismal transaction levels at the Nairobi Stock Exchange (NSE) are putting a severe financial strain on all operators in this market.
The Central Depository and Settlement Corporation (CDSC) is the latest casualty in a market that has been struggling to get out of recovery mode for the past two years.
CDSC has reportedly petitioned the Capital Markets Authority (CMA) to increase the level of funding and prevent the corporation from shutting down. Others hit by lean activity at the NSE are stockbrokerage firms and investment banks, which have seen their commissions and fees hit the floor.
FINANCIAL TROUBLE
Not even the CMA has been spared. Its surplus has been on a sharp decline over the past year.
Trouble for the NSE first began when two market intermediaries, Nyaga Stockbrokers and Discount Securities, went into financial trouble, necessitating a shutting down of their operations. What followed was an erosion of confidence, as local investors, who also drive the bulk of activity at the NSE, fled the bourse.
Matters got worse with the global financial crisis that ignited a flight by foreign investors out of the Nairobi bourse, and other similar exchanges in the developing world.
The local equities market has therefore been on a free fall, putting pressure on all players in this segment to survive.
Now, revelations that the CDSC is facing financial trouble, and could even shut down in the next three years, is cold and chilling indeed. At stake are CDSC clients' accounts estimated at 1,879,435 as of May 2010.
The corporation's primary revenue streams include transaction and depository levies, meaning that any decline in the volume of activities on the bourse severely affects the company's earnings. Currently, CDSC earns 0.06 per cent as transaction levy from every equity transaction.
This means that for the corporation to find its feet again, the level of activity at the NSE must be restored.
It also brings into sharp focus current efforts by CMA to restore market confidence and bring back retail investors, who incidentally drive daily activity at the bourse. It is still unclear whether Discount Securities will be revived. It is also unclear whether all investors who lost in Nyaga Stockbrokers have been fully compensated. Questions also remain unanswered on whether Ngenye Kariuki will reopen for business or be liquidated.
behind schedule
In the event that it is liquidated, the Sh50,000 limit that each investor will receive as compensation is too little and should be reviewed.
Further, plans to demutualise the NSE, thereby reducing the influence of the powerful stockbrokers and investment banks, is already running behind schedule, further denting the market's image.
Although trading at the NSE is now automated, there have been delays in purchasing a back office system that links brokerage firms with the CDSC and the Automated Trading System(ATS).
At the moment, only the ATS and the CDSC are linked, leaving stockbrokers to operate offline and in the dark.
It is upon CMA to ensure stockbrokers are brought into the loop through integration with the ATS and CDSC platforms to make the entire trading regime at the stock market more transparent and accountable.
Only when investor confidence is restored can the market pick up again and earnings from intermediaries improve.
While the presence of foreign investors at the NSE has improved, it is still erratic and unpredictable.
This implies that CMA must find ways of attracting retailer investors back to the market.
It must also strive to improve corporate governance through demutualisation, freeing the market from dominance by a powerful clique of stockbrokers and investment banks.
The installation of an electronic platform for stockbrokers and investment banks that links with the rest of the market is definitely a step in the right direction.
Source: The Standard | Online Edition
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