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February 20, 2019

Harness the capital markets

Despite the growth in the general economy, many companies and particularly SMEs have difficulties raising funds for expansion. For one, banks and financial institutions are reluctant to provide long-term credit. Secondly, the weak performance of individual listed companies has made it difficult for them to raise funds through the capital markets. This is despite the opening up of the SME trading board that allows young firms to be listed and raise equity and debt funding at the Nairobi Securities Exchange. The performance of the NSE is primarily driven by a handful of large companies that have maintained strong profitability and healthy balance sheets. Companies with low brand visibility, weak balance sheets and small capital have difficulties raising funding through issuing of bonds or equity. Lack of sufficient liquidity –availability of sell-and-buy opportunity – has led to a cause-and-effect problem where liquidity is low because of lack of investor interest. Investors are not interested because liquidity is low. As witnessed after the Asian crisis of 1990s, the capital development and especially the debt market has the capacity to catalyse the momentum of economic recovery. To achieve this, the status of the capital market needs to be made more favourable for the growth of a debt market by building sufficient market depth and sell-and-buy opportunities. Some of the interventions may include the following:

One, disclosure requirements may need to be tightened. The consequence of lack of sufficient disclosure or trust in the quality of disclosure means investors inherently assume the investment is risky and requires a steep risk premium. Directors, auditors and the regulators have the responsibility to build the confidence of investors and must be held accountable where disclosure has failed. Two, requiring issuers to obtain credit rating from approved rating agencies. The role of the credit agency will be to provide an objective analysis of the borrowing firm and the risks faced by investors. Three, there is need to promote the participation of retail investors through reduction of the minimum lot size of bond trading. The much awaited opening of the Treasury Bills to retail investors to invest in government securities through mobile technology will open the platform for private bond issues to tap the retail market.

Four, a continuous development of benchmark securities is critical. Typically, bond issues are priced off the government securities of similar maturity. The government issuance programmes need to continuously play the role of providing this pricing mechanism.

Finally, and most critical, the development of the retirement benefits system is critical to increasing local demand for the bond market through mobilisation of latent capital.


  Karen Kandie is a financial and risk consultant with First Trident. [email protected]

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