Capital markets watchdog accused of favouring banks
The Capital Markets Authority (CMA) has been accused of working in cahoots with some commercial banks to control investment funds under the collective investment schemes (CIS).
Speaking during a forum on capital markets reforms in Nairobi, Cytonn Investment Management chief executive Edwin Dande said CMA must work towards pulling more investors into the market to help the country shift reliance to markets for cheap funds, instead of going for expensive banks loans.
In reference to investment arms like Cytonn Unit Trustee Schemes — one of the investment arms of Cytonn Investment Management — launched six months ago, he said the regulator is working with some trustees in the money markets to frustrate others.
Dande said his firm is being forced to appoint a new trustee under circumstances that tells a lot.
“Normally in developed and well-functioning economies, businesses rely on banks for only 40 per cent of their financing, while a balance of 60 per cent comes from capital markets funding,” he said.
Money market
He said interest paid to individuals, who save with the money market fund, was slightly higher, say 10 per cent, compared to bank savings which yield 4.6 per cent.
Dande said the requirement that the chairman of the CMA or trustee must be a banker explains why 95 per cent of funding comes from commercial banks while only five per cent are sourced from the capital markets.
“This is a clear indication that something is terribly wrong with our capital markets and we need to have the courage to examine the distortion,” Dande told the media yesterday. He said he has contacted CMA over the issue but the regulator took long to respond.
John Kirimi, director at Sterling Capital Ltd agrees, adding that the concentration of funding from banks is not solely a CMA problem, but can be attributed to the structure and history of investments in Kenya.
Kirimi said CMA oversees long term investments in the form of equities, bonds and other investment instruments.
“Unfortunately most people used to fund their businesses through banks and this practice has continued long after independence,” he said.
Callstreet Investor Relations director George Bodo said the capital and banking markets are complementary in how they process risks.
“So my view is that the public capital markets has three perceived deficiencies (but not necessarily real) including high regulatory compliance costs, general lack of domestic start-up investment mindset which then accelerates listing as an exit avenue for founding investors and lack of efficiency in processing risks compared to capital markets.
To demonstrate his concerns Dande said Cooperative Bank is both a lender, a trustee and a fund manager - offering money market funds in two ways - directly through Coop Money Market Fund and indirectly through CIC Money Market Fund, since it owns 74.3 per cent of CIC, saying such are the conflict of interest concerns which bother the sector.
Private offer
“Interestingly the bank is also one of the five bank trustees/referee in the same money market funds in which it is heavily vested,” he said.
Dande called for clarity to smoothen the process that a market participant needs to go through for a private offer.
“Capital markets need to move from a coercion and intimidation approach to a service-oriented organisation,” he said.
Kirimi said the issue of “conflict of interest” is entrenched in the capital markets and there is a need to ensure that governance is adhered to. “Kenol Kobil is one of such cases but it is not widespread.
The chairman of CMA has some level of conflict of interest because he is also the chairman of a listed company but in my view, this is not of material consequence,” he said.
