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Kenya rolls back in new ABSA index

By John Otini
Friday, October 16th, 2020
NSE 20-Share Index recorded a 4.63 per cent decrease to close the quarter at 1,852.29. Photo/PD/FILE
In summary
    • Kenya needs to work on connectivity to international Central Securities Depository (ICSDs), introduction of primary dealer system, interbank forex turnover, greater market transparency, tax  regulatory environment, inclusion of corporate ratings, improved protection of minority shareholders.
    • South Africa, Mauritius, Nigeria, Botswana and Namibia rounded off  top five positions.

High taxes and low capacity of investors weighed down Kenya from third to seventh place on the Absa Africa Financial Markets Index for 2020.

While low market depth, low enforceability of standard financial market agreements and relatively low access to foreign exchange pulled down Kenya on the index, there was an improvement in corporate governance.

Relative to the total population, the index also shows that Kenya’s pension pool is low compared to Uganda, Tanzania and Malawi hence limiting the role of pension funds in deepening financial markets.

But the launch of green finance where Acorn raised funds to build student hostels, improved corporate governance and launch of a mobile application access for Nairobi Securities Exchange (NSE) investors deepened the market.

“The Nairobi Securities Exchange released a revamped mobile application for retail investors to boost financial markets,” the index noted.

Local capacity

The latest index is based on several pillars including market depth, access to foreign exchange, market transparency, regulatory environment and the tax regime, coupled with capacity of local investors.

Underlying macro opportunity and the legality and enforceability of standard financial markets agreements also informed the index.

While resilience of Kenya’s post Covid macroeconomic condition was noted, heavy debt which hit Sh7 trillion in August  and high fiscal deficit will weigh her down relative to Rwanda and Ivory Coast. 

“More work is needed towards inclusion of local pension asset participation and the property rights around enforce ability of master agreements especially on the off exchange transactions,” said Terrence Adembesa the Chief officer in charge of derivatives market at the Nairobi Securities Exchange (NSE).

The Capital Markets Authority (CMA) issued guidance allowing listed firms to purchase their own shares. These share buybacks, which can help encourage stock market activity, also helped improve the country’s score in this indicator.

Lack of close-out netting in the repo market to allow mark to market pricing for repo securities as opposed to pledge based collateral saw Kenya lose ground to competitors such as Ghana. 

Formal collateral

The EAC’s horizontal repurchase agreements (repos) – deals between commercial banks – have tended to use pledge-based collateral, without changing ownership of the collateral formally.

“Namibia, Kenya, Egypt, Seychelles and Morocco are in the early stages of drafting netting legislation,” the report says.

Kenya earned points for improved resolving insolvency scores.

Accorinding to the World Bank, Kenya had made resolving insolvency easier by improving the continuation of the debtor’s business during insolvency proceedings. 

Kenya and Mauritius have the highest resolving insolvency scores in the index.

However, South Africa once again topped the index by a wide margin, thanks to its deep capital and foreign exchange markets.

Mauritius was runner-up for the second year in a row, partly because of its alignment with internationally recognised legal frameworks.

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