The Nairobi Stock Exchange (NSE) in Kenya is small and somewhat speculative. The Exchange was established in 1954.
The Exchange is sub-Saharan Africa’s fourth-largest bourse. Twenty brokers (1995) are licensed to operate, and there are over 50 companies listed, with a total capitalisation of approximately $ 1.9 billion. The NSE’s market capitalisation jumped from $US 1.7 billion at the end of 1996 to $US 2.24 billion at end May 1997. Total NSE turnover in 1996 was $US 75 million through trade of 114 million shares.
The NSE, like many other emerging markets, suffers from the lack of liquidity in the market (averaging 4% in 1996). Foreign investment on the Nairobi Stock Exchange and foreign ownership of companies is by application. Foreign investment in the local subsidiaries of foreign-controlled companies is banned so as to encourage input into Kenyan companies.
The Kenyan government has made several reforms aimed at attracting foreign investment via the Nairobi Stock Exchange. The Exchange was opened to foreign investors for the first time in January 1995, but with a maximum limit of 20% shareholding for institutions and 2,5% for individuals. The ceiling on foreign investment has recently been increased to 40% for institutions and 5% for individuals, but fewer than 20 of the 58 listed companies are available to foreigners.
Since 1995 the Kenyan government has opened trade in the NSE and gilts to foreign portfolio investors; removed exchange controls; and introduced a favourable tax regime with non residents paying a 10% withholding tax on dividends (locals 5%) but no capital gains, stamp duty or value added tax. and the introduction of a central depository system is expected to speed up clearing and settlement.
Trading takes place on Mondays through Fridays between 10.00 am and 12.00 noon. The 20 member brokerages commissions have dropped from a fixed 2.5% to a sliding scale between 1.1% and 2%.
In Kenya, dealing in shares and stocks started in the 1920s when the country was still a British colony. There was, however, no formal market, nor rules or regulations to govern stockbroking activities. Trading took place on gentleman’s agreement, in which standard commissions were charged with clients being obligated to honour their contractual commitments of making good delivery and settling relevant costs.
At that time, stockbroking was a sideline business conducted by accountants, auctioneers, estate agents and lawyers, who met to exchange prices over a cup of coffee. Because these firms were engaged in other areas of specialisation, the need for association did not arise.
The NAIROBI STOCK EXCHANGE (NSE) was constituted in 1954 as a voluntary association of stockbrokers registered under the Societies Act. This was made possible after clearance was obtained from the London Stock Exchange which recognized the NSE as an Overseas Stock Exchange. This was important because an exchange not recognized by the leading stock exchange was of little value and credibility. The business of dealing in shares was then confined to the resident European community, since Africans and Asians were not permitted to trade in securities until after the attainment of independence in 1963. This partly explains why it was difficult to convince the local people, who had hitherto been barred from holding Quoted Shares purely on racial grounds, that this institution was a vital vehicle for handing over economic power from foreign dominance to local control.
At the dawn of independence, stock market activity slumped due to uncertainty about the future of independent Kenya. However, after three years of calm and economic growth, confidence in the market was rekindled and the exchange handled a number of highly over-subscribed public issues. The growth was, however, halted when the oil crisis of 1972 introduced inflationary pressures on the economy which depressed share prices. A 35% capital gains tax introduced in 1975 (suspended since 1985) inflicted further losses to the exchange. At the same time it lost its regional character following the nationalisations, exchange controls and other inter-territorial restrictions introduced in neighbouring Tanzania and Uganda. For instance, in 1976 Uganda compulsorily acquired a number of companies which were either quoted, or were subsidiaries of companies quoted on the Nairobi Stock Exchange.
In the 1980s the Kenyan Government realized the need to design and implement policy reforms to foster sustainable economic development with an efficient and stable financial system. In particular, it set out to enhance the role of the private sector in the economy, reduce the demands of public enterprises on the exchequer, rationalise the operations of the public enterprise sector to broaden the base of ownership and enhance capital market development. In 1984 an IFC/CBK study, Development of Money and Capital Markets in Kenya, became a blueprint for structural reforms in the financial markets, culminating in the formation of a regulatory body “The Capital Markets Authority (CMA) in 1989, to assist in the creation of an environment conducive to the growth and development of the country’s capital markets.
In 1991, the NSE was registered under the Companies Act and phased out the “Call Over” trading system in favour of the floor-based “Open Outcry System”. Subsequently the stock exchange embarked on an extensive modernization exercise, including a move to more spacious premises at the National Centre in July 1994. The facilities include a modern Information Centre. Computerization has also been enhanced, and with increasing trading volumes electronic trading has become feasible.
In 1995 the Kenyan Government also relaxed exchange control for locally controlled companies subject to an aggregate limit of 20% and an individual limit of 2.5%. These were doubled to 40% and 5% respectively in the June 1995 budget to help encourage foreign portfolio investments. A series of incentives are in place to encourage investments in the Nairobi Stock Exchange. A favourable tax regime exempts listed securities from stamp duty, capital gains tax and value added tax. Withholding tax on dividends is low at 5% for residents and 10% for non-residents. The entire Exchange Control Act was repealed in December 1995.
The number of stockbrokers has grown steadily to 20 from the original six (one of whom still survives) at its inception in 1954. Commission rates, which were once among the highest, have also come down considerably, from 2.5% to between 2% and 1% on a sliding scale for equities and 0.05% for all fixed interest securities for every Shilling.
The Nairobi Stock Exchange is poised to play an increasingly important role in the Kenyan economy, especially in the privatization of state-owned enterprises. In the last 10 years, 9 public enterprises have been successfully privatized through the NSE where the government has raised about Kshs. 5-billion. The privatisation process started in 1988 when the government floated 7.5-million shares (20% equity) of the Kenya Commercial Bank. The issue was over-subscribed 2.3 times. Subsequent issues have also proved highly popular, with subscription rates as high as 400%. In the privatization of Kenya Airways, for example, the stock exchange enabled more than 110,000 shareholders to acquire a stake in the airline. The NSE has enabled Kenya to receive more than US$ 50-million in a year and a half (1995/6), in the form of foreign portfolio investments.
The biggest challenge facing the NSE is to increase its turnover ratio, currently standing at only 3%. For the foreseeable future, the exchange will have to be driven by local investors who are now being targeted by a public education programme conducted by the NSE through brochures, radio and television programmes, seminars and group presentations.
(Information provided by NSE, September 1996)
