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%.


The primary market was very active for the period 1996 to mid-1997, with seven new issues floating more than 400 million shares valued at more than Kshs 5.3 billion.

Issuer Shares Issued Issue Price (Ksh) Amount Raised (Ksh)
Rea Vipingo 8 000 000 10.50 84 000 000
Kenya Airways 235 000 000 11.25 2 643 750 000
EA Portland Rights 72 000 000 14.00 1 008 000 000
National Bank of Kenya 40 000 000 15.00 600 000 000
Kenya Commercial Bank 11 880 000 50.00 594 000 000
TOTALS – 1996 366 880 000 4 929 750 000
T P S (Serena) 12 893 000 13.00 167 609 000
Athi River Mining 23 000 000 12.25 281 750 000
TOTALS – 1997 TO DATE 35 893 000 449 359 000
GRAND TOTAL – 1996 + 1997 TO DATE 402 773 000 5 379 109 000


The period was a turning point for the stockmarket, which saw the introduction of a new instrument, Corporate Bonds. The first issue to be listed was the 3-year Floating Rate Bond by the East African Development Bank (EADB). The issue raised Kshs. 820-million. The second issue to be listed was Issue 3 of the 1-Year Treasury Bond of the Central Bank, which raised Kshs. 2.8-billion. The third bond listing was Issue 4 of the 1-Year Treasury Bond, which was oversubscribed and raised Kshs. 7.9-billion.

Market Activity

Improved activity was registered in 1996, to trade 113-million shares valued at Kshs. 3.962 billion (US$ 70.6 million). This was an 18% rise over the 1995 turnover of Kshs. 3.3 billion.

1997 promises to achieve record levels in turnover, with the first half of the year registering a total turnover of Kshs. 3.6 billion. This is an 112% gain over the Kshs. 1.7 billion turnover in the corresponding period in 1996.

1995 1996 % change Totals

Jan – June



Jan – June


% change
A. NSE Index 3469 3114 -10.2% 3144 3530 12.28%
B. Market Cap Ksh 113 bn Ksh 99 bn -12.34% Ksh 104 bn Ksh 128 bn 22.75%
C. Shares Traded 59 mn 114 mn 91% 48 mn 82 mn 70.43%
D. Shares O/stng 1.8 bn 2.53 bn 40.56% 2.53 bn 2.84 bn 12.24%
E. Turnover C/D% 3.3% 4.5% 36% 1.9% 2.89% 51.85%
F. Value Traded Ksh 3.35 bn Ksh 3.96 bn 18.44% Ksh 1.7 bn Ksh 3.6 bn 112%
G. Turnover F/B% 2.96% 4% 35% 1.6% 2.8% 72.5%
H. No of Trans 54 280 63 304 16.6% 27 954 46 179 79.3%
I. Av Val/Trans Ksh 61 630 Ksh 62 591 1.56% Ksh 60 613 Ksh 77 688 28.17%

Foreign Investment

The stock market recorded dramatic increases in foreign capital inflows after the opening of the market to foreign investors in January 1995. At the close of 1995, total foreign investors’ turnover stood at Kshs. 222 million (US$ 4 million) and accounted for a marginal 6.6% of the total market. In 1996, foreign investors’ turnover increased to Kshs. 747 million (US$ 13.5 million) and accounted for 10% of the total market turnover. For the period January to June 1997, total foreign investors’ turnover stood at Kshs. 1.448 billion (US$ 26.44 million), a 757% surge over the Kshs. 107 million turnover for the corresponding period in 1996, and accounted for a substantial 40.4% of total turnover in the first half of 1997.

Regulatory Reforms

In the June 1996 Budget, the following measures were proposed and later implemented for the capital markets:

· The issuance of Commercial Paper was restricted to listed companies only.

· Withholding Tax on dividends was reduced from 7.5% to 6% for residents. The rate for non-residents remained at 10%.

· Withholding Tax on interest income was increased from 10% to 15% while the tax on certificates of deposit was increased from 10% to 20%.

· In August 1996, the C.M.A. published amendments to rules governing Takeovers and Delistings of listed companies.

· In September 1996 the process of bidding for Treasury Bills was changed by the removal of reference to Discount and Yield Rates which were replaced by reference to Interest Rates only.

· In October 1996, the Central Bank increased the minimum investment in Treasury Bills to Kshs. 1-million from Kshs. 50,000.

The Budget proposals presented to Parliament on June 19 1997 could facilitate a major transformation of the stock market and the capital markets as a whole, in view of the wide-ranging policy review measures announced by the Minister, including, among others:

· The gains that insurance companies were making from trading at the stock market, and which were previously taxable at the normal corporate tax level, will be exempted from taxation. The measure could release for trading large stockholdings which have been in the custody of insurance companies, which will boost supply of securities in the market and also release funds held by these companies for investment in listed securities, thus boosting demand in the market.

· Sole-purpose Dealers who will be tax-emempt will be licenced, and in order to discourage them from locking up securities they will be required to trade them within 24 months from purchase date or suffer taxation.

· All the costs incurred by companies in the process of acquiring international credit rating will be made tax-deductible. As a consequence, firms will be able to access cheaper funds from foreign capital markets by, for instance, floating debt securities offshore.

· Foreign fund managers advisors will be allowed to participate in the local capital markets by acquiring beneficial ownership in local stockbroking firms and fund managers, precisely, up to 50% in the case of brokers and up to 70% for funds. As a result, specialised expertise and foreign investible funds could start flowing into local markets.

· The Kenyan Government intends floating a Eurobond in 1998 to reduce domestic Government borrowing, and the Government will also convert all outstanding government overdrafts with the Central Bank into marketable securities.

· In order to encourage equity investments in medium-sized companies with growth prospects, Venture Capital Funds will enjoy a 10-year tax holiday on their dividend incomes.

Other Important Events

January 1996 The C.M.A. introduces charges on Public share issues, Private Placements, Bonuses and Rights, with a view to becoming self-financing to reduce reliance on the Treasury.

February 1996 The Government launches the Policy Framework Paper (1996-1998).

March 1996 Kenya receives development aid and pledges of US$ 730 million (Kshs. 40 billion) from the Paris Club.

E.A. Portland Rights make historic trading at NSE.

April 1996 Simba Fund is launched by Barings.

May 1996 Kenol applies to be delisted.

July 1996 President Yoweri Museveni visits NSE.

KFB is put under receivership.

September 1996 KQ Privatization Team receives the World Bank Award for Excellence for 1996.

October 1996 The Acacia Fund is launched.

Cairo hosts the 4th A.S.E.A. conference.

NSE conducts an induction course for stockbrokers.

The biggest deal in the 42-year history of NSE is done with NIC selling 4.9-million shares valued at Kshs. 217 million

November 1996 E.A.D.B. floats bonds.

The suspension of Kenol is lifted.

Regent Fund goes public.

December 1996 Government launches the 7th National Development Plan (1997-2001).

January 1997 The new C.M.A. Board is inaugurated.

February 1997 Treasury Bonds are listed at NSE.

March 1997 Regent Fund is launched at NSE.

Treasury Bonds make an historic listing at NSE.

April 1997 NSE/ODA Public Education Programme begins.

NIC acquires Ambank.

Future Prospects

Plans include:

· Improved technology in the trading process with the implementation of a Central Depository System.

· The development of long-term financial instruments and the institutions necessary for the efficient functioning of the market, such as debt and equity underwriters, merchant banks, credit rating agencies and specialized market information agencies.

· Development of collective investment vehicles such as unit trusts and investment trusts, professional fund managers and increased foreign portfolio investments.

· Diversity of tradeable securities including commodity stocks, options and futures, municipal stocks, repos, international stocks through cross-border listings, among others.


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)