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Kenya: Why Market is a Capitalist Tool
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The Nation (Nairobi)
OPINION
28 March 2008
Posted to the web 28 March 2008
Andrew Franklin
Nairobi
As the Safaricom IPO opens today, it seems almost impolite to question whether the Nairobi Stock Exchange is actually a healthy institution. The NSE is a limited liability entity originally established by the colonial-era legislative council with its legal status seemingly untouched by post-independence parliaments.
The NSE is owned by its members; membership criteria, standards of conduct and behavioural norms are left to the NSE to "self regulate". Despite legislation establishing the CMA within the Ministry of Finance with oversight over stockbrokers, investment banks, fund managers, investment advisers and authorised depositories, the NSE remains effectively unhindered in its operations by any specific regulatory body.
The CMA is merely one of several "agencies" within the ministry that are responsible for regulating banking, insurance, private pensions and registered provident funds. There seems to be no regulation.
To add to the confusion, Central Bank also implements macro-economic policies for the country and Kenya Revenue Authority collects money to finance government. In present day Kenya, money is defined institutionally and regulated according to "best practices" and legal interpretations dating back decades.
Consumer protection
Capital is not capital in the Kenyan market. Money laundering concerns, prevention of fraud, theft, consumer protection, etc, are all covered somewhere in the administrative jungle.
Because the NSE and its most prominent members have benefited immensely from the growth in its financial affairs, its leadership has been blinded by success to any deficiencies in its operations.
Its role as gatekeeper to the development of equity markets have enabled the members of an investment club and their coterie of fellow travellers and hangers-on to confuse personal success with the nation's economic prosperity. The NSE is the sole arbiter of who gets to participate in its sector and also gets to evaluate its own performance without any meaningful outside interference.
For the NSE, performance is judged to be more than satisfactory with the comment that future improvements in operations and procedures will be made to reduce costs, expand trading hours and enhance administrative efficiencies. All benefits of these accrue to the NSE.
The Safaricom IPO will be a resounding success especially for a cash-strapped government desperate for revenue and the brokers and bankers who will process applications for shares during this "once in a lifetime" opportunity. This despite the suspension of Nyaga Stockbrokers and the apparent disinterest in retail investors by Renaissance Capital which was, after all, sold the Francis Thuo & Partners "seat" by the NSE after the bourse rejected Sh210 million extra by Old Mutual.
This was a business decision made by the NSE for its own reasons and being stupid is neither illegal nor criminal. The trouble with the NSE is the trouble with all of the "players" in Kenya's financial sectors. There is literally no political will for reforming the convoluted capital markets and the "players" cannot be expected to reform themselves.
The prevailing ethos is to celebrate wealth and to pay lip service to the law. There is no recognition in Kenya that acting in strict accordance with law may not be the same as behaving ethically or with honesty and integrity. There is consistent denial that any behaviour (i.e. insider trading, alleged commingling of funds, bouncing cheques, etc.) at least falls within the definition of impropriety. Regardless of media reports, our leading investors consistently avoid any comments or explanations on published reports because we all have short memories.
The NSE is protected by law and, unless its legal status is changed, it will not have to operate in a manner that would be expected of any institution.
Policy change
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Presumably, the Finance minister could propose a major policy change when reading the budget in June 2008. Legislation that re-organises the existing regulatory confusion into a comprehensive Financial Services Authority (FSA) would seem to make sense and there would be no reason to add any new entities within.
The balloon is going up again today and naysayers are obviously ill-intentioned or deluded.
Mr Franklin is the managing director of Franklin Management Consultants.
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