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Kenya: Reforms Can Make Bourse Great Place to Invest
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The Nation (Nairobi)
OPINION
28 March 2008
Posted to the web 28 March 2008
Ahmed K. Bharadia
Nairobi
It's unfortunate for gross mismanagement to mess up peoples' investments. It is even more appalling that in spite of regulation, such big problems are often missed.
It's time for regulatory bodies to open their eyes to restore confidence in the stock market. To assess what is possible in enhancing the security of investments, we need to understand the existing framework. Our primary dealings are with the stockbroker or their agents. And these stockbrokers are owners of the Nairobi Stock Exchange, which has systems in place to check on their dealings.
Then we get to the independent prefect: the Capital Markets Authority. It is more of a government body that checks on the workings and trades of brokers.
Shift in the ownership
The fundamental change that has to occur at this level is a shift in the ownership of the NSE. Even with the best of intentions, the perception of investors will remain negative unless brokers are axed from ownership. This is called demutualisation, where at least a part ownership of the NSE is given to the public. Indeed, in foreign countries, this is the norm, and investors have the possibility of trading in shares of, for example, the London Stock Exchange. A mix, though, is definitely needed so that the board understands the position of the brokers in making regulatory decisions. The broker positions at the board should be cut down to 20 per cent.
This will ensure that those who invest in the market will be the monitors of broker actions, and this independence will be invaluable in setting up watertight systems. What's required now is for the CMA to wake up . We have not heard a solid opinion from that quarter on what should be done or what's being done. Even the first sign of a shiver from a brokerage house requires action. Awaiting receivership is allowing things to go too far.
Given priority
After establishing CMA's structure, which should be given priority by the finance formulators at the level of the ministry, serious work needs to be done in regulating the way brokers operate.
The first step is for brokers to expand their capital base in line with market growth. This will mean that they operate with cash that is commensurate with their expanding activities.
The second step is for brokers to volunteer to have random liquidity audits by the CMA to ensure that no broker takes unnecessary risks using investors' money to service another client's credit, and especially where it results in bad debt.
Indeed, allowing clients to trade on credit should also be monitored as this influences stability. This is especially so for large trades, which are tempting for brokers to undertake on credit. One way of monitoring this is to link the customer's account to the CDS records. By further providing customers with a reconciliation of the two positions, they will find it easier to ensure that their expectations match their portfolios. Broking firms should, as a rule, publish their financial results quarterly for investors to assess their stability. It will force the brokers to first look at their own fundamentals before shouting about other listed companies.
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Another step is to have a procedure in place for client complaints. This should be clearly advertised at all the forums that act as the first line of reference for clients of brokerage firms - from the brokers offices to their web sites. There should be a chain that a customer follows to sort out complaints - starting internally to the appropriate regulatory body. This will also protect brokers from false claims.
More will need to be instituted by the experts after observing the way advanced bourses operate. But, there has to be a starting point, and it is here and needs to be done now. To be successful, these actions must be pushed by all the brokers. That will show that they have the welfare of the greater masses at heart. This will fuel mutual gain by assuring clients, who will in turn invest more.
Mr Bharadia, an investor at the NSE and author of a book on share trading, is an investment columnist with Smart Company, Nation's business pullout.
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