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Kenya: Mbaru Proposes Bigger Capitalisation for Brokers
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Business Daily (Nairobi)
1 May 2008
Posted to the web 1 May 2008
Washington Gikunju
The Nairobi Stock Exchange (NSE) chairman, Mr Jimnah Mbaru, has called on stockbrokers and investment banks to raise their capitalisation level in line with their increased business volumes and corresponding operational risks.
Mr Mbaru suggests that investment banks should have a minimum paid up capital of at least Sh400 million and stockbrokers a minimum capital base of Sh200 million.
The Capital Markets Authority (CMA) currently requires stockbrokers to maintain a minimum paid-up capital of Sh5 million while investment banks are expected to observe a minimum capital requirement of Sh5 million.
These regulations were drafted in 1992, two years after the CMA, which licenses and regulates all institutions offering services in the capital markets, was founded.
A CMA-commissioned study last year recommended that stock market agents should raise their minimum capital base to Sh25 million for brokers, and Sh100 million for investment banks.
All the licensed 19 stockbrokers and investment banks have paid up capital of Sh300m or less, with the exception of Mr Mbaru's Dyer and Blair Investment Bank, which reportedly has a capital base of Sh1 billion.
The level of capitalisation of a business is considered crucial to its financial stability since management can draw from the capital account to cover for operational losses during difficult times.
The rapid growth of capital markets in the last five years has, however, presented a big challenge to players who have not kept pace with the requirement to increase their capital base in tandem with growth in their businesses.
The relatively low level of capitalisation has been blamed for the collapse of Francis Thuo and Partners and the placement of another stockbroker, Nyaga Stockbrokers, under statutory management in a space of less than a year.
Another six stockbrokers and two investment advisors have been placed on CMA's watch list and are operating on conditional licenses, with less than a month to put their houses in order.
Mr Mbaru acknowledged that Nyaga Stockbrokers was inadequately capitalised given the volume of business that it was handling.
A CMA investigative report on Nyaga seen by Business Daily in March showed that Nyaga had a paid up capital of about Sh60 million as at last year.
"Nyaga was handling over 130,000 investment client accounts, but we only came to realise when it was too late that the firm had a weak capital base," said Mr Mbaru. The NSE chairman was speaking during a Nairobi Central Business District annual luncheon at a Nairobi hotel on Wednesday.
Mr Mbaru also said players in the capital markets need to have a high level of ethical standards if Nairobi is to achieve its desired status of a regional financial services hub.
He cited the case of collapsed Stockbroker Francis Thuo and Partners, saying that the firm is suspected to have been involved in selling investors' shares without their consent and diverting such funds for personal use.
"What we are investigating now is whether the diversions were intentional or were as a result of management deficiencies that did not differentiate between investor's funds and the firm's profits," said Mr Mbaru.
The NSE chairman, who is expected to step down from the elective position by June this year, also joined those calling for the publication of financial statements as a first step towards revealing the financial status of the CMA licensees.
Stockbrokers' financial statements are still private documents available only to the regulator and the NSE.
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Mr Mbaru said such publication would be a valuable source of information for investors when choosing their investment intermediaries as it would inform them of their financial health.
"The CMA should require that all stockbrokers publish their half-year and annual accounts, the NSE should also publish its financial statements in the future," said Mr Mbaru.
Among other capital market reform proposals that the veteran stockbroker suggested include the merger of the Central Depository and Settlement Corporation (CDSC) with the NSE. Mr Mbaru says CMA should revise its rules to provide for the merger that this would facilitate monitoring of transfer of shares.
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