Business Daily (Nairobi)
Jimnah Mbaru
14 May 2008
opinion
My tenure as the chairman of the Nairobi Stock Exchange ends next month and I am not seeking re-election.
Looking at the challenges we have faced and the major steps we have taken to be where we are, I have a lot of satisfaction. More importantly, I see a very bright future indeed for the bourse.
Having said that, it is incumbent upon me to mention some of the major challenges that have to be overcome if we are to accelerate the growth of the Nairobi Stock Exchange (NSE) in particular and the capital markets in general. I will dwell on two major challenges - the capital markets regulation and the deepening of the investment opportunities beyond the NSE.
Under regulation, a lot of work still needs to be done. It is my sincere hope that the incoming leadership at the NSE, the Capital Markets Authority (CMA), the Ministry of Finance, the quoted companies and investors will work together to bring the regulatory framework in line with the established markets which we seek to be at par with.
While every market has its dynamics, most of the fundamentals should be the same, whether we are talking about Malaysia, Wall Street, London, Frankfurt, Nairobi or Dubai. The starting point, therefore, should be benchmarking on the legal framework between Nairobi and the leading financial hubs of the world.
Whatever may be a challenge to us, other markets have undergone the same and we should start by borrowing from their experiences and, naturally, adopting the same to fit our local dynamics.
Major players have to realise they have a role not just in a stock market, but in an aspiring financial hub for the Sub-Saharan Africa. Accordingly, they have to upgrade their business processes, ICT and business values to reflect the high expectations.
In modern and developed markets, however, this compliance is never left to the goodwill of the market players. Self-regulation at the NSE and the external regulation from the CMA are of paramount importance.
The CMA particularly has to pay attention to the issue of risk management if the isolated problems of the recent past are to be avoided. It should be instructive that the current global standards for risk management in the banking industry were introduced after problems mainly in the investment banking as opposed to commercial banking. You will recall the case of Nick Leeson and Barings Bank.
It was as a result of such failures that the Bank for International Settlement (BIS) introduced the BASEL Accords for Risk Management, namely BASEL I and BASEL II regulations.
I call upon the CMA to liaise with the Central Bank of Kenya to look at ways of extending BASEL II compliance to the investment banking industry.
All players within the investment banking and brokerage industries should be subjected to the same, if not more, risk management standards as their counterparts in commercial banking. If BASEL II standards of operational risk were in place, the recent problems within some brokers and investment banks would not have occurred.
Adopting BASEL II standards for credit risk and market risk will not only cushion the banks, brokers and their investing customers from undue risk exposures, but will also set the stage for the introduction of advanced market instruments like margin trading and derivatives.
The BASEL II standards would inevitably call for a review of the minimum capital requirements. I have proposed minimum capital requirement for a broker to be Sh200 million and Sh400 million for an investment bank.
Mbaru is the chairman of the Nairobi Stock Exchange.
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