Kampala — Access to cheap sources of financing will allow non-banking institutions and brokers to actively participate in the secondary market trading of government securities, experts have said. Francis Odubekin, East Africa regional advisor at the US treasury said the active participation of the non-bank institutions and broker/dealers was key to boosting trading volumes in the secondary market.

The secondary market is currently dominated by commercial banks that have access to cheap sources of finance including customer deposits, interbank market and repurchase agreements (repos). "Low participation of non-banks in the government bond market is due to competitive disadvantage due to lack of funds. Give them leverage and they can move the secondary market," he said in Kampala recently.

He added that they cannot participate meaningfully at the auctions which are also dominated by commercial banks. The Central bank introduced the primary dealer system in February 2003, giving exclusive rights to six commercial banks to trade government securities to the public on its behalf.

The banks purchase government securities at a discount during auctions and sell them in the secondary market at a full price. "Banks participate at wholesale level with the opportunity to sell at retail. This translates into a profitable business at retail level," Odubekin said.

The Central bank is working on reforms of the primary dealer regulatory framework aimed at boosting the system and creating a competitive environment. The bank plans to introduce non-bank primary dealers through a tiering system including underwriting provisions.

It is hoped that these dealers will enhance liquidity in the secondary market through aggressive buying and selling. "There is lack of aggressive marketing effort by intermediaries who should be creating a market. Retail investors are not aware of the returns in the fixed income market otherwise banks wouldn't be in this business," he adds.

Odubekin says the reforms will allow non-bank institutions to participate in auctions, have access to the Central bank payment and settlement system and the repo market. While secondary market trading for government securities has grown in the recent past, the securities remain thinly traded compared to the money market. The market is also dominated by buy and hold strategies.

In comparison to Kenya, Uganda still has to play catch up regarding volumes traded in the secondary market. Over sh1.1 trillion was traded in 2009 with over sh5b traded daily. In Kenya trading activity per day amounted to Ksh7b (sh75b).