15 January 2018

East Africa: Why Kenya Opted Out of EAC Project to Link Stock Markets

Kenya has opted out of the East African capital markets integration (CMI) project that is to be effected later this year in a bid to make trading in shares quicker and cheaper.

In a letter written to the EAC Secretariat in mid-November, Kenya said it would not join Burundi, Rwanda, Tanzania and Uganda to launch the platform in September, suggesting it had concerns on the infrastructure.

It said it would monitor the performance of the regional platform vis-à-vis its ongoing modernisation of trading interfaces.

Kenya pulled out of the CMI project in 2015, citing irregularities in the $3.3 million tendering process of the software and requested for more time to consult on the matter.

Quality of the software

Among the concerns Kenya had was on the quality of the software being purchased and whether it will be compatible with the Nairobi Securities Exchange's clearing and settlement system as well as the capacity of the vendor to deliver on the project.

Burundi, Rwanda, Tanzania and Uganda are working on a schedule to have the project up and running by its September 2018 completion target.

The project involves acquisition and installation of an information technology platform, the Smart Order Routing System, linking the clearing and settlements systems of securities trade among the EAC member states.

It is part of a wider World Bank-funded EAC Financial Sector Development and Regionalisation Project 1, which seeks to support the establishment of a single financial market among the EAC member states.

To ensure that the project is completed on time, the EAC Sectoral Council on Finance and Economic Affairs has directed the four nations to fast-track the CMI implementation by ensuring the integration between their systems and the CMI.

Contractual obligation

The Sectoral Council of Finance Ministers' report indicates that although the system hardware and software (including the Smart Order Router, the Central Systems Depository Interface, and the Messaging Platform), delivery and installation was done within schedule but the partner bourses have not yet tested it.

This has delayed the CMI implementation workplan and may have legal consequences for the Community.

"To avoid the incidental legal risks, the stakeholders need to work closely with the secretariat and InfoTech Private Ltd so that the latter can deliver a real-time system to the EAC as envisaged in the contract," said the Finance ministers in their report.

The stakeholders in the project include the Dar es Salaam Stock Exchange and the Uganda Securities Exchange with the vendor, STT on the one hand, and the Bank of the Republic of Burundi and the National Bank of Rwanda with their vendor, CMA Small Systems on the other. Without this, the CMI implementation may never be completed as envisaged.

Integration

The integration of the region's capital markets is in line with the provisions of the EAC Common Market Protocol, which provides for free movement of capital in the region.

The software was to link the trading platforms of the NSE, Uganda Securities Exchange, Dar es Salaam Securities Exchange and Rwanda Stock Exchange so that they run as a single market in real time.

The connection would allow investors to buy and sell shares of companies located in different EAC countries without necessarily going through different brokers.

It would also reduce the time it takes to trade in cross-listed shares from the more than 30 days presently to as low as three.

The project was initiated in 2011 by the EAC Secretariat in collaboration with the World Bank and runs through two back-to-back projects over a nine-year period. The initial phase covers 2011 to 2014 and the second from 2014 to 2019.

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