Kenyan investors will be able to lend and borrow shares from each other from June, with the NSE set to roll out a system upgrade to accommodate the product within the next five months.
Treasury CS Henry Rotich gazetted the rules allowing the securities lending and short selling at the end of November, although the notice was only published last week.
The regulations will allow investors to borrow shares from fellow traders and sell them on a bet that a future price drop will enable them to buy back the same stock cheaply and return them at a profit.
"We are upgrading our systems to allow the securities lending and borrowing framework to work... that should be coming onstream possibly in the second quarter of this year.
"The system can also be scaled up to bring on board more products," said NSE chief executive officer Geoffrey Odundo.
The stock exchange is betting on the securities lending framework to improve liquidity in the market, unlocking for regular trading the millions of shares held by long-term investors.
This form of trading does, however, carry a risk if not strongly regulated, opening the danger of stock manipulation by investors keen to benefit from a price fall and aggressive speculation.
Aggressive speculation by short sellers was partly blamed for exacerbating the 2008 financial crisis which nearly brought down global markets.
The Capital Markets Authority, however, said the regulations put in place will check this risk through the demand of collateral to cover the lender's exposure.
"The short selling that had that impact (in 2008) was naked short selling (without collateral protection) and which is not allowed within the Kenyan legal framework.
"What we have is covered short selling so that we will insulate the market from undue exposure," said CMA chief executive officer Paul Muthaura.
The regulations require that the borrower deposit with the lender a collateral equivalent to 100 per cent the value of the securities being borrowed, and in some cases the lender is allowed to ask for a higher value.
The collateral will also be adjusted regularly to match any increase in the value of the borrowed security.